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Of refund claims after final assessment

March 30, 2004

The central excise law provides that if duty of excise is refundable, the amount so refundable is to be credited to the Consumer Welfare Fund. However, in certain circumstances the amount, instead of being credited to the Consumer Welfare Fund, can be refunded to the applicant.

One such situation is when such amount is related to the duty of excise paid by manufacturer/borne by the buyer, if he had not passed on the incidence of such duty to any other person.

Manufacturers claiming refund are, therefore, required to comply with the provisions of Section 11 B of Central Excise Act failing which their claims are liable to be rejected. The onus to prove that duty has not been passed on lies on the person claiming refund.

In fact , the Excise Act provides that refund claim application itself is required to be accompanied by such documentary or other evidence as the applicant may furnish to establish that the amount of duty of excise in relation to which such refund is claimed was collected from, or paid by, him and the incidence of such duty had not been passed on by him to any other person.

The Larger Bench of the Supreme Court vide a recent ruling (2004-Taxindiaonline-27-SC-CX) on a reference made to it on inconsistencies between the decisions of Sinkhai Synthetics and Chemicals Pvt. Ltd. Vs. Collector of Central Excise (2002-Taxindiaonline-68-SC-CX) and Collector of Central Excise, Chennai Vs. T.V.S. Suzuki Ltd. (2003-Taxindiaonline-08-SC-CX) on one hand and the decision of nine-Judge Constitution Bench in Mafatlal Industries Ltd. Vs. Union of India (2002-Taxindiaonline-54-SC-CX) on the other hand has set aside Allied Photographics CESTAT ruling ( 2002-Taxindiaonline-88-Cestat-MUM) and has laid down the law that a claim for refund after final assessment when duty was paid under protest is governed by Section 11 B of Central Excise Act. Further, the purchaser who has stepped into the shoes of the manufacturer seeking refund of 'on account payment' is also bound to comply with Section 11B.

The twin issues decided by the Apex Court were whether refund of duty paid under provisional assessment is similar to duty paid under protest as both are 'On Account' payments adjustable on finalisation of assessment or vacating of protest?

Secondly, in the course of such adjustment or vacation of protest, if any amount is found payable by the Department to the manufacturer, is it open to the purchaser to contend that he (the purchaser) has stepped into the shoes of the manufacturer seeking refund of 'on account payment' and, therefore, he was not bound to comply with section 11B of the said Act.

The Apex Court held that there is a basic difference between duty paid under protest and duty paid under Rule 9B. The duty paid under protest falls under section 11B whereas duty paid under provisional assessment falls under rule 9B.

Section 11B deals with claim for refund whereas rule 9B deals with making of refund, in which case the assessee need not comply with section 11B. Therefore, section 11B and rule 9B operate in different spheres.

The Larger Bench of Supreme Court interpreted that vide Para 104 of the Judgment of Constitution Bench (2002-Taxindiaonline-54-SC-CX), it has been held that in cases where duty is paid under rule 9B and refund arises on adjustment under rule 9B(5), then such refund will not be governed by section 11B. SC clarified in the said para that if an independent refund claim is made after adjustment on final assessment under rule 9B(5), agitating the same issues, then such claim would attract section 11B.

This is because when the assessee makes an independent refund claim after final orders under rule 9B(5), such application represents a claim for refund and, it would not come in the category of making of refund and therefore, the bar of unjust enrichment would apply.

Mafatlal Industries Ltd. Vs. Union of India (2002-Taxindiaonline-54-SC-CX):

Para 104 of the above cited judgment of the Constitution Bench of Apex Court laid down as under:

"104. Rule 9-B provides for provisional assessment in situations specified in clauses (a), (b) and (c) of sub-rule (1). The goods provisionally assessed under sub-rule (1) may be cleared for home consumption or export in the same manner as the goods which are finally assessed. Sub-rule (5) provides that "when the duty leviable on the goods is assessed finally in accordance with the provisions of these Rules, the duty provisionally assessed shall be adjusted against the duty finally assessed, and if the duty provisionally assessed falls short of or is in excess of the duty finally assessed, the assessee shall pay the deficiency or be entitled to a refund, as the case may be."

Any recoveries or refunds consequent upon the adjustment under sub-rule (5) of Rule 9-B will not be governed by Section 11-A or Section 11B, as the case may be.

However, if the final orders passed under sub-rule (5) are appealed against - or questioned in a writ petition or suit, as the case may be, assuming that such a writ or suit is entertained and is allowed/decreed - then any refund claim arising as a consequence of the decision in such appeal or such other proceedings, as the case may be, would be governed by Section 11B.

It is also made clear that if an independent refund claim is filed after the final decision under Rule 9-B(5) reagitating the issues already decided under Rule 9-B - assuming that such a refund claim lies - and is allowed, it would obviously be governed by Section 11B. It follows logically that position would be the same in the converse situation."

Whether buyer stepping into shoes of manufacturer is entitled to refund without complying with 11B

The manufacturer had paid the excise duty under protest pending final assessment which was ultimately decided in favour of manufacturer and since manufacturer had sold the product to the respondent, the respondent claimed that it was entitled to the benefit of the second proviso to section 11B(1) which inter alia stated that limitation of six months shall not apply where duty had been paid under protest.

The Apex Court opined that the basis of assessment under section 4 was the real value of excisable goods which included manufacturing cost and manufacturing profit but excluded selling cost and selling profit. That the price charged by the manufacturer for sale of the goods represented the real value of the goods for assessment of excise duty.

The basis on which a manufacturer claims refund is different from the basis on which a buyer claims refund. The cost of purchase to the buyer consists of purchase price including taxes and duties payable on the date of purchase (other than the refund which is subsequently recoverable by the buyer from the Department). Consequently, it is not open to the buyer to include the refund amount in the cost of purchase on the date when he buys the goods as the right to refund accrues to him at a date after completion of the purchase depending upon his success in the assessment.

Section 11B dealt with claim for refund of duty. It did not deal with making of refund. Therefore, section 11B(3) stated that no refund shall be made except in terms of section 11B(2). Section 11B(2)(e) conferred a right on the buyer to claim refund in cases where he proved that he had not passed on the duty to any other person.

The entire scheme of section 11B showed the difference between the rights of a manufacturer to claim refund and the right of the buyer to claim refund as separate and distinct. Moreover, under section 4 of the said Act, every payment by the manufacturer whether under protest or under provisional assessment was on his own account. The accounts of the manufacturer are different from the accounts of a buyer (distributor).

It was, therefore, held that the distributor was not entitled to claim refund of 'on account' payment made under protest by the manufacturer without complying with section 11B of the Act.

The Supreme Court found that para 104 of the judgment in the case Mafatlal Industries Ltd. states that if refund arises upon finalization of provisional assessment, section 11B will not apply. Para 104 of the said judgment does not deal with payment under protest.

Apex Court ruling in Sinkhai Synthetics & Chemicals Pvt. Ltd (2002-Taxindiaonline-68-SC-CX)

The manufacturer claimed exemption which was denied by the department. The assessee went in appeal to CEGAT. pending appeal, assessee paid excise duty under protest. The assessee succeeded before the CEGAT and claimed refund on 17.1.1991. Refund was denied by the department.

Therefore, it was a case of payment of duty under protest. However, in the said decision, the Apex Court applied para 104 of the judgment of the Constitution Bench in the case of Mafatlal Industries Ltd. which had no application as has been held by the Larger Bench. Para 104 of the judgment in the case of Mafatlal Industries Ltd. (supra) dealt with refund consequent upon finalization of provisional assessment.

Para 104 does not deal with refund of duty paid under protest. As stated by the Larger Bench, "There is a difference under the Act between payment of duty under protest on one hand and refund consequent upon finalization of provisional assessment on the other hand. This distinction is missed out, with respect, by the judgment of this Court in the case of Mafatlal Industries Ltd. (supra)."

The judgment of Sinkhai Synthetics was found per incuriam by the Larger Bench. SC decision in T.V.S. Suzuki Ltd. (2003-Taxindiaonline-08-SC-CX)

In this case, application for refund was filed. This was on completion of final assessment. On 9.7.1996, the Department issued a show-cause notice as to why the refund claim should not be rejected for non-compliance of section 11B. By order dated 17.7.1996, the refund claim was rejected on the ground that it was beyond limitation. On appeal, the Commissioner (Appeals) observed that the bar of unjust enrichment was not applicable as the assessee claimed refund consequent upon final assessment. He allowed the refund claim. Tribunal agreed with the view of Commissioner (Appeals).

The department conceded before the Supreme Court that in view of Para 104 of the judgment in Mafatlal Industries Ltd. (supra), bar of unjust enrichment was not applicable in cases of refund consequent upon adjustment under rule 9B(5). Thus refund consequent upon finalization of provisional assessment did not attract the bar of unjust enrichment.

On 9.5.1997, a show cause notice was issued by the Department to M/s. Allied Photographics India Ltd. calling upon them to show cause why Rs. 1,25,34,988.97 should not be transferred to Consumer Welfare Fund. By order dated 31.10.1997 passed by the Assistant Commissioner refund was granted to M/s. APIL.

This order of Assistant Commissioner was confirmed in appeal by the Commissioner (Appeals) and the Tribunal vide impugned order dated 13.6.2000 and the Department was directed to refund Rs. 1,25,34,988.97 with interest. Being aggrieved, the Department moved to Supreme Court by civil appeal under section 35L(b) of the Act.

The Civil Appeal was allowed and the judgment passed by the CEGAT (2002-Taxindiaonline-88-Cestat-MUM) was set aside by the Apex Court.

The writer is Superintendent of Customs. The views expressed here are personal.

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