Gujarat HC orders refund after Revenue collected the same service tax twice, overriding limitation objection

The petitioner, a proprietorship firm providing manpower recruitment and supply services, collected and deposited service tax, education cess and higher education cess of ₹7,15,237 with the Service Tax Department on 21 June 2015.

In May 2017, an audit of respondent No. 3 concluded that, with effect from 1 April 2015, manpower supply services were subject to the complete reverse-charge mechanism and that the petitioner was not liable to collect or pay service tax.

Respondent No. 3 consequently paid service tax of ₹78,679, along with interest, on 16 May 2017 and issued a debit note to the petitioner on 22 May 2017.

The petitioner thereafter filed a refund claim under Section 11B of the Central Excise Act, 1944, on 27 June 2017.

The refund claim was rejected as time-barred by the adjudicating authority on 13 October 2017, and the petitioner’s appeal under Section 85 of the Finance Act, 1994, was dismissed on 12 February 2018.

The petitioner challenged both orders under Article 226 of the Constitution.

1. Whether the petitioner’s refund claim could be rejected as time-barred under Section 11B when the petitioner became aware of the unauthorised collection only upon issuance of the debit note by respondent No. 3 in May 2017?

2. Whether the High Court should exercise its extraordinary jurisdiction under Article 226 despite the availability of an alternative appellate remedy before the Tribunal?

3. Whether the Department could retain the amount deposited by the petitioner after recovering the same service tax from respondent No. 3 under the reverse-charge mechanism?

The Court applied Section 11B of the Central Excise Act, 1944, which ordinarily governs claims for refund of service tax and prescribes a limitation period of one year.

It considered Section 85 of the Finance Act, 1994, under which an appeal lay against the adjudicating order, and Article 226 of the Constitution, which permits exercise of writ jurisdiction in exceptional cases notwithstanding an alternative remedy.

The Court relied on the Constitution Bench decision in Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536, cited by the petitioner in support of the proposition that amounts collected without authority of law may be regarded as deposits and that appropriate relief may be granted in writ jurisdiction.

The governing principle applied was that the Revenue cannot retain amounts collected without legal authority, particularly where it has effectively recovered the same tax twice and thereby benefited from unjust enrichment.

The audit report expressly recorded that manpower supply services were covered by the complete reverse-charge mechanism from 1 April 2015 and that the petitioner was not liable to collect or pay service tax.

Consequently, the Department’s acceptance of the petitioner’s payment on 21 June 2015 was held to be unauthorised.

The Department subsequently recovered the same tax from respondent No. 3 on 16 May 2017 while retaining the amount earlier deposited by the petitioner, resulting in double recovery.

Since the petitioner became aware of the legal position only through respondent No. 3’s debit note dated 22 May 2017, the Court held that it would be inequitable and legally impermissible to reject the refund solely on limitation when the Department itself had retained an amount collected without authority and had become the beneficiary of unjust enrichment.

These exceptional circumstances justified bypassing the alternative remedy before the Tribunal and exercising writ jurisdiction under Article 226.

The orders dated 13 October 2017 and 12 February 2018 were quashed and set aside.

The respondents were directed to refund the amount claimed by the petitioner within six weeks from receipt of the judgment; failing payment within that period, the amount would carry interest at 9% per annum until actual payment.