2025 (5) TMI 482 - AT - Service Tax

Refund of service tax which was deposited by mistake - Refund rejected on the ground of time limitation - Applicability of Section 11B of CEA - rate of interest applicable 6% or 12% - HELD THAT - It is admitted fact that appellant had paid service tax by mistake which is not payable at all and same shall be treated as Revenue deposit not service tax paid by the appellant. Therefore the provision of Section 11B of the Act is not applicable. The same view has been affirmed by the Hon ble Apex court in the case of KVR Constructions Ltd. 2012 (7) TMI 22 - KARNATAKA HIGH COURT . As provision of Section 11B are not applicable to the facts of the present case in that circumstances determining the rate of interest under Section 11BB of the Act is not applicable. Therefore the Notification No. 67/2003 CE (NT) dated 12.09.2003 also not applicable to the facts of the case. Relying on the decision of further in the case of Indus Towers Limited 2025 (1) TMI 1261 - CESTAT CHANDIGARH wherein the interest @ 12% has been granted to the appellant. Therefore following the judicial pronouncement it is held that the appellant are entitled interest @ 12% on delayed refunds. Accordingly the Revenue is directed to pay interest @ 12% per annum to the appellant. Conclusion - i) Where service tax is paid by mistake of law on exempted services such payment is a revenue deposit and not duty or tax payable in law thus Section 11B and consequently Section 11BB are not applicable. ii) In cases of delayed refund of revenue deposits or mistaken payments interest at 12% per annum is appropriate. Appeal allowed.

The core legal questions considered by the Tribunal revolve around the applicability of refund provisions and interest rates where service tax was paid by mistake of law on exempted services, specifically:

1. Whether the provisions of Section 11B of the Central Excise Act, 1944, which govern claims for refund of duty, apply to refunds of service tax paid by mistake of law on exempted services.

2. What rate of interest is appropriate-6% as per Section 11BB of the Central Excise Act or 12%-for delayed refunds of such mistaken payments.

3. Whether payments made under a mistaken belief of liability can be treated as service tax or duty attracting statutory refund and interest provisions.

Issue 1: Applicability of Section 11B of the Central Excise Act to Refunds of Service Tax Paid by Mistake of Law

The relevant legal framework includes Section 11B of the Central Excise Act, which prescribes the procedure and limitation for refund claims of duty of excise, and Section 11BB, which deals with interest on delayed refunds. The Tribunal also considered judicial precedents interpreting these provisions in the context of mistaken payments.

Key precedents relied upon include the Karnataka High Court decision in KVR Construction Ltd., upheld by the Supreme Court, which held that Section 11B does not apply where service tax is paid by mistake on exempted services, as such payments do not constitute duty or tax payable in law. The Tribunal noted that mere payment and acceptance of an amount does not regularize it as a duty if it was not actually payable.

The Tribunal distinguished the decision in Mafatlal Industries Ltd. (which held interest payable under Section 11BB on refunds) on the basis that in Mafatlal, the duty was initially payable and later found exempt, whereas in the present case, the service tax was never payable due to exemption notifications and was paid under mistake of law.

The Tribunal also referred to the Tripura High Court decision in Tripura Cricket Association, which reaffirmed that Section 11B and related provisions do not apply to service tax paid by mistake on exempted services, and that writ petitions challenging such rejections of refund claims are maintainable.

The Tribunal analyzed the nature of the payment, concluding that since the appellant paid service tax on exempted services, the amount is a revenue deposit rather than duty or tax. Therefore, Section 11B, which applies only to refunds of duty or tax, is not applicable. This interpretation aligns with the principle that the tax authority cannot retain amounts not payable by law and that such mistaken payments do not acquire the character of tax merely by payment and acceptance.

Competing arguments from the Revenue, relying on decisions such as Triumph International (India) Pvt. Ltd., which awarded interest under Section 11BB at 6%, were rejected on the ground that those cases involved payments of duty that were initially payable or involved different factual matrices. The Tribunal emphasized binding precedent from the Supreme Court and High Courts that clarify the inapplicability of Section 11B to mistaken payments on exempted services.

Conclusion: Section 11B of the Central Excise Act does not apply to refund claims arising from service tax paid by mistake of law on exempted services. Such payments are treated as revenue deposits, not duty or tax.

Issue 2: Appropriate Rate of Interest on Delayed Refunds of Mistaken Payments

Having concluded that Section 11B is not applicable, the Tribunal examined whether interest under Section 11BB (which provides for 6% interest on delayed refunds of duty) applies. Since Section 11BB is linked to Section 11B refunds, its applicability is contingent on the refund claim being governed by Section 11B.

The Tribunal held that because the refund claim falls outside Section 11B, Section 11BB and the associated 6% interest rate do not apply. Instead, the Tribunal relied on other judicial pronouncements granting interest at 12% per annum on delayed refunds of revenue deposits or mistaken payments, such as the decision in Indus Towers Limited.

Precedents cited by the appellant supporting 12% interest include decisions from various Tribunals and High Courts, which treat mistaken payments as revenue deposits and award interest at commercial rates (12%) rather than statutory rates applicable to tax refunds.

The Revenue's reliance on cases awarding 6% interest was distinguished on the basis that those cases involved refunds of duty or tax legitimately payable and subsequently found refundable, unlike the present case of mistaken payment on exempted services.

Conclusion: The appellant is entitled to interest at 12% per annum on delayed refunds of service tax paid by mistake, as Section 11BB (6% interest) does not apply.

Issue 3: Characterization of Payment as Service Tax or Revenue Deposit

The Tribunal examined whether payment made under mistake of law on exempted services can be treated as service tax or duty attracting statutory refund provisions.

Drawing from the KVR Construction judgment and other precedents, the Tribunal emphasized that payment alone does not convert a non-payable amount into payable tax. The department's lack of authority to demand such tax means the payment is a revenue deposit, not a duty.

This characterization is critical because it determines the legal regime applicable to refund and interest claims. The Tribunal underscored that the department cannot retain amounts paid without authority of law, and the refund of such amounts is not governed by the Central Excise Act's refund provisions but by general principles of law.

The Tribunal rejected the Revenue's argument that the use of Form-R (refund form under Central Excise Act) and initial treatment of the amount as tax precludes re-characterization. The Tribunal held that the substance of the transaction governs, not the form or nomenclature.

Conclusion: Payments made by the appellant on exempted services under mistake of law are revenue deposits, not service tax or duty, and thus attract refund and interest provisions outside Sections 11B and 11BB.

Significant Holdings and Core Principles Established

"Mere payment of an amount by the assessee and acceptance by the Department would not regularize such an amount as duty if it was not actually payable and paid by mistake."

"Section 11B of the Central Excise Act refers to refund of duty of excise only and does not apply to amounts collected without authority of law."

"Where service tax is paid by mistake of law on exempted services, such payment is a revenue deposit and not duty or tax payable in law, thus Section 11B and consequently Section 11BB are not applicable."

"In cases of delayed refund of revenue deposits or mistaken payments, interest at 12% per annum is appropriate."

"The department lacks authority to retain amounts paid without legal obligation, and the mere nomenclature of payment as 'service tax' does not validate the payment."

The Tribunal's final determination was to allow the appeals and modify the impugned orders by granting refunds along with interest at 12% per annum, directing the Revenue to pay the same. The Tribunal expressly rejected the applicability of 6% interest under Section 11BB and the applicability of Section 11B refund provisions to the facts of the case.

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