JUNE 15, 2015

By Samir Kumar Sinha

THE popular column Daily Dose of Taxation (DDT) in its episode 2594 dated 11.05.2015 carried the following capsule titled "Refund to Fund - Does Money really go from Customs to Consumer Welfare Fund?" For quick reference, the same is reproduced below:

"In  a refund claim in Customs, Central Excise or Service Tax, if the assessee does not pass the 'unjust enrichment test', the refund has to be credited to the 'Consumer Welfare Fund'. A small survey conducted by us revealed that most of the Assistant Commissioners had no clue as to how to credit the refund to the 'Fund'. And some Assistant Commissioners were not even aware of the Fund. Even those officers who are aware of the Law do not credit the refund amounts to the Consumer Welfare Fund.

The CAG's Audit found one such instance. In its latest report to Parliament [Report No. 7 of 2015 (Indirect Taxes-Central Excise)], the CAG observes:

Section 11B of Central Excise Act provides for grant of refund if duty relating to refund claim was paid by manufacturer and the incidence of such duty had not been passed on by him to any other person. In case the duty incidence had been passed on to any other person, the amount of refund shall be credited to the Consumer Welfare Fund (CWF).

Scrutiny of records in Belapur Commissionerate revealed a long pending refund claim was decided in favour of the assessee in November 2003 and was remanded back to adjudicating authority to ensure whether the refund was to be provided to the assessee or credited to Consumer Welfare Fund. The case was adjudicated by the Assistant Commissioner who ordered (February 2005) the transfer of the amount of refund to the CWF after verifying the correctness of the amount of refund. However, no action had been taken by the Department to credit the amount of Rs.59.53 lakh to the Consumer Welfare Fund till August 2009 even after a lapse of more than 4 years.

When we pointed this out (August 2009), the department intimated (January 2014), that the amount of Rs.59.53 lakh was transferred to the Consumer Welfare Fund in January 2014.

We observe that even after the lapse was pointed out by CERA in August 2009, there was a delay of more than four years in transferring the amount to the Consumer Welfare Fund.

Shouldn't the Assistant Commissioner who sat over 60 lakhs of rupees meant to be used for consumer welfare, be asked to pay interest for these nine years?"

In this article, I would like to dwell more on the subject matter.

2. "Doctrine of Unjust Enrichment" is a term which is generally used by the Customs and Central Excise authorities in the matter of claim for refund of excess paid duty. Whenever it is found by the Customs and Central Excise authorities that the party is entitled for refund of duty and incidence of duty has not been passed on to any other person, refund amount is sanctioned and paid to the party since it is not hit by the doctrine of unjust enrichment. However, if it is found that incidence of duty has been passed on to any other person or if the party fails to submit evidence that incidence of duty has not been passed on to any other person, refund amount is sanctioned but credited to the Consumer Welfare Fund since it is hit by the doctrine of unjust enrichment. Interestingly, most of the refunds are sanctioned but they find their way to the Consumer Welfare Fund alleging that the claims are hit by the doctrine of unjust enrichment & by citing a plethora of case laws.

3. 'Unjust enrichment' means retention of a benefit by a person that is unjust or inequitable. 'Unjust enrichment' occurs when a person retains money or benefit which belongs to someone else in justice, equity and good conscience. The 'doctrine of unjust enrichment', therefore, is that no person can be allowed to enrich inequitably at the expense of another. A right of recovery under the 'doctrine of unjust enrichment' arises where retention of a benefit is considered contrary to justice or against equity.

4. There are provisions for refund of duty under Sections 18(5) and 27 of the Customs Act, 1962 and Section 11B of the Central Excise Act, 1944 subject to the condition that incidence of duty has not been passed on to any other person. Under the provisions, refund amount is credited to the Consumer Welfare Fund if it is found that incidence of duty has been passed on to any other person. The said provisions are considered as the law for unjust enrichment.

5. As per the Central Excises and Customs Laws (Amendment) Act, 1991 (Act No. 40 of 1991) read with the Notification No.30/91-CE(NT) dated 19.09.1991, Chapter IIA containing Sections 12A, 12B, 12C and 12D has been inserted in the Central Excise Act, 1944 with effect from 20.09.1991. By the said amendment, provision for establishment of the Consumer Welfare Fund has been made under Section 12C(1) of the Central Excise Act, 1944. Under the provisions of Section 12C(2) ibid, the amount of duty is to be credited to the Fund in such manner as may be prescribed. Under the provisions of Section 12D(1) ibid, any money credited to the Fund is utilized by the Central Government for the welfare of the consumers in accordance with such rules as that Government may make in this behalf. Accordingly, Consumer Welfare Fund Rules, 1992 has been made.

6. Under the proviso to Rule 3 of the Consumer Welfare Fund Rules, 1992, any amount having been credited to the Fund is to be paid from the Fund as ordered or directed as payable to any claimant by orders of the appellate authority or court. However, as observed in the referred DDT, refund amount is rarely credited to the Consumer Welfare Fund, whenever refund amount is sanctioned but ordered to be credited to the Fund by the lower authority. Consequently, refund amount is hardly paid from the Consumer Welfare Fund whenever the party gets relief from the appellate authority or court. In the absence of such a transaction as per the accounting procedure, the law for unjust enrichment is only an eye-wash to retain the illegally collected excess duty or any deposit amount by the Government.

7. Due to the doctrine of unjust enrichment, unnecessary hardships is caused to the party. As such, protracted litigation in refund claim is created. Strangely, doctrine of unjust enrichment is also applied in the case of refund of amount deposited(not towards duty) during investigation, appeal or provisional assessment. If the party gets consequential relief from the appellate authority or court in the matter of fine and penalty, doctrine of unjust enrichment is also applied in these cases of refund. As a result of protracted litigation due to doctrine of unjust enrichment, several cases of refunds are pending before the appellate authorities and courts.

8. In the case of order passed by the appellate authority or court in favour of the party, process of refund is kept pending by the lower authority till the order of the appellate authority or court is reviewed by the Committee of competent authorities. In the case of refund already sanctioned and paid by the lower authority, protective demand notice is issued for recovery of refund amount if the order passed by the lower authority is not accepted by the Committee of competent authorities and appeal is filed by the revenue department before the appellate authority. As such, process of refund gets stagnated in view of appeals filed by the department or party, as the case may be.

9. A nine Judges Bench of the Hon'ble Supreme Court with 8-1 majority decision has upheld the constitutionality of the law for unjust enrichment in the case of Mafatlal Industries Ltd Versus Union of India - 2002-TIOL-54-SC-CX-CB. This remarkable judgement(120 pages containing 305 paras) has been referred and followed in several cases but in some cases, it has also been distinguished. Now, it is a point of consideration whether doctrine of unjust enrichment is relevant in the matter of claim for refund of excess paid duty or any deposit amount.

10. The Hon'ble Supreme Court by the majority opinion has upheld the validity of law for unjust enrichment and that decision cannot be reviewed right now since it has attained the finality. However, relevancy of law for unjust enrichment may be considered in view of the fact that if the party is entitled for refund, doctrine of unjust enrichment should not be applied in the case of such refund since the person, to whom incidence of duty appears to be passed on, cannot file application for refund of excess paid duty which has not been levied on them but the assessee/importer.

11. The most remarkable opinion has been given by the dissenting judge in the said judgement wherein he has called the law for unjust enrichment quite absurd. He has inter alia opined that a ny provision appearing or trying to bar recovery of illegally collected tax is violative of Article 265 of the Constitution and must be struck down. As per the Article 265 of the Constitution, "no tax shall be levied or collected except by authority of law". With due respect to the judgement of the Hon'ble Supreme Court, it is submitted that the excess paid duty or any amount must be refunded to the party and, therefore, the law for unjust enrichment is required to be abolished for which opinion of the dissenting judge in the said judgement can be followed. The Hon'ble judge has carefully given his opinion supported with legal provisions.

12. It is submitted that opinions given by the dissenting judge in the majority decision of the Hon'ble Supreme Court in the case of Mafatlal Industries Ltd supra appear convincing. Although the law for unjust enrichment has been upheld by the majority opinions of the Hon'ble Supreme Court, it does not appear to be economically good. Also, it is not relevant in view of the fact that the duty is levied on the goods manufactured or imported by the assessee or importer, as the case may be, and it is paid by the assessee or importer and not by the consumer. Moreover, it is causing protracted litigation. As such, the law for unjust enrichment is required to be abolished. Needless to say, relevant Sections of the Customs Act, 1962 and the Central Excise Act, 1944 and the rules made thereunder are required to be amended in order to abolish the law for unjust enrichment.

13. In the case of Commissioner of State Revenue Versus Royal Insurance Australia Ltd. [69 A.L.J. 51], the Australian High Court rejected the plea of the State on the ground that inasmuch as the plaintiff has passed on the burden of illegally collected tax to others, it is not entitled to restitution. It was highlighted by the Hon'ble Chief Justice Mason in the said case that "Refund in a taxing statute is to be made not on the ground of compensation for loss or damage sustained by a tax-payer but on the principle of restoration to the tax-payer of what had been collected from him without justification of law".

14. Undoubtedly, if the law of unjust enrichment is abolished it will be a major trade facilitation measure. Also, it will minimise legal disputes. Moreover, revenue authorities will be in better and relaxed position to sanction the refund claim, if otherwise admissible.