Service tax officials cannot issue clarifications without statutory authority, Delhi High Court says; orders refund claim to be considered independently

Bajaj Capital Ltd. mobilised public savings into deposits, bonds and other schemes, and acted as a broker for fixed-deposit schemes, receiving commission.

After the company sought clarification on whether its activities attracted service tax, the Additional Commissioner replied on 7 May 2007 that its commission was taxable as Business Auxiliary Service (BAS).

The company sought to quash that letter, a declaration that its activities were not taxable, and a refund of tax deposited from September 2004 to March 2006.

The Union of India stated that the letter was only a reply to a representation, was not binding, and would not influence consideration of any refund claim.

The Court found that determining the tax liability and refund claim would require examination of the relevant agreements, contracts and statutory amendments.

Whether the service-tax authority had statutory power to issue the impugned clarification in response to the petitioner’s representation.

Whether the Court should determine in this writ petition whether the petitioner’s services were taxable during September 2004 to March 2006 and whether the deposited tax should be refunded.

The Court considered the Finance Act, 1994, including Sections 65(19) and 65(105)(zzb), concerning BAS and taxable services, and Section 96A in Chapter VA, which provides for advance rulings on specified questions concerning service-tax liability.

It noted that the Act contained no provision authorising the petitioner to seek a clarification from the jurisdictional service-tax authority or authorising that authority to issue one; statutory authorities may exercise only powers conferred by statute.

Relying on Mahanagar Telephone Nigam Ltd. v. UOI, 2023 SCC OnLine Del 1967, the Court reaffirmed that the Act provides no procedure for seeking such a clarification from the jurisdictional service-tax authority.

Whether a service is taxable, and the resulting liability, require adjudication through the proper statutory process.

The Court observed that the petitioner was not eligible to seek an advance ruling under Section 96A and identified no statutory basis for the representation-and-clarification process used here.

It therefore disapproved of using such clarifications to bypass the statutory advance-ruling mechanism and noted that a clarification could interfere with quasi-judicial adjudication of tax liability.

However, the respondent’s statement that the letter was not binding and would not influence the refund decision meant that the challenge to the letter no longer required determination.

The Court declined to decide taxability or refund entitlement because those questions depended on the parties’ agreements, the relevant statutory amendments and, if a refund were due, the issue of unjust enrichment.

It directed respondent no. 2 to treat the writ petition as an application for refund and decide it in accordance with law, uninfluenced by the impugned letter, the counter-affidavit or the Court’s observations.

The petitioner remained at liberty to pursue any remedies available in law.