2025 (12) TMI 644 - HC - Service Tax

Refund of service tax allowed; Section 102(3) cannot bar restitution of amounts collected without authority of law

HC allowed the appeal, setting aside the impugned order rejecting refund of service tax deposited during investigation. It held that the amount was paid ... Refund of the amount deposited during investigation - denial of refund on the ground of limitation under Section 102(3) of the Finance Act, 1994 - reliance placed on Section 102(3) and Notification No. 09/2016-ST to reject the claim - principles of natural justice and equitable treatment of taxpayers - HELD THAT:- In the matter of Commissioner of Central Excise (Appeals) Bangalore vs. KVR Construction [2012 (7) TMI 22 - KARNATAKA HIGH COURT] held that when tax is paid under a mistaken notion, though not legally payable, the Department lacks authority to retain it. Mere payment or labeling the amount as “service tax” does not convert an otherwise non-taxable amount into a valid levy. Where the Department itself had no authority to demand the tax due to an existing exemption, any such payment remains outside the scope of ‘service tax’. Consequently, the assessee retains a substantive right to refund, and procedural technicalities cannot defeat restitution of an amount collected without authority of law. Similarly, in the matter of the Hongkong and Shanghai Banking Corporation Ltd. v. Union of India [2023 (11) TMI 965 - BOMBAY HIGH COURT], emphasizes that procedural technicalities cannot override the substantive right to a refund once the Department has confirmed non-liability. Therefore, rejection of the refund on these grounds is unsustainable. Thus, it is evident that the appellant acted in good faith and made the refund claim promptly following the closure of the departmental investigation. The evidence submitted, including confirmation from the Raipur Municipal Corporation and supporting documentation, clearly establishes that the service provided was non-taxable and that the amount deposited by the appellant was not legally due. The reliance of the Adjudicating Authority and CESTAT on Section 102(3) of the Finance Act, 1994, to deny the refund is not justified in light of established judicial precedents emphasizing that limitation provisions should not be construed to defeat substantive rights or principles of natural justice. Procedural lapses, if any, cannot override the right of appellant to recover amounts paid under a bona fide belief of liability, particularly when the Department itself acknowledged non-liability. Furthermore, allowing the refund is consonant with constitutional principles under Article 265, ensuring that no tax is collected without legal justification, and prevents unjust enrichment of the Government at the cost of the appellant. In view of the foregoing, the appellant’s claim for refund is legitimate, and it is both legally and equitably appropriate to allow the refund along with applicable interest, thereby upholding the principles of fairness, natural justice, and statutory entitlement. The impugned order is set aside - it is declared that appellant is entitle for refund of the amount towards service tax - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether refund of the amount deposited during investigation could be denied as barred by limitation under Section 102(3) of the Finance Act, 1994, in the factual circumstances of the case. 1.2 Whether alleged procedural/documentary deficiencies and non-compliance with conditions under Section 102(1) and related notification could justify denial of refund where the services were found to be non-taxable and investigation was closed holding no service tax liability. 1.3 Whether retention of the amount deposited, after closure of investigation and acknowledgement of non-liability, is contrary to Article 265 of the Constitution and principles against unjust enrichment, thereby requiring refund with interest. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Limitation under Section 102(3) of the Finance Act, 1994 Legal framework (as discussed by the Court) 2.1 Section 102 of the Finance Act, 1994 grants a retrospective exemption for specified construction services provided to Government authorities for the period 01.04.2015 to 29.02.2016. Section 102(3) provides that refund of service tax in consequence of this retrospective exemption 'shall be made within six months from the date on which the Finance Bill, 2016 receives the assent of the President', i.e., up to 14.11.2016. 2.2 The Department and the Tribunal proceeded on the footing that any refund beyond this period is barred, relying also on precedent wherein the time limit under Section 102(3) was treated as mandatory and non-relaxable. Interpretation and reasoning 2.3 The Court noted that the deposit in question was made on 17.02.2016 during the pendency of investigation, and not pursuant to assessment, self-assessment, or any adjudication of service tax liability. Subsequently, on 15.12.2016, the Department issued a closure letter explicitly recording that no discrepancy relating to service tax liability was found and thereby dropped the investigation. 2.4 The Court emphasized that the appellant filed the refund application on 09.02.2017, i.e., promptly after the closure letter and after first acquiring certainty from the Department that no tax was legally payable. The amount had thus been paid under a mistaken belief during investigation, in a context where the Department itself later concluded that no liability existed. 2.5 Relying on decisions dealing with amounts collected during investigation without adjudication, the Court underscored that: (i) an assessee cannot be compelled to pay tax at the investigation stage without determination of liability; (ii) any amount so collected, without following statutory adjudication machinery or issuance of show-cause notice, is liable to be refunded; and (iii) such collections, if retained, offend Articles 265 and 300A of the Constitution. 2.6 The Court found that Section 102(3) and the associated time limit are framed in the context of refund of 'service tax' lawfully levied or collected and thereafter rendered non-payable by a retrospective exemption. In the present case, once the Department itself accepted that no service tax liability existed at all, the amount paid did not partake the character of 'service tax' legitimately due. 2.7 Drawing from the reasoning in decisions holding that amounts paid under mistake of law, or during investigation without adjudication, do not become valid tax by mere nomenclature, the Court held that such sums fall outside the regular charging and refund machinery and cannot be strictly controlled by the special limitation under Section 102(3), when that would result in retention of an amount never lawfully leviable. 2.8 The Court further noted that various precedents recognize the right to refund of amounts illegally or mistakenly paid, with limitation running from the date of discovery of mistake, and that limitation provisions should not be construed so rigidly as to defeat substantive rights where the tax itself is without authority of law. 2.9 In light of the closure letter confirming non-liability, the subsequent prompt filing of the refund claim, and the constitutional prohibition on retention of tax without authority of law, the Court held that the reliance on Section 102(3) to deny refund was misplaced and unsustainable. The special limitation could not be so applied as to negate the right to restitution in respect of an amount which the Department could not have lawfully demanded or retained. Conclusions 2.10 The Court concluded that the refund claim could not be rejected as time-barred under Section 102(3) in the peculiar facts where (i) the payment was made during investigation, (ii) the Department later confirmed absence of service tax liability, and (iii) the refund was sought promptly after closure of investigation. The strict statutory cut-off under Section 102(3) was held inapplicable to defeat the appellant's substantive right to refund. Issue 2 - Effect of procedural/documentary deficiencies and conditions under exemption/refund scheme Legal framework (as discussed by the Court) 2.11 The authorities had rejected the refund on grounds including: non-furnishing of evidence of stamp duty on the contract as referred to in Section 102(1) and related notification, absence of work-order-wise breakup and ST-3 returns, and inability to verify the nature of services or establish non-passing of tax incidence. Interpretation and reasoning 2.12 The Court observed that the Department itself, after detailed investigation and examination of documents, issued a closure letter dated 15.12.2016 clearly recording that no discrepancy in service tax liability was found. This departmental finding effectively acknowledged that the services in question were not taxable and that no service tax was leviable. 2.13 In this backdrop, the Court held that once the competent authority, after scrutiny, has accepted that no service tax was payable and closed the investigation, it is not open to subsequently deny refund on alleged insufficiencies in the same or similar documentation, or on technical deficiencies in forms and breakup statements. 2.14 The Court relied on judicial precedent stressing that where the Department lacks authority to demand tax due to exemption or non-taxability, any payment made under a mistaken notion cannot be treated as lawful tax; procedural conditions or technical requirements under refund provisions cannot be used to validate an otherwise unauthorized collection or to defeat the assessee's right to restitution. 2.15 It was also noted that in analogous cases, courts and tribunals have regarded amounts deposited during investigation as in the nature of pre-deposit, holding such sums not to be hit by statutory limitation or unjust enrichment when liability itself is negated and the depositor promptly claims refund. 2.16 The Court therefore reasoned that, where the substantive finding is that no service tax liability exists, and the payment was not legally due, the Department cannot shelter behind alleged documentary shortcomings or literal invocation of notification preconditions to retain the amount. Such an approach would elevate form over substance and condone retention of money without authority of law. Conclusions 2.17 The Court held that the grounds of non-furnishing of certain documents, alleged non-compliance with notification conditions, and similar procedural lapses could not justify denial of refund when the investigation itself culminated in an express finding of no tax liability. These objections were found insufficient to defeat the appellant's right to refund of an amount not legally payable. Issue 3 - Constitutional mandate under Article 265, unjust enrichment and entitlement to refund with interest Legal framework (as discussed by the Court) 2.18 The Court considered the constitutional requirement under Article 265 that no tax shall be levied or collected except by authority of law, and the corresponding obligation of the State to refund amounts collected without such authority. The Court also adverted to jurisprudence under the Contract Act and Limitation Act recognizing the right to recover payments made under mistake of law and the duty of the State to investigate and refund when illegality is established. Interpretation and reasoning 2.19 Citing multiple precedents, the Court reiterated that: (i) taxes illegally levied or collected must be refunded; (ii) mere acquiescence, mistake, or voluntary payment does not confer legality on a levy devoid of statutory basis; (iii) there can be no estoppel against statute in tax matters; and (iv) retention of such amounts, on technical or procedural grounds, amounts to unjust enrichment by the State. 2.20 The Court emphasized that, in the present case, the Department had conclusively accepted that there was no service tax liability on the services in question. Consequently, the amount deposited during investigation lacked statutory foundation and could not be treated as valid tax under the Finance Act. 2.21 The Court considered authorities holding that when the revenue retains amounts paid under mistake or without lawful authority, refusal to refund violates Article 265 and results in unauthorized enrichment, and that courts are bound to direct refund with interest once non-liability is established and the claim is pursued within a reasonable period. 2.22 The Court also recognized that the appellant had not abandoned its claim; instead, it had promptly filed a refund application after closure of investigation and pursued the statutory and appellate remedies diligently. In these circumstances, denial of refund solely on rigid application of special limitation or technical grounds was found inconsistent with constitutional norms and settled refund jurisprudence. Conclusions 2.23 The Court held that retention of the deposited amount after the Department's own finding of non-liability infringes Article 265 and results in unjust enrichment of the State. The appellant is entitled to refund of the amount deposited during investigation, together with applicable interest, and such refund cannot be denied on the basis of Section 102(3) limitation or alleged procedural/documentary defects. 2.24 Consequently, the Court set aside the orders of the appellate authority and the Tribunal, declared the appellant entitled to refund of the amount towards service tax, and directed the respondents to sanction the refund within the stipulated timeframe along with interest, thereby allowing the appeal.