The Bangalore bench of CESTAT ( Customs Excise and Service Tax Appellate Tribunal ) has directed that the refund of service tax paid for consultancy services under RCM ( Reverse Charge Mechanism ) shall not be considered as deposit in absence of FAR ( Final Audit Report ). It shall be considered as ‘Tax’ only and it was directed to sanction the refund under Section 11B of Central Excise Act.
The tribunal stated that “the tax being paid under service tax category under the relevant provisions and there is nothing declared unconstitutional or under mistake of law, the amount is necessarily to be considered as tax and refund has to be sanctioned as per the provisions specified under Section 11B of the Central Excise Act, 1944.”
The brief fact is that during an audit, it was noted that the respondent – P G Setty Construction needed to pay Service Tax under the reverse charge mechanism for Consultancy Services received from abroad. The respondent paid Rs. 18,98,107/- in Service Tax, including interest and penalty, through three challans dated 05.12.2016, 02.01.2017, and 27.12.2016.
Subsequently, the respondent filed a refund claim, asserting the payments were made under protest. The original authority rejected the refund due to limitations and dismissed the claim that the tax was paid under protest. The respondent appealed this decision to the Commissioner (A), arguing that the refund was not time-barred and that the payment was a deposit, not a Service Tax.
The Commissioner (Appeals) in the impugned order held that since the audit did not issue a Final Audit Report (FAR) on their observations, the tax paid by the appellant based on these observations is untenable. Without an approved FAR, the audit observations communicated to the appellant lack authority. The appellant paid the tax, interest, and penalty in the bona fide belief that the audit observations were legally valid. However, because these observations were not included in an FAR, or no FAR was issued, the amounts paid should be treated as a ‘deposit’ rather than a ‘tax amount’.
Based on the above observations, the Commissioner (Appeals) referring to the decisions of the Supreme Court in the case of Salonah Tea Company Ltd. vs. Superintendent of Tax: 1988 concluded that the amount paid by the respondent is to be treated as a ‘deposit’ towards tax, unless it is confirmed by the authorities as payment of tax and hence, the provisions of Section 11(B) of Central Excise Act, 1944 relating to limitation would not be applicable. Accordingly, the refund was allowed.
The Revenue filed the appeal against the above order before the CESTAT.
The Revenue’s Authorized Representative (AR)/appellant submitted that the appellate authority [Commissioner (Appeals)] incorrectly addressed the issue of limitation. The appellate authority decided that since the department didn’t issue the FAR, the payments should be considered ‘deposits’ rather than tax payments, making Section 11(B) inapplicable.
The AR contended this is wrong because the FAR is not mandatory under Rule 22 of the Central Excise Rules, 2002. The audit observation was communicated on November 16, 2016, and the respondent agreed to pay the Service Tax with interest and penalty, requesting the matter’s closure under Section 73(3) of the Finance Act, 1944, without a show-cause notice. Therefore, the order treating the amounts as deposits should be set aside.
On the contrary, the respondent- P G Setty Construction argued that there is no demand against them and the amount paid was by mistake, so it should be refunded. They claimed that the limitation under Section 11(B) of Central Excise Tax doesn’t apply, as the Commissioner (Appeals) ruled. It’s a settled law that amounts paid by mistake are refundable without limitation.
The respondent argued that their refund claim isn’t time-barred under Section 11(B). They stated that they filed the claim within one year of tax payment. However, the department delayed processing the claim until after an audit. Despite the department’s acknowledgment that the audit wasn’t complete, they rejected the claim as late.
The respondent contested that the Final Audit Report (FAR) is crucial, citing Excise Audit Manual 2008 and a Board Circular. They claimed the absence of FAR doesn’t justify treating their payments as deposits. Therefore, they believe the appellate authority’s decision to dismiss the appeal is correct.
The respondent asserted they weren’t liable for tax because the audit hadn’t concluded, a fact not disputed by the Revenue. This indicated the department collected the amount unlawfully, violating Article 265 of the Indian Constitution. They cite legal precedents like Salonah Tea Company Ltd. Vs. Superintendent of Taxes and others, among others, to support their claim.
The bench heard both sides and noted that the respondent deposited the service tax, interest, and penalty within the time frame prescribed by Section 11B. However, the Commissioner determined that the claim was incorrect, as the payments weren’t made under protest and were time-barred. Since there was no appeal against this finding, the time bar issue stands settled and cannot be reopened.
The respondent paid the service tax based on audit observations and requested closure without a show-cause notice, which the Commissioner observed. The respondent paid the tax on consulting charges under reverse charge mechanism and requested no show-cause notice be issued, as they had already paid the tax liability, interest, and penalty. Therefore, the case laws cited by the Commissioner are not applicable here.
Further noted that the respondent paid service tax on consultancy services based on audit observations communicated on 16.11.2016. They agreed and paid the tax, interest, and penalty, requesting closure without a show-cause notice on 03.04.2017 under Section 73(3) of the Finance Act, 1944. The Audit Manual outlined procedures and guides for audit officers. The Commissioner (A) noted that the respondent informed the Audit Commissionerate of the payments and requested closure without a show-cause notice, confirming compliance with relevant provisions.
In this case, it’s acknowledged that the respondent paid service tax based on an audit letter dated 16.11.2016 for consulting charges to M/s. Aluforms Korea Co. Ltd. under reverse charge mechanism. The words of respondent intimated to the Assistant Commissioner of Central Excise and Service Tax is as follows “in terms of the provisions of Section 73(3) of Chapter V of the Finance Act, 1994, we request that the demand show-cause notice may not be issued to us since we have discharged the service tax liability along with the applicable interest and penalty at 15% on the service tax amount”.
Therefore, there is no question of duty being paid under mistake of law or to be held ultra vires and hence, the case laws relied upon by the Commissioner (A) in the impugned order are not applicable in the facts of the case” stated the tribunal.
Thus, the bench of R Bhagya Devi (Technical Member), ruling in favour of Revenue, decided that the service tax category under the relevant provisions and there is nothing declared unconstitutional or under mistake of law, the amount is necessarily to be considered as tax and refund has to be sanctioned as per the provisions specified under Section 11B of the Central Excise Act, 1944. Accordingly, the appeal was allowed.
This ruling, though directed at a refund, supported the appellant’s /revenue’s contention to set aside the order treating the amount paid as ‘Deposit.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
