Amounts Collected During Central Excise Investigation Must Be Refunded After Demand is Set Aside: CESTAT [Read Order]
CESTAT has ruled that money collected during a central excise investigation must be refunded once the tax demand is set aside
The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that amounts collected during investigation cannot be retained by the department once the demand itself is set aside, and such amounts must be refunded along with applicable interest.
Sri Coronation Fireworks Pvt. Ltd., along with two other related companies, was engaged in manufacture of fireworks at Sivakasi. During investigation by the Directorate General of GST Intelligence (DGGI), the appellants paid substantial amounts in 2021, even before issuance of show cause notices.
In the lead case, an amount of Rs. 1,25,12,819 was paid during investigation. These payments were clearly recorded in the show cause notices and were described as amounts paid voluntarily during investigation.
The Commissioner adjudicated the matter and confirmed service tax demands while appropriating the amounts already paid. The appellants challenged the adjudication orders before the CESTAT. In March 2024, the Tribunal allowed the appeals and set aside the entire demand raised against the appellants.
After succeeding before the Tribunal, the appellants applied for refund of the full amounts paid during investigation. However, the Assistant Commissioner refunded only a small portion by treating the payments as pre-deposit under Section 35F, granting refund of only 7.5% of the demand with interest. The remaining amounts were not refunded.
The Commissioner (Appeals) upheld this partial refund. Aggrieved by rejection of the major portion of the refund, the appellants again approached the CESTAT.
The appellants argued that the amounts were paid during investigation and not as pre-deposit under Section 35F. They argued that once the Tribunal had set aside the demand in full, the department had no authority to retain any part of the money collected.
They argued that retention of such amounts violates Article 265 of theConstitution, which prohibits collection of tax without authority of law. They relied on the Delhi High Court decision in Team HR Services Pvt. Ltd., which held that amounts collected during investigation must be refunded when the demand is quashed.
The Revenue counsel argued that the refund was correctly restricted by treating the payments as pre-deposit under Section 35F and that only the statutory pre-deposit was refundable with interest. The department supported the orders passed by the lower authorities.
The two-member bench comprising P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) observed that the payments were made during investigation even before issuance of show cause notices and this fact was clearly acknowledged in the show cause notices themselves.
The tribunal observed that Section 35F applies only to deposits made for filing appeals and does not govern amounts collected during investigation. The tribunal explained that the department cannot collect or retain any amount without authority of law.
The tribunal pointed out that once the adjudication orders confirming the demand were set aside earlier by the Tribunal, the very basis for retaining the amounts disappeared. In view of these findings, the tribunal allowed all the appeals and directed refund of the entire amounts collected during investigation along with interest as specified.
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