The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that an assessee is not entitled to interest on a service tax refund where the refund is sanctioned within the statutory period of three months prescribed under Section 11BB of the Central Excise Act, 1944.
The bench of Rajeev Tandon (Technical Member) ruled that refund claims cannot be allowed in the absence of documentary evidence establishing payment of the disputed tax, even if the tax was allegedly paid under a mistake of law.
The appellant/assessee challenged the denial of interest on refund and partial rejection of refund claims due to non-submission of supporting documents.
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The appellants were engaged in construction of low-cost residential houses and single independent residential units for the Rajasthan Housing Board under the Central Government’s affordable housing scheme. They contended that these construction services were exempt from service tax under Notification No. 25/2012-ST. However, service tax had been paid during the period from 2012-13 to 2015-16, which the contractors later claimed had been deposited under a mistaken understanding of the law.
Refund applications were subsequently filed in 2024 and 2025 seeking refund of the service tax paid. The adjudicating authorities sanctioned substantial portions of the refund but rejected certain amounts because the appellants failed to produce challans or certificates proving that the disputed tax had actually been deposited into the Government account. The authorities also denied interest on the refunds on the ground that the admissible refunds had been processed within three months of receipt of the refund applications.
The principal issue before the Tribunal was whether taxpayers could claim interest at 12% from the date of payment of service tax by arguing that the amount paid was merely a “deposit” made under a mistake of law rather than tax, thereby taking the case outside the framework of Sections 11B and 11BB of the Central Excise Act.
The appellants also sought refund of amounts disallowed solely because documentary proof of payment had not been furnished.
The Tribunal categorically held that Section 11BB governs interest on delayed refunds, and interest becomes payable only when the refund ordered under Section 11B is not released within three months from the date of receipt of the refund application.
Since the admissible refund amounts had been sanctioned within the prescribed statutory period, the Tribunal held that no interest was payable, rejecting the demand for interest from the original date of tax payment.
The Bench observed that once an assessee files a refund claim under Section 11B, it cannot simultaneously contend that Section 11B does not apply merely because the tax was allegedly paid under a mistake of law.
The Tribunal also refused to grant the balance refund amounts that had been rejected due to absence of documentary evidence.
The appellants argued that references in the show cause notices acknowledging tax deposited by the Rajasthan Housing Board were sufficient and that production of challans or certificates should not be insisted upon.
Rejecting this contention, the Tribunal held that Section 11B expressly requires refund applications to be supported by documentary evidence establishing payment of duty. Mere statements in a show cause notice could not substitute statutory proof of payment.
The Bench observed that there was no reliable evidence showing when the alleged tax was deposited, the amount actually deposited, the tax head under which it was deposited, or whether the Rajasthan Housing Board had deposited the amount with the Government.
Accordingly, the denial of refund relating to unsupported amounts was upheld.
The Tribunal rejected the argument that every payment made under a mistake of law should automatically be treated as a deposit carrying interest from the date of payment.
It noted that the service tax had been voluntarily paid through self-assessment over several years without protest, while refund claims were filed almost a decade later. According to the Bench, such voluntary payments could not readily be characterised as deposits merely to claim higher interest after many years.
The Tribunal remarked that accepting such a proposition would effectively convert tax payments into a risk-free investment yielding higher returns than ordinary financial instruments, an interpretation inconsistent with the statutory scheme.
While deciding the appeals, the Tribunal extensively relied upon landmark judgments including: Mafatlal Industries Ltd. v. Union of India, holding that refund claims arising from mistaken payment of tax must ordinarily be pursued within the statutory framework governing refunds. ITC Ltd. v. Commissioner of Central Excise, reiterating that refund authorities cannot reassess completed assessments while processing refund applications. Subsequent Tribunal decisions holding that interest under Section 11BB becomes payable only upon delay beyond the statutory three-month period.
CESTAT dismissed all five appeals, holding that no interest was payable because the admissible refunds had been granted within the statutory period prescribed under Section 11BB; and refund claims unsupported by documentary evidence of tax payment were rightly rejected.
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