2017 (4) TMI 857 - AT - Service Tax

Refund of interest - demand held as time barred - case of appellant is that interest is of compensatory nature and since the demand itself is held to be time barred, the appellant is not liable to pay the same. The interest cannot be retained by the department - Held that - Merely because an assessee pays an amount prior to the issuance of SCN, or before passing of adjudication order, he cannot be put into a disadvantaged position than an assessee who pays the amount after the stage of adjudication or at any other appellate stage - even though the appellant paid the amount voluntarily prior to issuance of show cause notice, he has contested the demand. At the level of adjudication itself, the demand in respect of the period 2005-06 was set aside as being time barred. In such a case, the appellant can claim refund of service tax as well as the interest thereon - the rejection of claim for refund of interest is improper - appeal allowed - decided in favor of assessee.

Summary

Issues:
Refund claim for interest on service tax held as time-barred by adjudicating authority.

Analysis:
The appellant, engaged in providing Franchise Services, was found liable to pay service tax for the period October 2005 to March 2008. The original authority confirmed a demand of &8377; 13,87,585/- for 2006-2007 and 2007-2008, while the demand for 2005-06 of &8377; 2,65,129/- was held as time-barred. A penalty was imposed, and the appellant paid a reduced penalty. The Commissioner (Appeals) set aside the penalty, leading to a refund claim for interest and penalty. The original authority sanctioned the penalty refund but rejected the interest refund claim. The appellant appealed, arguing that interest is compensatory and should be refunded since the demand was time-barred.

The department contended that since the liability to pay tax was confirmed and the demand set aside only on the ground of being time-barred, the appellant was not entitled to a refund. The department argued that the appellant voluntarily paid the tax and interest, and the demand not being set aside on merits meant no refund was due. The department maintained that the appellant's payment before the issuance of the show cause notice did not entitle him to a refund.

The Tribunal held that the department's argument was unacceptable in fiscal law. It emphasized that the law encourages payments before proceedings to avoid litigation. The Tribunal stated that if a demand is set aside, the taxpayer is entitled to a refund, regardless of when the payment was made. The Tribunal clarified the distinction between time-barred civil debt and time-barred tax demands, highlighting that the liability to pay tax is derived from the Constitution and excess tax payments are refundable.

The Tribunal concluded that the rejection of the interest refund was unjustified. It held that when a demand is held as time-barred, the department's legal claim on the service tax is canceled, necessitating the refund of the interest portion. The Tribunal allowed the appeal, setting aside the order rejecting the interest refund and granting any consequential reliefs.

This detailed analysis of the judgment highlights the issues involved, the arguments presented by both parties, and the Tribunal's reasoning leading to the decision to allow the appeal for the refund of interest on the time-barred service tax demand.