2025 (5) TMI 1760 - HC - Service Tax

HC grants tax refund under RCM after Tribunal incorrectly denied due to precedent extraction error

The HC allowed the assessee's appeal seeking refund of tax paid under RCM. The Tribunal had incorrectly denied the refund due to an error in extracting a ... Seeking refund of tax paid under the Reverse Charge Mechanism (RCM) - violation and mis-interpretation of Circular No. 207/5/2017-Service Tax, read with Section 142 (9) (b) of CGST Act, 2017, Rule 7 of the Point of Taxation Rules, 2011 and Rule 7B of the Service Tax Rules, 1994 - Unjust enrichment - HELD THAT:- The learned Tribunal having accepted the fact that there is an error apparent on the face of the order inasmuch as the word “no” was missed out while extracting the relevant portion of the decision in the case of OSI Systems Pvt. Ltd.[2022 (9) TMI 801 - CESTAT HYDERABAD], the Tribunal ought to have noted that the consequence thereof would be to allow the appeal of the assessee and direct the Adjudicating authority to grant refund within a time-frame. In fact, the factual position in OSI Systems Pvt. Ltd., is identical to that of the case of the assessee. Therefore, the conclusion of the learned Tribunal that the assessee sought for modification of the earlier order dated 4.9.2024 is incorrect since if the word “no” is inserted in the appropriate place then the judgment in OSI Systems Pvt. Ltd. will fully apply to the facts and circumstances of the assessee’s case and consequently, they would be entitled for refund. Thus, the appeal filed by the assessee is allowed and the order passed by the learned Tribunal is set aside and the substantial questions of law are answered in favour of the assessee and the Adjudicating authority is directed to grant refund within a period of 60 (sixty) days from the date of receipt of the server copy of this order. The stay petition (GA/1/2025) also stands allowed. 1. ISSUES PRESENTED and CONSIDEREDThe Court considered the following core legal questions:(i) Whether the Learned Tribunal erred in law and fact in holding that the question of unjust enrichment arises in cases where refund of tax paid under the Reverse Charge Mechanism (RCM) is soughtRs.(ii) Whether the Learned Tribunal erred in expanding the scope of dispute to issues not raised in the original show cause noticeRs.(iii) Whether the Learned Tribunal erred in remanding the matter to the Adjudicating Authority to determine unjust enrichment despite having allowed the refund claimRs.(iv) Whether the Learned Tribunal erred in refusing to modify the operative portion of its order on rectification despite acknowledging factual errors in the original orderRs.2. ISSUE-WISE DETAILED ANALYSISIssue (i): Applicability of Unjust Enrichment in Refund Claims under Reverse Charge MechanismRelevant Legal Framework and Precedents: The refund claim was governed by provisions under Section 35G of the Central Excise Act, 1944, Section 142(9)(b) of the CGST Act, 2017, Rule 7 of the Point of Taxation Rules, 2011, and Rule 7B of the Service Tax Rules, 1994. The principle of unjust enrichment is a well-recognized bar to refund claims under indirect tax laws. However, the assessee relied on Circular No. 341/34/2010-TRU (31 March 2011) and Circular No. 207/5/2017-Service Tax (28 September 2017) clarifying the credit and refund position under RCM. The Supreme Court decision in Collector of Central Excise, Pune vs. Dai Ichi Karkaria Ltd. (1999) was cited to establish the indefeasible nature of credit under RCM.The Tribunal relied on co-ordinate Bench decisions in M/s. Circor Flow Technologies India Pvt. Ltd. and OSI Systems Pvt. Ltd., which held that unjust enrichment does not arise in refund claims of service tax paid under RCM.Court's Interpretation and Reasoning: The Court noted that the Tribunal initially allowed the appeal based on these precedents but erroneously remanded the matter to the Adjudicating Authority to examine unjust enrichment, a point not raised by the department. The error stemmed from omission of the word 'no' before 'unjust enrichment' in the Tribunal's order while extracting the OSI Systems judgment, leading to a misinterpretation that unjust enrichment needed consideration.Key Evidence and Findings: The show cause notice and earlier orders did not raise unjust enrichment as an issue. The Tribunal's remand was therefore based on a misreading of precedent. The Court found the factual position in the assessee's case identical to OSI Systems, where it was held that no unjust enrichment arises in refund claims under RCM.Application of Law to Facts: Since the tax was paid under RCM and the refund claim was valid under the applicable provisions and circulars, the principle of unjust enrichment was inapplicable. The Tribunal's remand for its determination was thus unwarranted.Treatment of Competing Arguments: The department did not contest the applicability of unjust enrichment in the original proceedings. The Court emphasized that the Tribunal should not have expanded the scope sua sponte.Conclusion: The Court held that unjust enrichment does not arise in refund claims of tax paid under RCM and the Tribunal erred in remanding the matter for its determination.Issue (ii): Expansion of Scope of Dispute by the TribunalRelevant Legal Framework: Principles of natural justice and fair adjudication require that issues raised in adjudication or appeal proceedings be confined to those raised in the show cause notice or appeal grounds.Court's Interpretation and Reasoning: The Court observed that the Tribunal expanded the scope by considering unjust enrichment, which was never part of the original dispute. This was an error in law and fact.Key Evidence and Findings: The show cause notice, order of admission, and appellate orders did not raise unjust enrichment. The Tribunal's introduction of this issue was based on a misreading of precedent.Application of Law to Facts: The Tribunal was not empowered to consider issues outside the pleadings or show cause notice, especially when such issues were not raised by the revenue.Conclusion: The Tribunal erred in expanding the scope of dispute to include unjust enrichment.Issue (iii): Remand to Adjudicating Authority Despite Allowing RefundCourt's Reasoning: The Tribunal allowed the appeal but remanded the matter to the Adjudicating Authority to examine unjust enrichment. The Court found this contradictory and erroneous since the refund claim was allowed and the plea of unjust enrichment was not raised by the department.Conclusion: The remand was unnecessary and incorrect.Issue (iv): Rectification Order and Refusal to Modify Operative PortionRelevant Legal Framework: Rectification under the Tribunal's rules allows correction of errors apparent on the face of the record.Court's Interpretation and Reasoning: The Tribunal accepted the existence of two errors: (a) incorrect factual finding regarding payment dates, and (b) omission of the word 'no' in the extracted portion of OSI Systems judgment. The Tribunal rectified the textual error by inserting 'no' but refused to modify the operative portion of the order to grant refund without further verification.Key Evidence and Findings: The factual error pertained to the date and nature of service tax payment under RCM, which was crucial to the refund claim. The omission of 'no' changed the meaning of the precedent and affected the outcome.Application of Law to Facts: The Court held that once the error was acknowledged and corrected, the Tribunal should have allowed the refund outright without remanding for further verification, as the facts and law supported the assessee's claim.Treatment of Competing Arguments: The department's argument for further verification was not supported by any new evidence or legal basis.Conclusion: The Tribunal erred in refusing to modify the operative portion of the order to grant refund directly.3. SIGNIFICANT HOLDINGSThe Court held:'The learned Tribunal having accepted the fact that there is an error apparent on the face of the order inasmuch as the word 'no' was missed out while extracting the relevant portion of the decision in the case of OSI Systems Pvt. Ltd., the Tribunal ought to have noted that the consequence thereof would be to allow the appeal of the assessee and direct the Adjudicating authority to grant refund within a time-frame.'Core principles established include:Refund claims of service tax paid under Reverse Charge Mechanism are not subject to the bar of unjust enrichment.The scope of adjudication or appeal cannot be expanded to issues not raised in the show cause notice or appeal grounds.Errors apparent on the face of the record, once established, must be rectified in a manner that gives effect to the correct legal position and facts.Where a precedent squarely applies and factual position is identical, the refund claim must be allowed without remand or further verification.Final determinations:The Tribunal erred in remanding the matter for determination of unjust enrichment.The Tribunal erred in expanding the scope of dispute to an issue not raised by the revenue.The Tribunal erred in refusing to modify the operative portion of its order on rectification.The appeal is allowed, the Tribunal's order set aside, and the Adjudicating Authority is directed to grant refund within sixty days.