2015 (4) TMI 389 - SC - Central Excise

Refund claim - doctrine of unjust enrichment - Capital goods - Captive consumption - Whether the doctrine of unjust enrichment is applicable in respect of raw material imported and consumed in the manufacture of a final product - Held that - principle of unjust enrichment is applicable even when the goods are used for captive consumption. - if a particular material is used for manufacture of a final product, that has to be treated as the cost of the product. Insofar as cost of production is concerned, it may include capital goods which are a part of fixed cost as well as raw material which are a part of variable cost. Both are the components which come into costing of a particular product. Therefore it cannot be said that the principle laid down by the Court in Solar Pesticides would not extend to capital goods which are used in the manufacture of a product and have gone into the costing of the goods. In order to come out of the applicability of the doctrine of unjust enrichment, it therefor becomes necessary for the assessee to demonstrate that in the costing of the particular product, the cost of capital goods was not taken into consideration. Tribunal has observed that capital goods viz. ESPs have been only used captively for pollution control purpose and the same is not used for processing or manufacturing of any final product and therefore there is no question of passing on the burden of duty to any one. These observations are clearly erroneous in law in view of the judgment of this Court in Indian Farmers Fertilisers COOP. Ltd. - Accordingly, the judgment of the Tribunal is set aside. - Decided in favour of Revenue.

Summary

Issues Involved:
1. Applicability of the doctrine of unjust enrichment in the case of refund of duty paid on capital goods used captively.
2. Whether the principle of unjust enrichment extends to capital goods, similar to raw materials used in manufacturing.

Issue-Wise Detailed Analysis:

1. Applicability of the doctrine of unjust enrichment in the case of refund of duty paid on capital goods used captively:
The respondent purchased Electro Static Precipitators (ESPs) from M/s. BHEL at a concessional duty rate of 5% ad valorem, as per Notification No. 78/1990-CE, provided the goods were certified for pollution control purposes by an officer not below the rank of Deputy Secretary in the Ministry of Environment and Forests (MoEF). A dispute arose regarding the entitlement to this concessional rate, leading the respondent to pay the normal duty rate of 15% and subsequently seek a refund of the excess duty paid. The Revenue refused the refund, arguing that the respondent had passed on the burden of the duty, thereby invoking the doctrine of unjust enrichment. The Commissioner of Central Excise (Appeal) upheld this decision, but the CESTAT overturned it, directing the refund. The CESTAT distinguished the case from the Supreme Court's judgment in Union of India vs. Solar Pesticides Pvt. Ltd., which dealt with raw materials, not capital goods used captively. The Supreme Court, however, clarified that the principle of unjust enrichment applies regardless of whether the goods are used captively or otherwise.

2. Whether the principle of unjust enrichment extends to capital goods, similar to raw materials used in manufacturing:
The Supreme Court examined the applicability of the unjust enrichment doctrine to capital goods by referencing the Solar Pesticides case, which discussed the principle in the context of raw materials. The Court noted that the principle of unjust enrichment applies to both actual and potential passing of the duty burden. It emphasized that this principle is relevant even when goods are used for captive consumption. The Court further drew parallels with the Indian Farmers Fertiliser Coop. Ltd. case, which dealt with exemptions for raw materials used in production processes. The Court concluded that the cost of capital goods, like raw materials, is part of the overall production cost and thus falls under the unjust enrichment doctrine. The Tribunal's view that capital goods used for pollution control do not pass on the duty burden was deemed erroneous. The Supreme Court allowed the appeal, setting aside the Tribunal's judgment but granted the respondent an opportunity to prove that the cost of capital goods was not included in the product costing to qualify for the refund.