Service Tax Paid by Mistake Cannot Be Adjusted Against Future Liability: CESTAT Directs TVS Motor to Seek Refund [Read Order]

The Chennai Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) ruled that service tax paid by mistake cannot adjust against future service tax liability and must claimed only through statutory refund process.

TVS Motor Company Ltd., the appellant, engaged in manufacture of motorcycles and mopeds and also registered for payment of service tax on various taxable services. During the relevant period, the appellant received technical consultancy services from foreign service providers. The services partly render outside India. The appellant paid service tax on these under mistaken belief that tax payable.

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Later, appellant realized that service tax was not leviable on services rendered outside India in that period. Instead of filing refund claim, the appellant adjusted excess service tax pay against future service tax liability by using Rule 6(3) of Service Tax Rules, 1994.

The department issue show cause notice alleged that such self adjustment was not allow under Service Tax Rules. The adjudicating authority confirmed demand with interest. On appeal, the Commissioner (Appeals) upheld the order. Not happy with appellate order, the appellant approached CESTAT.

The appellant’s counsel argued that service tax pay under mistake of law and Rule 6(3) allow adjustment of excess tax. They argued that condition about refund of tax to service recipient not apply because appellant itself the service recipient.

The department’s counsel argued that Rule 6(3) applied only to cases where service provider get advance payment and later fail to provide service. They argued that rule not apply to payments make by mistake on non-taxable services. The department further argued that once tax credit to Government, it becomes Government revenue until refund through proper process. The department said unilateral adjustment means short payment of tax and was not allowed.

The two-member bench with P. Dinesha (Judicial Member) and R. Bhagya Devi (Technical Member) observed that Rule 6(3) applied only in limited situations where advance payment was received for taxable services that were not provided later. The tribunal explained that appellant not meet conditions of Rule 6(3), include requirement of refund tax amount to the service recipient.

The tribunal pointed out that payment of tax under mistake of law must be corrected only through refund procedure under Section 11B. The tribunal explained that Supreme Court decision in Mafatlal Industries Ltd. is binding and required all refund claims from mistaken payments to follow statutory way.

The tribunal also observed that appellant failed to show burden of service tax not passed on, and unjust enrichment applied. The tribunal pointed out that refund proceedings cannot be used as substituted for statutory remedies or adjustments not permitted by law.

Because of these, the tribunal dismiss appeal and uphold demand of service tax with interest.

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