2022 (3) TMI 7 - AT - Service Tax

Refund of service tax - Export of goods - allegation of illicit mining - Levy of tax on illegal activities / illegal export. As per Sulekha Beevi C.S., Member (J), 100% EOU - refund of service tax paid - input services used for export of goods - respondent was of the view that appellants were not eligible for the refunds claimed, inasmuch as, the minerals had been exported by illicit mining and transportation - N/N. 41/2012-S.T., dated 29-6-2012 - HELD THAT - Undisputedly, the department does not have a case that the appellant has not exported goods or that they have not paid service tax on the input services used for export of goods. So also, there is no allegation that the conditions of the above notification are not fulfilled. The reason for rejecting the refund claims for the period from May, 2016 to December, 2016 is that the department gathered information from the District Level Committee of Tirunelveli that appellant has committed illicit mining of Beach Sands and unlawfully transported the same. The export of goods procured by violation of MM DR Act/Rules and, therefore are illegal exports as per Section 11H of Customs Act, 1962. The MMDR Act itself provides for punishments for contraventions of provisions of the Act. Sub-clause (a) of Section 11H defines illegal exports - appellant herein is a registered 100% EOU and does not possess any mining lease. Both these are different entities in the eyes of law. Merely because the supplier of goods has committed violation of local law, the exporter, who has procured the goods cannot be put into adverse situations. Even if it is proved that the supplier had contravened the provisions of MMDR Act, to hold that the exports are illegal exports, it has to be established that the exporter had acted consciously or abetted for such illegal mining. It needs to be stated that there is no show cause notice issued under the Customs Act, 1962 against the appellant alleging illegal export. By depriving the refund the department has sought to impose a punishment or penalty on the appellant for the alleged illegal export. The intention of Notification No. 41/2012 is to refund the service tax paid by the exporter on the goods exported. This is to give effect to the policy of the Government that taxes are not to be exported . To deny refund would be directing the appellant to suffer the burden of taxes on the goods exported. Thus, it would be imposing penalty/punishment on the appellant without due process of law. If the department has reasons to believe that appellant has contravened any provision of the Customs Act, 1962, then the appellant has to be put to notice by issuing a show cause notice. The rejection of refund claim is unjustified. The impugned orders are set aside, the appeals are allowed with consequential reliefs, if any. As Per P. Venkata Subba Rao, Member (T), Whether tax laws apply even to cases of illegal activities if they are otherwise covered by the tax law? - will tax be leviable even on illegal activities? - whether any tax benefit or relief is available to illegal activities also? - HELD THAT - The goods exported in this case are allegedly made out of illegally mined sand according to the State Government which regulates the mining of sand. As per Notification No. 41/2012-S.T., dated 29-6-2012, exporters are eligible for refund of the service tax paid on transport of the exported goods. The appellant in this case is a 100% EOU and hence no taxes are paid. However, the export goods had to be transported from the factory to the port and service tax was paid on such transportation charges and they sought refund of the same as per the notification. It is undisputed that the conditions of the Notification No. 41/2012-S.T. have been fulfilled. However, the exported goods were made out of illicitly mined beach sand - sand is a minor mineral which can be regulated by the State Government under the MMDR Act. In this case, in violation of the ban imposed by the State Government, the appellant unlawfully extracted beach sand and transported and the minerals were exported. According to the Revenue since the export was from illegal mining and transportation, they cannot be given the benefit of refund of service tax paid in such illegal export. Thus, while the export itself is not illegal the product emanated from illegal mining in violation under the MMDR Act. The question is can the Government incentivize such an export by providing refund? Conversely, if tax could have been collected on an illegal activity, can such a tax be collected notwithstanding the action under some other law? Can the Government profit from an illegal activity by collecting tax on it while on the other hand, taking action against the person under some other law? Does it not amount to the Government endorsing the illegal activity? These fundamental questions do not appear to have been addressed in the context of service tax. The settled legal position is therefore, the taxation should not consider legality or illegality of the acts in question. So long as the acts in question fall under the taxing statute, tax must be paid regardless of whatever action is necessary and may be taken under any other law which has been violated. Conversely, if any benefit is available under the tax laws, it is available regardless of the illegality of the underlying act. Although the goods are illegally imported, duty as applicable, is collected. This rate would be the tariff rate read with any exemption notifications that may apply. Not only is the customs duty collected on the illegal imports but the benefit of any exemption notification is also available for such illegal imports. Similarly, when export goods confiscated under Section 113 and thereafter allowed to be redeemed and exported, if any export duty is leviable, it has to be paid and if any exemption notification is available from such export duty, they can avail the benefit of the same - unless there is any provision to the contrary, the charging sections of the tax laws apply to illegal acts as they apply to legal acts and therefore tax is leviable notwithstanding that action for the illegal actions may be taken under some other law. This does not amount to endorsing the illegal activity by the State but only the recognition that it has taken place. This taxes illegal businesses and does not absolve them of their tax liability by virtue of their illegality. Since tax is leviable on illegal activity, tax benefits or tax relief are equally available to illegal businesses. Notification No. 41/2012-S.T. which provides for refund of the service tax is agnostic to the legality of the export and is available to both legal exports and illegal ones and also to legal exports of goods allegedly procured through illegal means such as the illegal mining in this case - appellant, is therefore, eligible for the benefit of the exemption Notification No. 41/2012-S.T. and the impugned order is liable to be set aside. Appeal allowed.

Summary

Issues Involved:

1. Eligibility for refund claims under Notification No. 41/2012-S.T.
2. Legality of exports under the Customs Act, 1962.
3. Alleged violation of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act).
4. Impact of illegal mining and transportation on refund claims.
5. Distinction between different entities involved in the mining and export process.
6. Applicability of tax laws to illegal activities.

Issue-wise Analysis:

1. Eligibility for Refund Claims under Notification No. 41/2012-S.T.:

The appellant, a 100% Export Oriented Unit (EOU), filed refund claims for service tax paid on input services used for exporting 'Garnet' and 'Super Garnet' under Notification No. 41/2012-S.T. The department did not dispute the fulfillment of conditions under the notification or the payment of service tax on input services. The rejection was based on allegations of illegal mining and transportation of minerals.

2. Legality of Exports under the Customs Act, 1962:

The department argued that the minerals were exported in violation of the MMDR Act, thus constituting "illegal exports" under Section 11H of the Customs Act, 1962. The appellant contended that there was no show cause notice issued under the Customs Act alleging illegal export, and the goods were inspected and cleared by Customs authorities before export.

3. Alleged Violation of the MMDR Act:

The show cause notices were based on the findings of the District Level Committee of Tirunelveli, which alleged unlawful mining and transportation of minerals by the appellant's group company. However, no action under the MMDR Act had been initiated against the appellant or the license holders. The appellant argued that the recommendations of the District Level Committee were not legally binding as the government order was not placed before the legislative assembly.

4. Impact of Illegal Mining and Transportation on Refund Claims:

The department's rejection of the refund claims was based on the assumption that the minerals were illegally mined and transported. The appellant argued that even if the supplier had violated the MMDR Act, it did not affect the eligibility for refund claims under the service tax notification, as there was no direct evidence of illegal export by the appellant.

5. Distinction Between Different Entities Involved in the Mining and Export Process:

The appellant emphasized that the illegal mining allegations were against M/s. V.V. Minerals (Mines), a different entity from the appellant, which is a 100% EOU without a mining lease. The appellant procured minerals from other license holders and processed them for export. Therefore, the recommendations against the mining licensees should not impact the appellant's refund claims.

6. Applicability of Tax Laws to Illegal Activities:

The judgment referenced various legal precedents, including income tax cases, to establish that tax laws apply to both legal and illegal activities. The principle is that tax must be paid on illegal activities, and conversely, tax benefits or reliefs are available to illegal activities unless explicitly excluded by law. The Tribunal concluded that the appellant was eligible for the refund claims under Notification No. 41/2012-S.T., regardless of the alleged illegal mining by the supplier.

Conclusion:

The Tribunal set aside the impugned orders and allowed the appeals, granting the refund claims with consequential reliefs. The judgment emphasized that the denial of refund claims based on allegations of illegal mining was unjustified without due process of law under the Customs Act. The Tribunal also highlighted that tax laws apply to illegal activities, and benefits under tax laws are available unless specifically excluded.