2015 (4) TMI 389 - SC - Central Excise

Refund claim - doctrine of unjust enrichment - Capital goods - Captive consumption - Whether the doctrine of unjust enrichment is applicable in respect of raw material imported and consumed in the manufacture of a final product - Held that - principle of unjust enrichment is applicable even when the goods are used for captive consumption. - if a particular material is used for manufacture of a final product that has to be treated as the cost of the product. Insofar as cost of production is concerned it may include capital goods which are a part of fixed cost as well as raw material which are a part of variable cost. Both are the components which come into costing of a particular product. Therefore it cannot be said that the principle laid down by the Court in Solar Pesticides would not extend to capital goods which are used in the manufacture of a product and have gone into the costing of the goods. In order to come out of the applicability of the doctrine of unjust enrichment it therefor becomes necessary for the assessee to demonstrate that in the costing of the particular product the cost of capital goods was not taken into consideration. Tribunal has observed that capital goods viz. ESPs have been only used captively for pollution control purpose and the same is not used for processing or manufacturing of any final product and therefore there is no question of passing on the burden of duty to any one. These observations are clearly erroneous in law in view of the judgment of this Court in Indian Farmers Fertilisers COOP. Ltd. - Accordingly the judgment of the Tribunal is set aside. - Decided in favour of Revenue.

Summary

The core legal question considered in this judgment is the applicability of the doctrine of unjust enrichment in the context of refund of duty paid on capital goods used captively. Specifically, whether the principle of unjust enrichment applies when a manufacturer seeks refund of excess duty paid on capital goods that are not used in the manufacture or processing of a final product but are used solely for pollution control purposes.

The Court analyzed the issue by first examining the relevant statutory provisions governing refund of excise duty, particularly Section 11-B of the Central Excise Act and its amendments, which lay down the procedure and conditions for claiming refunds, including the requirement that the incidence of duty must not have been passed on to another person. The Court also reviewed the doctrine of unjust enrichment as expounded in prior case law, including the Constitution Bench decision in Mafatlal Industries Ltd., which established that a refund is not permissible if it results in unjust enrichment of the claimant.

In the leading precedent discussed, the Court in the case involving raw materials imported and consumed in manufacturing held that the doctrine of unjust enrichment applies even in cases of captive consumption. The principle is that refund is not allowed if the duty burden has been passed on to another person, and this applies whether the goods are raw materials or used captively.

The present case raised the distinct question of whether this principle extends to capital goods, which are part of the fixed cost in manufacturing, as opposed to raw materials, which are variable costs. The Court reasoned that capital goods, like raw materials, form part of the cost of production and thus, if the cost of capital goods is included in the pricing or costing of the final product, the duty paid on such goods would have been passed on to the buyer. Therefore, refund of duty in such cases would amount to unjust enrichment.

The Court found the approach of the Tribunal erroneous in holding that capital goods used solely for pollution control purposes and not in manufacturing any final product cannot lead to passing on the burden of duty. The Court referred to the judgment in Indian Farmers Fertiliser Coop. Ltd., which clarified that materials used in ancillary processes integral to manufacturing, including pollution control, are part of the cost structure and thus their cost is passed on in the price of the final product.

Accordingly, the Court held that the doctrine of unjust enrichment applies to capital goods used captively as well, and the onus is on the claimant seeking refund to demonstrate that the cost of such capital goods was not included in the costing of the final product. Only if the claimant proves that the duty incidence was not passed on to any other person, refund can be granted.

In application to the facts, the Court set aside the Tribunal's order allowing refund without such demonstration. However, the Court granted the claimant an opportunity to prove to the assessing authority that the cost of the capital goods was not factored into the cost of the machinery or product. The refund would be permissible only upon such proof.

Significant holdings include the following verbatim principle from the Court's reasoning:

"It cannot be said that the principle laid down by the Court in Solar Pesticides would not extend to capital goods which are used in the manufacture of a product and have gone into the costing of the goods. In order to come out of the applicability of the doctrine of unjust enrichment, it becomes necessary for the assessee to demonstrate that in the costing of the particular product, the cost of capital goods was not taken into consideration."

Also, the Court observed:

"The Tribunal's observations that capital goods have been only used captively for pollution control purpose and the same is not used for processing or manufacturing of any final product and therefore there is no question of passing on the burden of duty to anyone are clearly erroneous in law."

In conclusion, the Court established that the doctrine of unjust enrichment applies uniformly to duty paid on capital goods used captively, aligning it with the principle applicable to raw materials. The final determination is that refund of duty is contingent upon the claimant proving that the duty incidence was not passed on, failing which refund must be denied.