Service Tax | Madras High Court Says Refund Cannot Be Denied For Tax Paid Under Mistake Of Law

The Madras High Court has dismissed the Revenue's appeal against an order granting a refund of service tax paid on the supply of floating rigs, holding that the tax had been collected under an erroneous classification and could not be retained by the Government.

A Division Bench comprising Dr. Justice G. Jayachandran and Justice N. Mala held that where service tax was paid due to a mistake of law, the Department could not deny a refund merely by relying on the limitation prescribed under Section 11B of the Central Excise Act, 1944.

The case concerned Hardy Exploration & Production (India) Ltd., which had entered into an agreement with M/s. Aban Offshore Ltd. for the supply and operation of floating rigs for petroleum exploration.

Aban Offshore had collected service tax from Hardy and deposited it with the Department by classifying the service under “Mining Services” for the period from June 1, 2007, to May 15, 2008.

Hardy Exploration later sought a refund, contending that the supply of floating rigs became taxable only from May 16, 2008 under the category of “Supply of Tangible Goods Service." The original authority rejected the claim, but the appellate authority allowed the refund. The CESTAT subsequently upheld the appellate order.

The Revenue challenged the CESTAT's decision before the High Court, arguing that Aban Offshore, the service provider, had never disputed the classification or sought a refund. It was therefore contended that Hardy Exploration, as the service recipient, could not independently claim refund.

The High Court rejected this objection. It noted that the classification of supply of floating rigs under “Supply of Tangible Goods Service”, and not “Mining Services”, had already been settled by the Supreme Court in Union of India v. Indian National Shipowners Association.

The Bench further held that the erroneous classification resulted in payment of service tax due to a mistake of law. Such payment could not be treated as a lawful levy merely because the amount had been deposited with the Government.

On the Revenue's argument that the refund claim was barred by limitation, the Court held that the limitation under Section 11B could not be used to justify retention of tax paid under a mistake of law. Referring to Article 265 of the Constitution, the Court observed that tax cannot be levied or collected except by authority of law.

"...The misclassification and payment of service tax erroneously can never carry the character of lawful levy of tax to satisfy the mandate of Article 265 of Constitution of India. The amount collected from the respondent as service tax and remitted to the Government by M/s.Aban Offshore Ltd., by passing on the tax liability on the respondent, cannot be withheld by the Government either citing limitation or on technical grounds", the Court observed.

On the question of unjust enrichment, the Bench relied upon the certificates and documents produced by the assessee, including the certificate issued by CPCL and the certificate issued by Aban Offshore regarding payment of service tax.

Answering all five substantial questions of law against the Department, the High Court concluded that Hardy Exploration was entitled to a refund of the service tax paid erroneously under the classification of “Mining Service."

"..the authorities below have rightly exercised jurisdiction to grant relief, since the collection of tax and retention of tax is against the spirit of the Constitution", the court ruled.

The Court accordingly dismissed the Revenue's Civil Miscellaneous Appeal, with no order as to costs, and closed the connected miscellaneous petition.

For Appellant: A.P.Srinivas, Senior Standing Counsel

For Respondent: P.S.Raman, Senior Advocate for Thriyambak J. Kannan, Advocate