SCN for recovery of erroneous refund without reviewing refund order is valid

CHENNAI, JAN 08, 2008 :   Let us go into the details of a case where the dispute relates to the duty payable and the refund pertaining to the assessments of around 22 years back – latest order to be passed by the CESTAT in 2007. An assessee is engaged in the manufacture of dry cell batteries. The assessments were provisional for some reasons for the period 1985 to 1997. They were finally finalized by the Assistant Commissioner in December 2007, demanding differential duty of nearly Rs 56 Lakhs. Aggrieved, the assessee appealed to the Commissioner (Appeals) for relief. Thankfully for the assessee, the Commissioner (Appeals) ordered refund of Rs 3,31,365/- to the assessee. Implementing the order, the AC sanctioned the refund of Rs 3,31,365. There was no appeal against this order of refund by the AC. Also there was no appeal by the Department against the order of the Commissioner (Appeals) ordering refund. After sanctioning the refund, just before four days of expiry of six months from the date of sanction of refund, the Assistant Commissioner issued show cause notice proposing to recover the refund on the ground that no refund claim was filed and also the he had not scrutinized the unjust enrichment aspect. The AC held that the provisions of Section 11B are attracted in the instant case and ordered for recovery of the refund.

The assessee took the matter to the Commissioner (Appeals). As luck would have it, the Commissioner (Appeals) held that the Assistant Commissioner’ s order is not sustainable as the order sanctioning the refund had not been reviewed under Section 35E (2) of the Central Excise Act, 1944 and demand under Section 11 A alone did not suffice to recover the alleged erroneous refund and allowed the appeal by the assessee.

Now it is the revenue’s turn to file appeal. Aggrieved by the above order of the Commissioner (Appeals), the revenue filed appeal with the CESTAT. The assessee strongly contested the order of the Assistant Commissioner on two grounds. One is that the aspect of unjust enrichment is not applicable as the refund is arising consequent to the finalization of the provisional assessment by placing reliance on para 95 of the famous Mafatlal case. However the Tribunal relying on the same para held that the impugned refund is arising as a consequence of the appellate order and thus the unjust enrichment is very much applicable.

The second ground taken by the assessee is that there was no review of the refund order of the Assistant Commissioner under Section 35E of the Central Excise Act and therefore the order was not in accordance with law by placing reliance on a number of CESTAT orders. However, the CESTAT held that this challenge cannot be sustained in view of the judgment of the apex Court in UOI Vs. Jain Shudh Vanaspati Ltd. The ratio of this decision is to the effect that Show Cause Notice under Section 28 of the Customs Act could be issued for demand of duty without revising the order under Section 47 in terms of Section 130 of the Customs Act. In its judgment in CCE, Bhubaneshwar Vs. Re-Rolling Mills, the apex Court had held that Section 11 A was pari materia with Section 28 of the Customs Act and that the ratio of Jain Shudh Vanaspati Ltd (supra) applied to Central Excise cases also.

Therefore, the CESTAT held that the challenge of the respondents to demand under Section 11A of an amount erroneously refunded without reviewing the refund order in terms of Section 35 E of the Act is not sustainable.

Tail piece: Turn the clock back to June 2006 –In case of Commissioner of Central Excise, Madurai Vs Supdtg. Engineer, TNEB (2006-TIOL-1969- CESTAT-MAD) , in appeals filed by the revenue against
sanction of refund by the Commissioner (Appeals) by placing reliance on the same Jain Shudh Vanaspati Ltd, the single member bench of the CESTAT ( who is also one of the members in the order reported today) held that:

I have no hesitation to hold these appeals to be frivolous inasmuch as the Department, by their conduct, acquiesced in two orders of the Commissioner (Appeals) and the consequential orders of the original authority. The department, if aggrieved by the omission of the original authority ought to have reviewed the orders passed by the original authority pursuant to Order-in-appeal No. 202/96. Having not chosen to do that, the department gave a go-by to the time-bar issue. They kept mum even after Order-in-Appeal No. 112/03 was passed by the appellate Commissioner without touching the time-bar issue. In these facts, it cannot be said that the refund orders issued by the original authority pursuant to the Order-in-Appeal No. 112/03 were erroneous. Those orders were lawfully issued in pursuance of the order of the appellate Commissioner, which was not challenged by the department. Hence there is no question of erroneous refund of duty in this case. Both the show-cause notices issued in March/May 2004 are not maintainable.

Learned SDR has made an endeavour to salvage the department’s case by relying on the Hon’ble Supreme Court’s judgement in Jain Vanaspati (supra). In that case, it was held that show-cause notice could be issued under Section 28 of the Customs Act, 1962 for demanding duty without recourse to revisional remedy under Section 130 of the Act. It has been claimed that the ruling in that case is equally applicable to Central Excise cases like the instant one on account of the parity between the provisions of Section 28 of the Customs Act and Section 11A of the Central Excise Act. But, on a closer look at the facts of the present case, I find that the ratio of the decision in Jain Vanaspati (supra) cannot be applied to the facts of this case. In the present case, the question raised by the learned SDR is whether Section 11A was invocable for demanding duty already refunded to the assessee or, alternatively, whether the process of review under Section 35E of the Act could be resorted to for challenging the refund sanction orders passed pursuant to the order passed by the Commissioner (Appeals). The refund sanction orders of the original authority were only consequential to the order of the appellate authority and any process of review should have been thought of against the appellate order rather than against the consequential orders of the original authority. The appellate authority’s order (which treated the refund claims as not time-barred) became final and binding on the Department in the absence of review and, consequently, it was not open to the Department to demand duty from the party on the ground of erroneous refund.

In addition to the above single member ruling, what about the many cases before CESTAT where it is held that refund/demand cannot be made if the original assessment is not challenged? Can the assistant Commissioner issue a notice under Section 11A against a refund sanctioned by him when the refund order is not reviewed? Is he not a functus officio?