The Principal Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, has delivered an important ruling clarifying the interplay between limitation under Section 11B of the Central Excise Act and the doctrine of unjust enrichment in service tax refund claims.
While holding that amounts deposited under a mistake of law cannot be rejected as time-barred under Section 11B, the bench of Binu Tamta (Judicial Member) and P. V. Subba Rao (Technical Member) simultaneously ruled that a builder who has already recovered the tax from buyers cannot itself obtain the refund. Instead, the Tribunal granted liberty to the affected buyers/allottees to seek refunds directly from the Government.
The appeal was filed by the Estate Officer of the Madhya Pradesh Housing & Infrastructure Board against an order rejecting its service tax refund claim. The Board had paid service tax on construction and housing projects for the period prior to 1 July 2010. Subsequently, relying on CBEC Circular No. 108/02/2009-ST and the legal position prevailing before the statutory amendment effective from 1 July 2010, it claimed that the levy itself was not applicable during the relevant period and that the tax had been paid under a bona fide mistake of law. Consequently, it filed a refund application on 10 June 2019.
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The adjudicating authority rejected the refund claim on three grounds—limitation under Section 11B, unjust enrichment, and failure to establish correlation between the tax paid and the refund claimed. The Commissioner (Appeals) upheld that decision, leading to the present appeal before the Tribunal.
The appellant contended that the Government had no authority to collect service tax on such construction activities prior to 1 July 2010. Therefore, the amount deposited could not legally be treated as “service tax” but only as an amount paid under a mistake of law.
It further argued that the limitation prescribed under Section 11B applies only to refunds of duty or tax legally leviable and not to deposits made without authority of law. The Board also submitted that it intended to refund the amount to the eligible allottees from whom the tax had been collected and requested that the matter be remanded to enable verification of buyer-wise records, CA certificates, ledgers and other supporting documents.
The department maintained that Section 11B mandates filing refund claims within one year from the relevant date and that the appellant’s application was filed well beyond that statutory period.
The department also argued that the claim was barred by the doctrine of unjust enrichment because the service tax had admittedly been recovered from homebuyers. Since the financial burden had been passed on, the appellant could not establish that it had itself borne the incidence of tax. It further pointed out that the appellant had failed to produce evidence demonstrating that the collected amount had already been returned to the buyers.
The Tribunal first examined whether the refund claim could be dismissed as time-barred.
It observed that Section 11B governs refund of “duty” or “tax”. In the present case, however, the amount sought to be refunded was not legally payable as service tax because, during the relevant period, there was no statutory authority imposing service tax on such construction services.
Accordingly, the Bench held that the amount deposited under a mistake of law could not be treated as tax or duty. Since the Government lacked legal authority to collect it, the refund was not governed by the limitation period prescribed under Section 11B.
The Tribunal relied upon several judicial precedents, including the Delhi High Court’s decision in Mera Baba Realty Associate (P) Ltd., the Madras High Court’s ruling in 3E Infotech, and the Karnataka High Court’s decisions in KVR Constructions and Heliocon Agro Chemicals, all of which recognised that deposits made without authority of law stand on a different footing from legally leviable taxes and therefore are not subject to Section 11B limitation.
Although the Tribunal accepted the appellant’s argument on limitation, it refused to grant the refund to the Housing Board.
The Bench noted that the appellant had admittedly collected the service tax amount from the allottees and buyers. Since the burden of tax had already been passed on, the statutory bar of unjust enrichment under Section 11B became applicable.
The Tribunal observed that a claimant seeking refund must establish that it has itself borne the tax burden. In the present case, that requirement was not satisfied. Therefore, the refund could not be granted to the appellant. The Tribunal also noted that any amount collected as service tax was required to be deposited with the Central Government under Section 73A of the Finance Act, 1994.
Recognising that the Government cannot retain money collected without authority of law under Article 265 of the Constitution, the Tribunal devised an equitable solution.
It granted liberty to the eligible buyers and allottees, who had actually borne the incidence of tax, to file refund claims directly. The Tribunal directed that such claims should be verified and, if found genuine, refunded along with applicable interest in accordance with law.
It further clarified that, for these buyers, the limitation period under Section 11B would be computed from the date of the Tribunal’s order under Explanation (B)(ec) to Section 11B. The Housing Board was also directed to provide necessary assistance to enable buyers to file their refund applications expeditiously.
The department had relied upon the Supreme Court’s decision in Union of India v. ITC Ltd. and the Delhi High Court’s judgment in BT India Pvt. Ltd. to contend that refund claims cannot be entertained without first challenging the assessment order.
The Tribunal distinguished those precedents, observing that the present case involved an amount deposited without any legal levy. Since there was no valid taxable event, the payment constituted only a deposit and not service tax. Consequently, the principles governing refund of assessed tax did not apply. The Tribunal also noted that individual buyers would neither have assessment orders nor the legal standing to challenge the Housing Board’s assessments, making those precedents inapplicable.
The Tribunal modified the impugned order to the extent of holding that the refund claim could not be rejected on the ground of limitation. However, it upheld the rejection of the Housing Board’s refund claim on the ground of unjust enrichment. At the same time, it granted liberty to the buyers and allottees to file independent refund claims, with the Housing Board directed to assist them in the process.
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