2025 (9) TMI 333 - AT - Service Tax

Appeal allowed and refund granted for service tax paid by mistake of law; Section 11B does not bar refund claims

M/s J.D. Associates Versus Commissioner of Central Excise & CGST, Kanpur

M/s J.D. Associates Versus Commissioner of Central Excise & CGST, Kanpur - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the statutory limitation under Section 11B of the Central Excise Act (as made applicable to service tax matters) bars refund claims where the amount was paid under a mistake of law and the tax was never leviable. 2. Whether an amount voluntarily paid and labelled as 'service tax' but which was not recoverable by the revenue (for lack of authority to levy) attains the character of tax such that refund claims are subject to Section 11B, unjust enrichment doctrine, or other tax-specific restrictions. 3. Whether the appellate authority may determine substantive issues beyond the scope of the Show Cause Notices (SCNs) issued and thereby raise grounds not put in controversy by the SCNs (in particular, classification of services). ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Section 11B limitation to refunds of amounts paid under mistake of law Legal framework: Section 11B prescribes a one-year limitation for claims for refund of duty of excise from the relevant date and requires evidence that the incidence was not passed on. Section 83 of the Finance Act renders certain central excise provisions applicable to service tax matters. Precedent treatment: Courts and tribunals have held that Section 11B governs refunds of duties legitimately levied and collected; however, a line of authority treats payments made under a mistake of law (where the authority lacked power to levy) as not being 'duty' or 'tax' for purposes of Section 11B, thereby excluding such claims from the statutory one-year bar. Higher court decisions addressing refund where tax was never payable have been followed to this effect. Interpretation and reasoning: The Court examined whether the payments were recoverable by the revenue had they not been voluntarily made. If the revenue lacked authority to demand the amount (owing to exemption or absence of charge), the payment does not acquire the character of excise duty/service tax; consequently Section 11B's temporal bar, which applies to refunds of duty actually leviable, is inapplicable. The Court analyzed Board circulars and notifications, relevant exemptions, documentary evidence (work orders, certificate from the government authority and challans), and held that the taxes were not leviable for the relevant period. The Court further noted that applying Section 11B to bar such refunds would conflict with constitutional tenets (no tax except by authority of law) and established equitable principles requiring restitution of money wrongly retained by the State. Ratio vs. Obiter: Ratio - where payment was made under a mistake of law and the revenue had no authority to demand it, Section 11B does not apply to bar refund; claim is not time-barred under Section 11B. Obiter - discussions of particular circulars' retrospective effect are explanatory but ancillary to the core ratio. Conclusion: The limitation prescribed under Section 11B is not applicable to refund claims for amounts paid under a mistake of law where the amount was never payable as service tax; such refund claims cannot be rejected solely on the ground that Section 11B's one-year period elapsed. Issue 2: Characterization of voluntarily paid amounts and applicability of unjust enrichment Legal framework: Principles governing restitution where money has been paid under a mistake, doctrine of unjust enrichment, Article 265 (no tax except by authority of law), and requirement in Section 11B that the incidence of duty must not have been passed on. Precedent treatment: Authorities recognize that payment under mistake creates an equitable obligation on the recipient (including the State) to refund; several courts have held that if the payer did not pass on incidence and the payment was not legally exigible, the revenue is a trustee obligated to return the amount and unjust enrichment restriction does not preclude refund when incidence was not passed on. Interpretation and reasoning: The Court reviewed accounting records, challans and audit trail showing the assessee paid tax from its own funds without passing the incidence to the contracting authority. Given that the payer did not collect the tax from the principal and the amount was paid though not leviable, the doctrine of unjust enrichment does not operate to defeat the refund. Moreover, retention by revenue of amounts not legally due would contravene Article 265 and equitable restitutionary principles. The Court treated the State as holding the amount on an obligation to repay once it is shown the payment was not a legally chargeable tax and was not passed on. Ratio vs. Obiter: Ratio - where payment is established to have been made by the claimant from its own resources and not passed on, unjust enrichment does not bar refund of amounts paid under mistake of law. Obiter - references to specific pre-audit communications and administrative practices are illustrative. Conclusion: The bar of unjust enrichment is inapplicable where the claimant proves the incidence was not passed on and the amount was not leviable; the claimant is entitled to refund despite the revenue's retention. Issue 3: Competence of appellate authority to raise and decide matters beyond SCN scope Legal framework: Principles that SCN frames the controversy; adjudication and appellate review are ordinarily confined to matters raised in SCNs and the issues before the original adjudicating authority. Precedent treatment: It is established that an appellate authority should not decide issues that were not the subject of the SCN or not put to the parties in the original proceedings; raising new substantive issues on appeal may be procedurally impermissible. Interpretation and reasoning: The Court observed that the Commissioner (Appeals) traversed beyond the SCNs' scope by addressing the category/classification of services - an issue not put in controversy by the notices. The Tribunal emphasized that findings on matters not raised in SCNs are not tenable and liable to be set aside. Therefore, the appellate findings on classification were disallowed while the original adjudicating authority's findings (which addressed the SCN matters) were upheld where legally sound. Ratio vs. Obiter: Ratio - appellate authority cannot legitimately decide substantive issues not raised in the SCN; such findings are not sustainable. Obiter - the Court's comments about procedural fairness and limits on appellate review reinforce existing principles. Conclusion: Findings of the appellate authority that went beyond the scope of the SCNs (specifically classification issues) are not tenable and were set aside; the original adjudicating authority's determination on the matters actually raised was upheld. Overall Disposition The Court concluded that the refund claim related to amounts paid under a mistake of law and that Section 11B limitation does not apply to bar the refund; unjust enrichment did not preclude refund because incidence was not passed on; and the Commissioner (Appeals) erred in raising and deciding issues beyond the SCNs. Accordingly, the original order allowing the refund was upheld and the departmental appeal was dismissed.