Refund of service tax on EWS, LIG housing allowed; Section 11B limitation inapplicable due to mistake of law

CESTAT, New Delhi allowed the appeals and set aside the impugned orders rejecting refund of service tax paid on construction of EWS and LIG houses exempt under Entry 14(c) of N/N 25/2012-ST. The Tribunal held that the appellants filed refund claims within five years and established, through Chartered Accountant certification and billing evidence, that the service tax was deducted from their running bills by the housing board and was ultimately borne by them, thereby overcoming the bar of unjust enrichment. It further held that the tax was paid under a mistake of law, rendering Section 11B limitation inapplicable, and directed grant of refund in line with precedent.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether construction services provided for individual residential houses for economically weaker section (EWS) and low-income group (LIG) under work orders of a housing board are exempt from service tax under the relevant exemption notification.

1.2 Whether refund of service tax, including both the portion paid by the contractors and the portion paid by the housing board under reverse charge mechanism but deducted from contractors' bills, is barred by the doctrine of unjust enrichment.

1.3 Whether the limitation prescribed under section 11B of the Central Excise Act, 1944 applies to refund of service tax paid by mistake on exempt construction services, and whether the amounts so paid constitute "tax" or "revenue deposit."

1.4 Whether the assessees are entitled to interest on the refunded amount and, if so, at what rate.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability / Exemption of Construction of Individual Residential Houses

Legal framework

2.1 The Tribunal referred to prior decisions interpreting section 65(105)(zzzh), section 65(30a) and section 65(91a) of the Finance Act, 1994 relating to "construction of complex" and "residential complex," as well as the exemption under Notification No. 25/2012-ST dated 20.06.2012 exempting services by way of construction of a single residential unit otherwise than as a part of a residential complex.

2.2 Earlier decisions, including those cited from the order in S.P. Builders and related cases, held that:

(a) "Residential complex" means a complex comprising a building or buildings having more than 12 residential units (prior to 01.07.2012); and

(b) Independent residential houses/blocks having 12 or fewer units in a building are outside the scope of "residential complex" and hence not liable under "construction of complex" service; and post 01.07.2012, exemption applies for a single residential unit otherwise than as part of a residential complex.

Interpretation and reasoning

2.3 The Tribunal relied on its earlier final order in S.P. Builders, which had examined the same statutory definitions and held that construction of individual/independent residential houses, each being a separate residential unit and not constituting a "residential complex" as defined, is not exigible to service tax. That view was also supported by multiple precedents (Macro Marvel Projects, Lakhlan & Qureshi, Beriwal Constructions, Quality Builders, A.S. Sikarwar) and affirmed by higher courts.

2.4 It was noted that, post 01.07.2012, though "construction of complex" became a declared service, the exemption notification exempted construction of a single residential unit otherwise than as part of a residential complex. On identical facts in S.P. Builders, benefit of Notification No. 25/2012-ST had been extended.

2.5 In the present matters, the appellants had constructed individual residential houses for EWS/LIG for the housing board, and such activity matched the factual and legal scenario considered in S.P. Builders.

Conclusions

2.6 The services in question, being construction of individual/independent residential houses for EWS/LIG and not forming part of a taxable "residential complex," were exempt from service tax under Notification No. 25/2012-ST; hence, the tax collected on such services was not legally payable.

Issue 2: Unjust Enrichment and Eligibility to Refund of Both Portions of Tax

Legal framework

2.7 The Tribunal examined the principle that refund is barred where the incidence of tax has been passed on to another person (unjust enrichment). It referred to the decision of a High Court (Indian Farmers Fertilizers Coop. Ltd.) which held that refund can be claimed by a person who has borne the incidence of tax.

Interpretation and reasoning

2.8 As per the work orders, service tax liability was contractually to be borne by the contractors. Under the reverse charge mechanism, the housing board paid its portion of service tax but deducted that amount from the contractors' running bills.

2.9 The Tribunal found, on facts, that the entire service tax - both the portion directly deposited by the contractors and the portion deposited by the housing board under reverse charge - had in substance been borne by the appellants, because the housing board's share was recovered from the amounts payable to the contractors. A Chartered Accountant's certificate to this effect was placed on record.

2.10 The Tribunal distinguished the decision relied on by Revenue (Nahar Singh Contractor) on factual grounds: in that case, the refund claim was filed 5½ years after the Tribunal's order, the appellant failed to establish that the houses were not part of any apartment/township, and there was no evidence of non-passing on of the tax, leading to application of limitation and unjust enrichment. In the present appeals, refund claims were filed within five years, and sufficient evidence showed that the incidence of tax was borne by the appellants.

2.11 Relying on S.P. Builders and similar cases, the Tribunal reiterated that where the contract stipulates that service tax is to be borne by the contractor and the service recipient recovers even the reverse charge portion from the contractor, the incidence of the entire tax is on the contractor who is then entitled to refund.

Conclusions

2.12 The incidence of the entire service tax (both directly paid and reverse-charge portion) was borne by the appellants. The bar of unjust enrichment does not apply.

2.13 The appellants are entitled to refund of both portions of service tax - that paid directly by them and that paid by the housing board but deducted from their bills.

Issue 3: Applicability of Section 11B Limitation to Tax Paid by Mistake on Exempt Services

Legal framework

2.14 The Tribunal considered section 11B of the Central Excise Act, 1944, which prescribes a limitation period and procedure for refund of "duty of excise" (made applicable to service tax), and the judicial position as laid down by the Karnataka High Court in KVR Constructions, affirmed by the Supreme Court, and followed by another High Court (Tripura Cricket Association).

2.15 The Tribunal also relied on its own decisions, including Credible Engineering Construction, S.P. Builders, Meenu Builders, and Gajendra Singh Sankhla, where it had been held that payments made under a mistaken notion for amounts not legally exigible as tax are to be regarded as deposits, not as "duty/tax," and hence outside the purview of section 11B.

Interpretation and reasoning

2.16 Following KVR Constructions, the Tribunal noted that section 11B governs refund of "duty of excise" and not other amounts collected without authority of law. Where, due to exemption, the department had no authority to levy or collect service tax on the transaction, any amount paid under a mistaken belief cannot be treated as tax/duty for the purpose of section 11B.

2.17 The Tribunal reiterated that:

(a) If the services in question were exempt and not legally taxable, any amount paid as "service tax" thereon was not a duty/tax but a deposit.

(b) Mere payment by the assessee and acceptance by the department does not convert an otherwise non-exigible amount into lawful "tax."

(c) Consequently, the statutory limitation and procedural requirements under section 11B for refund of duty do not apply to such deposits.

2.18 In Meenu Builders and Gajendra Singh Sankhla, after analyzing KVR Constructions and distinguishing Mafatlal Industries and other authorities cited by Revenue, the Tribunal had held that where service tax was paid purely under mistake of law on exempt services, the payments are to be treated as revenue deposits, and limitation under section 11B and interest regime under section 11BB are inapplicable.

2.19 Applying the above reasoning, the Tribunal held in the present matters that the service tax had been paid by mistake on exempt construction services; thus, the payments were deposits and not service tax, and section 11B could not be invoked to reject the refund as time-barred.

Conclusions

2.20 The amounts paid as "service tax" on the exempt construction of individual EWS/LIG houses were not legally exigible and constitute deposits with the government, not tax.

2.21 The limitation provisions of section 11B of the Central Excise Act, 1944 do not apply to such deposits; accordingly, the refund claims are not barred by limitation on the basis of section 11B.

Issue 4: Entitlement to Interest on Refund and Applicable Rate

Legal framework

2.22 The Tribunal considered its prior decisions, including Meenu Builders, Gajendra Singh Sankhla, and Indus Towers Limited, which addressed interest on refunds in cases where tax was paid by mistake and section 11B/11BB was held inapplicable.

Interpretation and reasoning

2.23 In Meenu Builders and Gajendra Singh Sankhla, after holding that payments of service tax made under mistake of law on exempt services are outside section 11B, the Tribunal concluded that section 11BB (which governs interest on delayed refund of "duty") and Notification No. 67/2003-CE (NT) concerning the rate of interest under that regime do not apply.

2.24 In those cases, relying inter alia on Indus Towers Limited, the Tribunal granted interest at 12% per annum on delayed refunds where the department had retained amounts which were only deposits and not legally payable tax.

2.25 Applying the same reasoning, the Tribunal held in the present matters that, as section 11B and 11BB are inapplicable, interest must nevertheless be paid on delayed refund of deposits, and following the established precedent, the appropriate rate is 12% per annum.

Conclusions

2.26 The appellants are entitled to interest on the refunded amounts, as the sums were revenue deposits wrongly retained by the department.

2.27 Consistent with prior decisions (including Indus Towers Limited, Meenu Builders, and Gajendra Singh Sankhla), interest is payable at the rate of 12% per annum on the refunded amounts.

Overall Dispositive Conclusions

2.28 The construction of individual EWS/LIG residential houses under the housing board's work orders was exempt from service tax under the applicable notification; tax paid thereon was not legally due.

2.29 The entire incidence of the purported service tax, including the reverse-charge portion deposited by the housing board after deduction from the contractors' bills, was borne by the appellants; thus, refund is not hit by unjust enrichment.

2.30 The payments made were in the nature of deposits consequent to mistake of law, not "tax/duty," and section 11B limitation does not apply; the refund claims are therefore not time-barred under section 11B.

2.31 The appellants are entitled to refund of the full amount paid by them and by the service recipient (recovered from their bills), together with interest at 12% per annum; the impugned orders rejecting the refund claims are set aside with consequential relief.

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