Revenue 'Officially But Illegally' Usurped Income: CESTAT Kolkata Orders Interest On Wrongly Collected Service Tax

Observing that the revenue had "officially but illegally" usurped more than half of an employee's annual income, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata, directed the department to pay 6% annual interest on the amount collected from her. The tribunal held that the interest would run from the date the amount was collected until the date it was refunded.

A coram of Judicial Member R. Muralidhar observed, "The severity of such a demand is beyond imagination when it is made on a person earning about Rs.6 lacs per annum [Avg for the four years], during this period. More than 50% of her annual income has been simply usurped by the Revenue officially but illegally."

The tribunal also observed that all the officials involved in raising the demand should be held responsible for fastening a non-existent service tax demand on the taxpayer.

"However, this also shows that none of the officials involved right from the person setting up the demand of Rs.3,60,910, to the one asking for the interest thereon, to the one rejecting the refund claim to the one dismissing the Appeal, has ever applied their basic intelligence to go over the factual detail vis-à-vis the statutory provisions about the threshold limit. I am yet to come across such a case of such gross violation of statutory provisions and of principles of natural justice with all the authorities below keeping their eyes fully closed, without even attempting to open it slightly. I take the view that all these officials should be held responsible for fastening the non-existent Service Tax demand on the appellant.", it observed.

The appellant was working as Manager-Corporate Communication with Vedanta Aluminium Ltd. In August 2012, departmental officers took the view that she was providing "Management or Business Consultancy Service" and called upon her to pay about ₹3.61 lakh as Service Tax. She paid the amount but later informed the authorities that it had been paid by mistake because no Service Tax was payable. She subsequently sought a refund.

The refund claim was rejected initially. After the matter reached CESTAT, the tribunal remanded it for fresh adjudication. In the de novo proceedings, the adjudicating authority held that the appellant was not liable to pay Service Tax and sanctioned the refund. The amount was released in August 2021 without any interest, leading to the present appeal.

On examining the record, the tribunal found that the Revenue had never issued a show cause notice seeking to appropriate the amount paid by the appellant.

It held that, in the absence of such proceedings, the money retained by the revenue was "illegal ab initio". The tribunal further held that the order rejecting the refund claim was also "void ab initio" because the department questioned the refund without first determining any tax liability.

The tribunal also found that the authorities ignored the threshold exemption applicable to each financial year. Rather than examining the appellant's income separately for every year, they added together the income earned over four financial years and raised the Service Tax demand. The adjudicating authority later found that her annual income remained below the exemption limit in each of those years. It therefore concluded that she was never liable to pay service tax

The tribunal also noted that the revenue took more than three years to complete the de novo proceedings after the earlier remand. Even after that delay, it opposed the appellant's claim for interest.

Relying on the Supreme Court's decisions in Ranbaxy Laboratories Ltd., Hamdard (Waqf) Laboratories and Manisha Pharmo Plast Pvt. Ltd., the tribunal held that the Department was liable to pay interest on the amount it had wrongly retained.

Allowing the appeal, the tribunal set aside the impugned order. It directed the revenue to pay interest at 6% per annum from August 30, 2012, when the amount was collected, until August 18, 2021, when the refund was granted. The interest has to be paid within eight weeks from the communication of the order.

For Appellant: Advocate Kishore Kumar Acharya

For Respondent: Shri P. Das, Authorised Representative