Service Tax Refund Granted on Rebuttal of Unjust Enrichment – CESTAT Allahabad Ruling in Jagdish Saran Case

Background and Factual Overview

The CESTAT Allahabad recently delivered a significant ruling in Jagdish Saran Vs Commissioner, addressing two critical issues in indirect tax law — the doctrine of unjust enrichment in the context of service tax refund claims, and the applicability of Section 11B of the Central Excise Act, 1944 to refund of interest paid under a mistaken notion of law.

The assessee in this matter was engaged in the manufacture and supply of Ready-Mix Concrete (RMC) and cement slurry to M/s Rosa Power Supply Company Limited (M/s RPSC), operating under multiple work orders covering different periods. Acting under an erroneous belief that its activities were taxable under "Works Contract Service" as defined in Section 65(105)(zzzza) of the Finance Act, 1994, the assessee obtained service tax registration and deposited service tax amounting to ₹1,06,31,288 along with interest of ₹2,33,874 for the period 05.05.2008 to 24.01.2011. VAT was also partially discharged on a portion of the consideration received.

The situation changed when, during the assessment of sales tax returns for Financial Year 2007–2008, the State Commercial Tax Department took the position that the entire transaction between the assessee and M/s RPSC constituted a sale of goods, not a provision of service. Accordingly, the assessee was directed to pay sales tax on the total transaction value vide Order No. J-7/2007-08/Dhara-28/21 dated 29.04.2010. This determination was subsequently upheld by the Joint Commissioner of Trade Tax and affirmed by the Hon'ble Allahabad High Court.

Having established that no service tax liability existed, the assessee filed:

  • A refund claim for service tax of ₹86,18,019 on 02.02.2012
  • A separate refund claim for interest of ₹2,33,874 on 29.11.2012

To address the question of unjust enrichment proactively, the assessee issued credit notes dated 01.04.2012 for the entire service tax amount of ₹1,06,31,289 collected from M/s RPSC, later backed by a bank guarantee dated 13.09.2013.

Procedural History

Initial Rejection and First Appellate Relief

Upon receipt of the refund application, a show cause notice dated 20.03.2012 was issued proposing rejection on the basis that RMC supply constituted a works contract service under Section 65(105)(zzzza) of the Finance Act, 1994. The Adjudicating Authority rejected the refund claim vide Order-in-Original dated 21.05.2012, holding that the assessee was liable to service tax.

The assessee appealed, and the Commissioner (Appeals), vide Order-in-Appeal dated 17.09.2012, held that:

  • Supply of RMC was a pure sale contract involving no taxable service
  • The assessee had no liability to pay service tax
  • The refund was therefore admissible in principle

However, the matter was remanded to examine the issue of unjust enrichment. Crucially, the Revenue did not challenge this order, allowing it to attain finality.

Remand Order and Second Round of Rejection

On remand, the Adjudicating Authority passed Order-in-Original dated 31.12.2013 rejecting the refund once again. The reasoning was that since service tax had originally been collected from M/s RPSC, the issuance of subsequent credit notes did not overcome the bar of unjust enrichment.

Simultaneously, a separate show cause notice dated 21.03.2013 was issued for the interest refund claim, proposing rejection on grounds of limitation and unjust enrichment. The refund of interest was rejected vide Order-in-Original dated 03.01.2014, holding it to be barred by limitation under Section 11B.