Contractor Not Entitled to Refund of Service Tax Passed on to MES: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi has held that a contractor who had already passed the burden of service tax to the Military Engineering Services (MES) cannot claim refund of the tax merely on the basis of a No Objection Certificate (NOC) issued by MES. The bench of P.V. Subba Rao (Technical Member) ruled that the department cannot recover the refund amount that had already been erroneously sanctioned earlier without following the statutory procedure. The appellant had rendered services to the Military Engineering Services (MES) during the period from 1 April 2015 to 29 February 2016. These services were initially exempt from service tax under Notification No. 25/2012-ST. Although the exemption was withdrawn with effect from 1 April 2015, the Government later restored the exemption retrospectively through Notification No. 6/2015-ST dated 1 March 2015. Based on this retrospective exemption, the appellant sought a refund of ₹2,73,649, contending that the service tax paid during the relevant period was not payable. The department did not dispute the eligibility of the refund on merits. However, it was noted that the contractor had already collected the service tax amount from MES, thereby passing on the tax burden to the service recipient. The department argued that under Section 11B of the Central Excise Act, 1944, which applies to service tax matters through Section 83 of the Finance Act, 1994, refund can only be granted to the person who has actually borne the tax burden. Since the contractor had collected the tax from MES, the refund could only be claimed by MES and not by the appellant. The NOC issued by MES allowing the contractor to claim the refund, according to the department, had no legal validity and could not override statutory provisions. The Tribunal observed that there was no dispute that the service tax was not payable and that the refund was admissible on merits. However, the crucial issue was the application of the principle of unjust enrichment. The bench rejected the appellant’s argument that unjust enrichment would not apply when the tax itself was not payable. It held that every refund claim under Section 11B arises precisely because tax was paid even though it was not legally payable, and therefore the doctrine of unjust enrichment remains applicable. The Tribunal also rejected the reliance placed by the appellant on an NOC issued by an MES engineer, observing that such a document cannot override statutory provisions or the binding precedent of the Supreme Court in Mafatlal Industries Ltd. v. Union of India. While examining Section 11B, the Tribunal clarified an important legal point: refund cannot be rejected solely on the ground of unjust enrichment. If the tax is refundable but the claimant has passed on the burden to another person, the amount must be credited to the Consumer Welfare Fund instead of being paid to the claimant. Accordingly, the Tribunal held that the authorities were incorrect in rejecting the refund outright. Instead, the refundable amount should have been credited to the Consumer Welfare Fund. The Tribunal also examined the direction issued by the department requiring the appellant to repay ₹2,50,131, which had already been sanctioned earlier as refund. It held that Section 11B does not contain any provision to recover an erroneously sanctioned refund. Such recovery can only be made by issuing a proper notice under Section 73 of the Finance Act, 1994 relating to recovery of service tax not levied, short paid, or erroneously refunded. Since no such procedure was followed, the direction to repay the amount was held to be unsustainable. The Tribunal partly allowed the appeal and modified the impugned order with the various directions. The refund claim cannot be paid to the appellant because the tax burden was passed on to MES. The refundable amount should be credited to the Consumer Welfare Fund. The direction requiring the appellant to repay ₹2,50,131 already refunded was set aside, as recovery must follow the statutory procedure under Section 73. Case Details Case Title: M/s Amarnath Sharma Versus Commissioner CGST (Appeals) Citation: JURISHOUR-344-HC-2026(Ker) Case No.: Service Tax Appeal No. 51710 Of 2021 (SM) Date: 12.03.2026 Counsel For Appellant: Ankur Jain and Samay Jain, Advocates Counsel For Respondent: Rohit Issar, Authorized Representative Click Here To Read Order Read More: No Concessional 0.1% GST on HDPE Drums Supplied to Manufacturer Instead of Merchant Exporter: Karnataka High Court

Contractor Not Entitled to Refund of Service Tax Passed on to MES: CESTAT

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