By TIOL News Service

MUMBAI, NOV 28, 2016: THE appellant having contracted with M/s M Pallonji & Co on 30th August 2004 for construction of a coal berth jetty at Trombay, had been charged service tax for rendering of 'Commercial and Industrial Construction service' in the bills raised by the latter during the execution of the project.

Having ascertained in 2006 that such projects were not liable to tax owing to the exclusion provision in the definition of the service in section 65 (25b) of FA, 1994, on 1 st September 2006 they applied for refund of Rs.2.53 crores charged from them towards service tax for the period from 1 st September 2004 to 31 st July 2006.

The claim was rejected by the AC with the finding that the documentation furnished was not sufficient to evince that the tax had been collected by M/s M Pallonji & Co or that M/s Pallonji & Co had deposited the said amount to the credit of the Central Government.

The Commr.(A)invoked the bar of limitation for a portion of the claim and the bar of 'unjust enrichment' for the entire amount to confirm the rejection.

The appellant is before the CESTAT.

+ Presumably, the first appellate authority was satisfied with evidence of tax having been collected and credited to the account of the Central Government. Else, there was no cause to venture into a finding on 'unjust enrichment' which need be invoked only at the stage of sanction. Having invoked the bar of 'unjust enrichment', the only course of action available to the appellate was to reverse the order of the lower authority by sanctioning and crediting Rs.1,08,95,273 to the Fund and rejecting the claim for Rs.1,44,69,743 as time-barred.

+ Every refund claim must necessarily pass the test of 'unjust enrichment' after determining eligibility and entitlement to refund and, unless covered by the situations enumerated in the first proviso to section 11B(2) of Central Excise Act, 1944, must be transferred to the Fund. Further, the evidence produced must be considered in the context of the business activity of the claimant for satisfaction that duty/taxes have been borne only by the claimant.

+ Consequently, we hold that if the bar of 'unjust enrichment' has been invoked then the eligibility for the claim has been accepted by the authority – original or appellate – because only eligible amounts can be credited to the Fund. It also implies that refund claim cannot be rejected for failing to cross the hurdle of 'unjust enrichment' which fate is reserved for those claims barred by time or those found to be ineligible. Accordingly, the rejection of the refund claim in the impugned order is set aside.

+ In accounting terms, capitalization is a management decision that the expense for an item is not to be met from the revenues of the year in which it was acquired. The expense is, thereby, transformed into expenditure to be recovered from future streams of revenue. The annual amortization of this expenditure is charged on the revenues of subsequent years and such charge is termed as depreciation. To the extent that depreciation is not a charge on the proceeds from sale of goods or service, capitalization is sufficient evidence of the incidence not having been passed on.

+ Settled law, undoubtedly, holds that there is no presumption of passing the hurdle of 'unjust enrichment' in relation to duties levied on capital goods utilized for manufacture. However, it cannot be concluded therefrom that refund of duty is barred should there be any discharge of liability in excess of that due. The proportion of duty that is included in the depreciation of each year that is charged on cost of sales has obviously been shifted but the amount retained in the asset value of the year has not been included in the cost of sales. Thus every capital asset on which some or all of the duty has been paid in excess will need to be scrutinized and refund allowed to the extent that the capitalized amount is inclusive of duty. The reasoning in the impugned order that incidence of duty has been passed on is not tenable.

+ Till the capitalization is approved, no portion of the cost could have been included in the tariff for sale to distributors. Any refund sanctioned at any later period would be subject to scrutiny by purchasing distributors who would insist that refunded amount should be excluded from tariff calculation or, if included, to be adjusted in future tariff fixation. There is, thus, an in-built mechanism in the energy sector to secure refunds granted to entities from 'unjustly enriching' the claimant. For these reasons, the appellant can be inferred to have borne the incidence of tax contrary to the peremptory findings of the adjudicating Commissioner.

+ The scheme of section 11B of Central Excise Act, 1944 does not specify that duty has to be credited to the Central Government as a pre-requisite for eligibility. It merely requires that duty be paid and, as far as recipient of service is concerned, that obligation is discharged by making over the amount in the invoice that separately identifies the tax component. The claimant is not required to enforce tax-payment; that is the responsibility of tax officials who are vested with power to recover such tax which has been collected in excess . With that specific empowerment available in the statute, the need to prove that provider has deposited the tax is rendered superfluous. It is sufficient to evince that invoices, incorporating the tax amount, has been honoured in full. The bank statement and invoices furnished do evidence that tax liability has been discharged along with consideration for services received.

+ The impugned order has found that the payment made prior to September 2005 is barred by limitation. We hold that this finding is in accordance with the time-line laid down in section 11B of Finance Act,1994, …

Concluding that the rejection of the claim for the period prior to September 2005 on grounds of limitation is legal and proper, the appeal was allowed to the extent of Rs.1,08,95,273 as being refundable to the appellant.

(See 2016-TIOL-3073-CESTAT-MUM)