refund of amount deposited under protest in service tax proceedings, Goods and Services Tax - GST

[POOJA AGARWAL]

Dear Sir,

We had deposited the demand of service tax under protest during pendency of proceedings. The amount was deposited by debiting RG 23 Register part A (SC + Cess + SHE Cess) and was deposited by utilizing the ITC of respective heads.

Now the appeal has been decided in our favour, but the department is rejecting the refund of the amount deposited under protest, by pressing into service section 140(1) of CGST Act.

Please guide how to defend the SCN

Posts / Replies

[KASTURI SETHI]

I want the following information from you :-

What is the date of pre-deposit ?

What is the date of O-i-A  ?

What is the date of O-i-O. ?

[YAGAY andSUN]

LEGAL OPINION

Subject: Legality of rejection of refund of Service Tax deposited under protest through CENVAT Credit (RG 23A) in light of Section 140(1) of the CGST Act, 2017.

Facts of the Case: The assessee had deposited the disputed demand of Service Tax during the pendency of adjudication proceedings. The payment was made under protest by utilizing CENVAT Credit through RG 23A Part A (i.e., via Input Tax Credit (ITC) balances under the heads: Basic Service Tax, Education Cess, and Secondary & Higher Education Cess). Subsequently, the appeal was decided in favour of the assessee, confirming that the levy was not sustainable.
The assessee filed a refund claim for the amount so deposited. However, the department has issued a Show Cause Notice proposing to reject the refund on the ground that such credit had already been transitioned under Section 140(1) of the CGST Act, 2017, and hence, refund is not admissible.

Issue for Consideration: Whether refund of service tax deposited under protest utilizing CENVAT Credit (pre-GST era) can be denied by invoking Section 140(1) of the CGST Act, 2017?

LEGAL POSITION AND ANALYSIS:

1. Nature of the Amount Deposited Under Protest:
   • The amount paid under protest is not "tax paid" in the strict sense but a deposit to safeguard the assessee’s right during the pendency of appeal or adjudication.
   • Judicial precedents (e.g., Sandro Power Co. Ltd. v. CCE, 2013 (298) ELT 481) have clearly held that amount deposited under protest retains the character of a deposit and not tax, until the issue is finally adjudicated.
2. Effect of Successful Appeal:
   • Once the appeal is decided in favour of the assessee, the legal basis for retaining the amount deposited under protest ceases.
   • As per CCE v. Flock (India) Pvt. Ltd., 2000 (120) ELT 285 (SC), and Commissioner v. ITC Ltd., 2009 (238) ELT 3 (SC), refund becomes automatic when adjudication is in favour of the assessee.
3. Applicability of Section 140(1), CGST Act:
   • Section 140(1) pertains to carry forward of CENVAT credit as closing balance in the last return filed under the existing law.
   • The ITC utilized for payment of service tax under protest was not part of closing balance of CENVAT Credit as on 30th June 2017, and hence, was not transitioned under Section 140(1).
   • Therefore, the invocation of Section 140(1) is factually and legally untenable.
4. Bar on Refund of Credit transitioned:
   • Even if arguendo, some part of the credit was transitioned, that does not cover the amount paid under protest as it had been utilized for a specific purpose (payment of alleged tax liability).
   • Once the appellate authority has held that no tax is payable, the assessee becomes entitled to re-credit or cash refund of the same, as the underlying liability ceases to exist.
5. Relevant Judicial Precedents:
   • Union of India v. Slovak India Trading Co. Pvt. Ltd. (2006 (201) ELT 559): Refund of duty paid under protest is not hit by unjust enrichment.
   • CCE v. Karnataka Soaps & Detergents Ltd. 2010 (260) ELT 60 (Tri. - Bang): Held that when tax is not payable, and amount paid under protest is deposited using CENVAT credit, refund cannot be denied on ground of unjust enrichment or bar under Rule 5.
   • Hindustan Zinc Ltd. v. CCE, 2014 (302) ELT 233 (Tri.-Del): Amount deposited under protest using CENVAT credit is eligible for refund.
6. No Double Benefit:
   • It must be demonstrated that the credit amount used for payment was not carried forward to GST regime via TRAN-1. Therefore, refund would not amount to dual benefit.

Conclusion:

In view of the above, the rejection of refund by invoking Section 140(1) of the CGST Act is misplaced and legally unsustainable. The credit utilized for payment under protest was not carried forward to GST, and the liability has been quashed by appellate order. Hence, the refund of the amount is legally permissible.

Recommended Action:

• Respond to the SCN asserting that:
  • The deposit under protest is distinct from regular tax liability.
  • It was not part of closing balance transitioned under Section 140(1).
  • Refund is due as per appellate order.
  • There is no unjust enrichment or dual benefit involved.

***

[KASTURI SETHI]

In case the querist has correctly understood the SCN  as well as  Section 140(1) and full facts have been disclosed in the query, refund claim is not hit by Section 140 (1) of CGST Act.

          It is often seen that the querists do not disclose full facts at the first and the query is changed.

[POOJA AGARWAL]

Thanks for the detailed response. My apologies if I am not able to explain the query. 

I am trying to explain the department's objection once again

1. There is no dispute regarding refund of the demand of service tax, which was paid by utilizing service tax ITC during pendency of proceedings.

2. The department is only rejecting the refund of amount of Cess demands; which was paid from the Cess ITC in November 2015. 

3. The reason given by the department that the Cess ITC had become redundant from 01.06.2015; however the department has pressed into service the provisions of GST Act, which are not applicable in the present case - this ground we have taken in our reply

4. However as an alternative submission, just wanted to confirm that since the decision in the matter of SUTHERLAND GLOBAL SERVICES PVT. LTD is reversed by larger bench in (2023) 6 Centax 99 (Mad.), are there any other favorable citations.

Please guide

[Sadanand Bulbule]

I welcome the comprehensive replies of the experts.

[AMIT MUSADDI]

Subject: Response to SCN – Refund of Amount Deposited Under Protest in Service Tax Proceedings

Dear [Recipient's Name],

I hope this letter finds you well.

This is in reference to the Show Cause Notice issued in connection with our refund application for the amount deposited under protest during the pendency of service tax proceedings. We respectfully submit our response and request the department to reconsider its decision in view of the facts and legal position outlined below.

1. Background and Facts of the Case

• The service tax amount in question was deposited under protest, which was duly recorded in our RG-23 register, utilizing available Input Tax Credit (ITC) from relevant heads, i.e., Service Tax, Education Cess, and Secondary & Higher Education Cess.

• Subsequent to this deposit, our appeal has been decided in our favor, and the original demand has been quashed by the appellate authority, confirming that the tax liability did not exist in the first place.

2. Inapplicability of Section 140(1) of the CGST Act, 2017

We respectfully submit that the department’s reliance on Section 140(1) of the CGST Act is misplaced in the present context. Section 140(1) pertains to the transition of closing balances of Cenvat credit into the GST regime, and does not govern the refund of amounts deposited under protest during litigation.

Our refund claim does not pertain to transitional credit under GST. Instead, it relates to the refund of an amount that has now been conclusively determined as not payable, following adjudication in our favor.

3. Legal Position and Judicial Precedents

It is a well-settled legal principle that any amount deposited under protest during litigation is refundable if the case is ultimately decided in favor of the assessee. This principle has been upheld by various High Courts and the Hon’ble CESTAT in numerous decisions, including:

• Sandvik Asia Ltd. v. Commissioner of Income Tax (2006) – where the Hon’ble Supreme Court emphasized that the government must return amounts that were not legally due.

• CCE v. Voltas Ltd. [2012 (28) STR 564 (Tri-Mum)] – held that refund of deposits made under protest is admissible when the demand is set aside.

The rationale behind these decisions is that such deposits are not payments of tax per se but are contingent in nature, and when the final decision negates the demand, the deposit loses its legal basis.

4. Transparency in Credit Utilization

We have maintained clear and transparent records of the utilization of ITC for this deposit. The credit utilized for this payment was legally available and valid, and its use was done under protest with the expectation of a potential refund depending on the outcome of the proceedings.

Blocking the refund based on the transitional provisions under Section 140 would amount to denial of a legitimate right and would create undue hardship, particularly when the taxpayer has been exonerated of any liability.

5. Conclusion and Request for Redressal

In view of the above, we humbly submit that:

• The amount deposited under protest should be refunded in full as the original service tax demand stands nullified post-appeal.

• Section 140(1) is not relevant in this case, as it deals with transitional credit, not litigation-related refunds.

• Denying the refund would be contrary to established legal principles and would result in unjust enrichment of the exchequer at the expense of the taxpayer.

We, therefore, request the department to kindly withdraw the SCN, drop the proposed denial of refund, and process the refund expeditiously.

Should you require any further clarification or documentation, we are happy to furnish the same.

We thank you for your understanding and look forward to a fair and favorable resolution.

Warm regards,
Amit Musaddi
Founder & Tax Advisor
Proton Accounting Firm
[email protected]