Service Tax Refund On Advance Cannot Be Time-Barred After Contract Termination: CESTAT Kolkata

On 20 August, the Kolkata Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that service tax paid on an advance is refundable where the contract is subsequently terminated without any service being provided, and that the limitation period under Section 11B of the Central Excise Act, 1944 does not apply to such a refund claim.

A Bench of Judicial Member Ashok Jindal and Technical Member K. Anpazhakan passed the ruling while allowing an appeal filed by Sry Real Estate Private Limited against rejection of its service tax refund claim. It observed:

“Admittedly, in this case, the appellant is not liable to pay service tax as they have not provided any service to NTPC. Therefore, as the service tax paid on advance received from NTPC, which was refunded to them by way of encashment of bank guarantee, the appellant was not liable to pay service tax. As the service tax is not payable by the appellant, therefore, the provisions of Section 11B of the Act are not applicable to the facts and circumstances of the case. As the appellant has borne the incidence of service tax paid by them, therefore, the same is to be refunded to them.”

Sry Real Estate had entered into a contract with NTPC Limited for development and operation of the Pakri Barwadih Coal Project in Jharkhand. Out of the project value of Rs. 280 crore, the company received an advance of Rs. 56 crore and paid service tax of Rs. 5.16 crore on the amount.

The contract was subsequently terminated before commencement of the services. NTPC recovered the entire advance by encashing the bank guarantee furnished by Sry Real Estate. The company thereafter sought a refund of the service tax paid on the advance.

The authorities rejected the refund claim on the ground that the service tax had been paid in 2011, whereas the refund application was filed in 2015, beyond the limitation period prescribed under Section 11B of the Central Excise Act.

The Tribunal observed that no service had ultimately been provided to NTPC and that the advance had been recovered through encashment of the bank guarantee. It held that the cause of action for seeking the refund arose when the contract was terminated and the advance amount was recovered.

Accordingly, the CESTAT held that the refund claim could not be rejected as time-barred and directed the concerned authority to sanction the refund along with consequential relief within 30 days of receipt of the order.

For the Appellant: Shri Rohit Tiwari, Advocate

For the Respondent/Revenue: Shri Desh Dulal Chatterjee, Authorised Representative