2026 (3) TMI 750 - AT - Service Tax

Presumption of passing on under Section 11B bars direct claimant refunds; recovery of erroneous refunds must follow notice based procedure.

Section 11B creates a rebuttable presumption that the tax burden was passed on to customers and mandates that amounts found refundable be credited to the ... Rejection of refund claim under section 11B - Unjust enrichment - rebuttable presumption of passing on tax burden - credit to consumer welfare fund - limitation period for recovery - Validity of third-party No Objection Certificate for refund claim - recovery of erroneously refunded service tax under section 73. Unjust enrichment under section 11B - HELD THAT:- The Court held that section 11B (as made applicable to Service Tax) applies to claims of refund where duty was not payable but was paid. There is a statutory, rebuttable presumption that the incidence of duty has been passed on to the customer and amounts refundable in such cases are to be credited to the Consumer Welfare Fund unless the claimant establishes that the burden was not passed. Consequently, the impugned order rejecting refund on the sole ground of unjust enrichment was incorrect; the correct course was credit to the Consumer Welfare Fund. [Paras 11, 16, 17] Refund could not be sustained to the appellant in his favour under section 11B; the amount should be credited to the Consumer Welfare Fund. Validity of third-party No Objection Certificate for refund claim - HELD THAT:- The Court held that an NOC issued by an official of MES purporting to authorise the appellant to claim refund cannot override the statutory scheme in section 11B or the binding decision of the Supreme Court in Mafatlal Industries [1996 (12) TMI 50 - SUPREME COURT]. A departmental or contractual document cannot displace the statutory presumption of passed-on incidence and therefore the NOC has no legal standing to permit grant of refund to the appellant in place of the person who bore the burden. [Paras 12, 13, 14] The NOC issued by MES cannot be accepted as a lawful basis for sanctioning refund to the appellant. Recovery of erroneously refunded service tax under section 73 - Whether the appellant could be directed under section 11B to repay the refund already paid to him - HELD THAT:- The Court found that section 11B contains no provision to recover an erroneously sanctioned refund. Recovery of an erroneously refunded service tax must proceed only under the recovery provisions of section 73 of the Finance Act, 1994. Having regard to that statutory scheme, the direction in the impugned order to the appellant to repay the amount already paid to him was not sustainable and was set aside. [Paras 18, 19, 20] Direction to the appellant to repay the erroneously sanctioned refund was set aside; recovery, if any, is governed by section 73 procedures. Final Conclusion: The appeal was partly allowed: the rejection of refund to the appellant on the ground of unjust enrichment was replaced by an order that the refundable amount be credited to the Consumer Welfare Fund; the direction requiring the appellant to repay the erroneously sanctioned refund was set aside, recovery being subject to the procedure under section 73. Issues: (i) Whether the refund claim can be rejected under section 11B of the Central Excise Act, 1944 on the ground of unjust enrichment where the applicant had collected service tax but the burden was passed on to the customer; (ii) Whether the appellant is liable to repay the erroneously sanctioned refund of Rs. 2,50,131/- which was already paid to him.Issue (i): Whether refund can be refused on unjust enrichment grounds under section 11B of the Central Excise Act, 1944.Analysis: Section 11B, as made applicable to service tax, creates a rebuttable presumption that the incidence of duty has been passed on to the customer and provides that amounts determined refundable are to be credited to the Consumer Welfare Fund unless the claimant proves the burden was not passed on. The provision distinguishes cases where refund is not payable on merits or by limitation from cases where refundable amounts must be credited to the Fund. The statutory scheme and the binding precedent cited by the Tribunal (Mafatlal Industries) require application of section 11B in such refund claims; documentary instruments (such as an NOC from the customer) contrary to the statutory scheme cannot override the statutory presumption and mechanism.Conclusion: Refund cannot be granted to the appellant in the form claimed to him; the refundable amount (to the extent allowable) should be credited to the Consumer Welfare Fund under section 11B unless the claimant proves the burden was not passed on.Issue (ii): Whether the appellant must repay the erroneously sanctioned refund of Rs. 2,50,131/- already paid to him.Analysis: There is no provision in section 11B for direct recovery of an erroneously sanctioned refund. Recovery of an erroneously refunded amount is governed by the recovery provisions of the service tax law, specifically section 73 of the Finance Act, 1994, which prescribes notice-based recovery within the applicable limitation periods and the procedure for determination and collection. The Assistant Commissioner's direction to the appellant to refund the amount was not supported by section 11B and recovery, if any, must follow the procedure under section 73.Conclusion: The direction to the appellant to repay Rs. 2,50,131/- is set aside; the appellant is not required to repay that amount under section 11B and any recovery must be effected only in accordance with section 73 of the Finance Act, 1994 within applicable limitation.Final Conclusion: The appeal is partly allowed - the rejection of refund in form of denying credit to the Consumer Welfare Fund is set aside insofar as the refund should have been credited to the Consumer Welfare Fund under section 11B, and the direction to the appellant to repay the already paid Rs. 2,50,131/- is set aside; any recovery of erroneously paid refund must proceed under section 73 of the Finance Act, 1994.Ratio Decidendi: Section 11B of the Central Excise Act, 1944 mandates credit of refundable amounts to the Consumer Welfare Fund due to a rebuttable presumption that the duty burden has been passed on, and it does not provide for direct recovery of erroneously sanctioned refunds; recovery of such refunds must be effected only under the notice-based procedure of section 73 of the Finance Act, 1994 within prescribed limitation.