Service Tax paid under RCM liable for refund on cancellation of contract

Lifecell International Pvt. Ltd. Vs Commissioner of GST & Central Excise (CESTAT Chennai)

The appellant then sought for refund of the service tax paid by them to the tune of Rs.11,60,968/- on the ground that no services were provided by the German company to them and that the amount having been refunded to them, they are not liable to pay service tax under reverse charge mechanism. They sought to consider the payment as deposit and to refund the amount in terms of section 142(3) of CGST Act, 2017. The refund claim was filed on 23.1.2019.

On perusal of the records, it is seen that there is no dispute that the appellant has not paid the service tax on the amount paid by them to the German company. So also there is no dispute that the contract was cancelled and the advance paid by them was returned by the foreign company to the appellant.

It is seen from the Rule 6(3) of Service Tax Rules, 1994 that when the service is not provided wholly or partially, the assessee can take recredit of the service tax paid by him. The said section talks about the service provider who has paid service tax and has not provided any service to the service recipient. In the present case, the appellant has paid the service tax under reverse charge mechanism and has to be in the shoes of a service provider.

Section 142(5) of CGST Act, 2017 provides that the refund claim of service tax paid under the existing law in respect of services not provided shall be disposed of under the existing law and has to be paid in cash. It states that such refund is subject to provisions of sub-section (2) of section 11B of Central Excise Act, 1944 only. In the present case, refund has been rejected on the ground of being filed beyond the period of one year as stipulated in sub-section (1) of section 11B. The contract having been annulled on 9.8.2018, it cannot be expected of the appellant to file the refund claim within a period of one year from the date (6.6.2017) of payment of service tax. Further, section 142(5) expressly states that the limitation provided in sub-section (1) of section 11B is not applicable.

In the case of PKF Sridhar & Santhanam LLP Vs. CGST, Chennai North reported in 2022 (58) GSTL 423 (Tri. Chennai), it was held that the department cannot retain any amount which is not collected under the authority of law. When there is no liability to pay the service tax, the amount paid by the appellant cannot be retained by the department.

On perusal of section 142(5), it is stated that any amount accruing to the assessee has to be paid in cash notwithstanding anything contrary contained other than the provisions of sub­section (2) of section 11B of the Central Excise Act, 1944. The restriction with regard to limitation is contained in section 11B(1) of the Central Excise Act, 1944. This being the case, the rejection of refund on the ground that it is time-barred cannot be justified.

FULL TEXT OF THE CESTAT CHENNAI ORDER

Brief facts are that the appellant is engaged in the business of cord blood banking and is registered with the department. The business of the appellant was exempted in the pre-GST regime as per Mega Exemption Notification 25/2012-ST dated 20.6.2012. However, they had obtained registration for payment of service tax for discharging the liabilities by way of reverse charge mechanism. The appellant had entered into an agreement with a German company called ‘LifeCodexx AG” for technology transfer of non-invasive prenatal diagnostic qPCR test including licensing rights on 20.4.2017. They paid the first instalment of licensing fee amounting to EURO 99,000 (INR Rs.69,64,650) in May 2017. The appellant paid the service tax on this amount under reverse charge mechanism to the tune of Rs.11,60,968/-on 6.6.2017 for the services under Intellectual Property Rights. They also filed their ST-3 returns for the period April 2017 to June 2017 on 14.8.2017 reflecting the payment of service tax made by them under reverse charge mechanism. Subsequently, the said company annulled the contract on 9.8.2017 and refunded the amount paid by the appellant. There upon, the appellant field revised return manually on 4.1.2019 as they could not file revised return within 45 days of filing of said return in terms of Notification 18/2017-CE dated 22.6.2017.

2. The appellant then sought for refund of the service tax paid by them to the tune of Rs.11,60,968/- on the ground that no services were provided by the German company to them and that the amount having been refunded to them, they are not liable to pay service tax under reverse charge mechanism. They sought to consider the payment as deposit and to refund the amount in terms of section 142(3) of CGST Act, 2017. The refund claim was filed on 23.1.2019.

3. After due process of law, the original authority rejected the refund claim as being time-barred. On appeal, the Commissioner (Appeals) upheld the same. Hence this appeal.

4. The learned counsel Shri N. Viswanathan appeared and argued for the appellant. He submitted that due to some technical and commercial reasons, the agreement entered with the German company was cancelled on 9.8.2018 and consequently the amount paid by the appellant was returned to them on 28.8.2018. The appellant had already paid the service tax on the said amount on 6.6.2017. As no service was provided by the German company, the appellant was not liable to pay any service tax under reverse charge mechanism. Thus, they are eligible for refund of the tax amount paid by them.

5. He argued that as per Rule 6(3) of the erstwhile Service Tax Rules, 1994, the appellant is permitted to take recredit of the service tax if any paid on services which is not actually provided either wholly or partially. The said provision read along with section 142(5) of the CGST Act, 2017 makes the appellant eligible to file a refund application and to get refund of the amount of service tax paid by them in cash. It is submitted that as an abundant caution, the appellant had also filed a revised ST-3 return for the period April to June 2017 manually on 4.1.2019 since after the introduction of GST regime, the appellant was not able to file the returns digitally.

6. The learned counsel adverted to the provisions under Rule 6(3) of Service Tax Rules, 1994 and section 142(5) of CGST Act, 2017 to contend that any amount accruing to the appellant under Ruel 6(3) has to be paid in cash notwithstanding anything to the contrary contained under the provisions of the existing law other than the provisions of sub-section (2) to section 11B of the Central Excise Act, 1944. He relied upon the decision in the case of Aakash The Place To Celebrate Vs. Commissioner of Service Tax, Ahmedabad reported in 2013 (31) STR 251 (Tri. Ahmd.) and Lancor Holdings Ltd. Vs. CGST, Chennai reported in 2020 (43) GSTL 399 (Tri. Chennai). He prayed that the appeal may be allowed.

7. The learned AR Shri Vikas Jhajharia supported the findings in the impugned order.

8. Heard both sides.

9. On perusal of the records, it is seen that there is no dispute that the appellant has not paid the service tax on the amount paid by them to the German company. So also there is no dispute that the contract was cancelled and the advance paid by them was returned by the foreign company to the appellant. Rule 6(3) of Service Tax Rules, 1994 reads as under:-

(3) Where an assessee has issued an invoice, or received any payment, against a service to be provided which is not so provided by him either wholly or partially for any reason, [or where the amount of invoice is renegotiated due to deficient provision of service, or any terms contained in a contract], the assessee may take the credit of such excess service tax paid by him, if the assessee. –

(a) has refunded the payment or part thereof, so received for the service provided to the person from whom it was received; or]

(b) has issued a credit note for the value of the service not so provided to the person to whom such an invoice had been issued.”

10. It is seen from the said Rules that when the service is not provided wholly or partially, the assessee can take recredit of the service tax paid by him. The said section talks about the service provider who has paid service tax and has not provided any service to the service recipient. In the present case, the appellant has paid the service tax under reverse charge mechanism and has to be in the shoes of a service provider.

11. Section 142(5) of CGST Act, 2017 provides that the refund claim of service tax paid under the existing law in respect of services not provided shall be disposed of under the existing law and has to be paid in cash. It states that such refund is subject to provisions of sub-section (2) of section 11B of Central Excise Act, 1944 only. In the present case, refund has been rejected on the ground of being filed beyond the period of one year as stipulated in sub-section (1) of section 11B. The contract having been annulled on 9.8.2018, it cannot be expected of the appellant to file the refund claim within a period of one year from the date (6.6.2017) of payment of service tax. Further, section 142(5) expressly states that the limitation provided in sub-section (1) of section 11B is not applicable.

12. The Tribunal in the case of Punjab National Bank Vs. Commissioner of Central Tax, Bangalore North reported in 2021 (52) GSTL 421 (Tri. Bang.) had occasion to consider a similar issue as to whether limitation would apply to the refund filed after the introduction of GST. In para 5.1 to 6, the Tribunal has observed as under:-

“5.1 Further I find that it is a settled legal position that if there is a conflict between the substantive provision of the statute and the Rules framed thereunder then it is the statute which will have a overriding effect and in the present case Section 142(9)(b) has a overriding effect over Section 118 of the Central Excise Act, 1944. If I analyze the provision of Section 142(9)(b) of the CGST Act which provides as follows:

(a) Where return filed under the existing law is revised after the appointed day but within the time limit prescribed for revision of return under the existing law;

(b) Pursuant to filing of revised return, when closing balance of Cenvat credit increases as compare to closing balance of Cenvat credit in original return;

(c) In this case the registered person is required to file refund for the differential amount;

(d) The differential amount shall be refunded to registered person in cash as per provisions of existing law

(e) Notwithstanding anything to the contrary contained in the said law other than the provisions of sub-section (2) of Section 118 of the Central Excise Act, 1944.

5.2 Further, I find that the words “notwithstanding anything contrary contain in said law” means that the provisions of this Section will prevail over provisions of existing law except provision of Section 118(2) of Central Excise Act, 1944. The Section 118(2) of Central Excise Act, 1944 contains provisions relating to granting of refund in case of unjust enrichment. Thus, as far as conditions of Section 142(9)(b) of CGST Act, 2017 is concerned, the appellant has fulfilled the said conditions and hence is entitled for refund. As far as new ground taken by the Learned Commissioner that the appellant has filed the revised return late is not valid because this ground has not been raised either in the show cause notice or in the Order-in-Original and hence the Commissioner (Appeals) is not justified to invoke a new ground to reject the refund claim. Further, I find that it is a settled law that whenever two options are available, the assessee may choose the option which is more beneficial for them and in the present case the assessee/appellant has chosen to file the refund claim under Section 142(9)(b) of CGST Act, 2017 which has a overriding effect over Section 118 of Central Excise Act, 1944. The appellant did not choose to carry forward the credit in TRAN-1 and preferred to claim cash refund as provided under Section 142(9)(b) of CGST Act, 2017. Further, I find that both the authorities have held that the appellant failed to furnish the original invoices which are necessary for verification of the claim of refund of the appellant.

6. In view of my discussion above, I set aside the impugned order holding that appellant is entitled for cash refund in view of Section 142(9)(b) of the CGST Act but for the purpose of verification of original invoices/documents, I remand the case back to the original authority for the limited purpose of verification of the invoices/ documents. The original authority will grant the refund after verification of the document and after following the principles of natural justice. The original authority will decide within a period of three months from the receipt of the certified copy of this order. The appeal is accordingly disposed of by way of remand.”

(Emphasis suppied)

13. In the case of PKF Sridhar & Santhanam LLP Vs. CGST, Chennai North reported in 2022 (58) GSTL 423 (Tri. Chennai), it was held that the department cannot retain any amount which is not collected under the authority of law. When there is no liability to pay the service tax, the amount paid by the appellant cannot be retained by the department.

14. On perusal of section 142(5), it is stated that any amount accruing to the assessee has to be paid in cash notwithstanding anything contrary contained other than the provisions of sub­section (2) of section 11B of the Central Excise Act, 1944. The restriction with regard to limitation is contained in section 11B(1) of the Central Excise Act, 1944. This being the case, the rejection of refund on the ground that it is time-barred cannot be justified. The impugned order is set aside. The appeal is allowed with consequential relief, if any.

(Pronounced in open court on 22.6.2022)