The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has directed the Department to pay 6% interest on an illegally collected service tax amount of ₹3.60 lakh from the date of its recovery in August 2012 until its refund in August 2021 and has strongly criticized the tax authorities for compelling an employee to pay service tax that was never legally payable and observed that the case reflected an extraordinary failure by departmental officers to apply even the basic statutory provisions. 

The bench of R. Muralidhar (Judicial Member) has observed that  once the Department accepted the amount without issuing a statutory show cause notice establishing tax liability, the amount retained by the Revenue became illegal ab initio. Even when the appellant sought refund, the Department attempted to justify the tax demand for the first time during refund proceedings instead of establishing liability through the statutory adjudication process.

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The appellant had worked as Manager – Corporate Communications with Vedanta Aluminium Ltd. between September 2008 and March 2012, earning approximately ₹55,000 per month. In August 2012, jurisdictional Service Tax authorities took the view that she was providing taxable “Management or Business Consultancy Service” and directed her to pay service tax amounting to ₹3,60,910.

Feeling compelled by departmental pressure, she deposited the entire amount on 30 August 2012. Subsequently, departmental officers orally demanded interest for delayed payment. On consulting tax professionals, she realized that she was not liable to pay service tax at all and sought refund of the amount paid under a mistaken belief. 

Her refund application filed in August 2013 was rejected. After prolonged litigation, including an earlier remand by the Tribunal, the adjudicating authority finally accepted in July 2021 that the service tax had never been payable because her annual remuneration during each relevant financial year remained below the then applicable ₹10 lakh threshold exemption limit. The refund was sanctioned and disbursed in August 2021. However, the Department refused to grant any interest on the delayed refund, leading to the present appeal. 

The Tribunal observed that one of the most striking aspects of the case was that no show cause notice had ever been issued seeking appropriation of the amount voluntarily deposited by the appellant.

The Tribunal held that rejection of the refund claim itself was legally unsustainable because the foundational tax liability had never been established in accordance with law. 

The Tribunal found that the entire demand originated merely from information available in Form 26AS, where the authorities simply aggregated remuneration received over four different financial years to arrive at a taxable value.

However, the statutory threshold exemption under Service Tax operated financial year-wise, not cumulatively.

The adjudicating authority during the de novo proceedings had correctly found that the appellant’s income remained below ₹10 lakh in each individual financial year, making her completely exempt from service tax throughout the relevant period. 

The judgment contains unusually strong observations against the functioning of departmental authorities.

The Tribunal remarked that none of the officers involved—from the officer initiating the demand, to those demanding interest, rejecting the refund, and dismissing the appeal—had applied even basic intelligence while examining the statutory threshold provisions.

The Bench observed that it had rarely encountered a case involving such a gross violation of statutory provisions and principles of natural justice, where authorities failed to examine even the most elementary legal requirements.

It further noted that the appellant, whose average annual income during the relevant period was approximately ₹6 lakh, was compelled to deposit more than 50% of her annual earnings through an unlawful demand. The Tribunal described the Revenue’s retention of the amount for nearly nine years as an illegal deprivation of the taxpayer’s money. 

The Tribunal also criticized the Department for taking more than three years to complete the de novo adjudication even after the earlier remand order of the Tribunal.

The appellant had repeatedly requested the authorities to conclude the proceedings. During the process, the Department even informed her that its own refund records had been misplaced due to reorganization of the Commissionerate and requested her to reconstruct the departmental file by supplying fresh copies of all documents. 

The Tribunal relied extensively on the Supreme Court’s landmark decisions in Ranbaxy Laboratories Ltd., Hamdard (Waqf) Laboratories, Manisha Pharmo Plast Pvt. Ltd., and Sandvik Asia Ltd., reiterating that interest on delayed refund is not a discretionary benefit but a statutory entitlement.

The Bench emphasized that where the Government unlawfully retains money belonging to a taxpayer, compensation by way of interest becomes necessary. It observed that the Revenue cannot take advantage of its own wrongful conduct by withholding refunds without lawful authority. 

Rejecting the Department’s contention that interest should run only after the refund order, the Tribunal held that the peculiar facts of the present case justified a different approach.

Since the service tax had been illegally recovered without any valid adjudication and retained for almost nine years, the Tribunal directed the Department to pay interest at 6% per annum from 30 August 2012—the date of illegal collection—until 18 August 2021, when the refund was actually disbursed. It further directed that the interest amount be calculated and paid within eight weeks from communication of the order. 

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