Court’s Decision
The Delhi High Court allowed the writ petition filed by the petitioner-company challenging the rejection of its refund claim for excise duty paid on freight charges. The Court held that the petitioner was entitled to the refund as the amount had been deposited under a mistake of law and that the principle of unjust enrichment would not apply to deny the refund, as the tax was never lawfully payable in the first place. The Court quashed the order of the Commissioner (Appeals) and directed the Respondent-Department to refund the amount, along with applicable interest under Section 11BB of the Central Excise Act, 1944.
Facts
The petitioner, a manufacturer and supplier of electronic goods, had collected excise duty on freight charges in addition to the assessable value of the goods between July 2000 and December 2001. This was based on a mistaken belief that excise duty was chargeable on freight, even though freight charges were separately shown and agreed upon in the sales contracts. Subsequently, realising the legal position—particularly in light of the Supreme Court’s judgment in CCE v. Roofit Industries Ltd.—the petitioner filed a refund claim for the excess excise duty paid on the freight component.
The refund claim was rejected by the Assistant Commissioner, and the appeal against the same was dismissed by the Commissioner (Appeals) on the grounds that the burden of duty had been passed on to the customers and that unjust enrichment would bar refund.
Issues
- Whether excise duty collected on freight charges beyond the assessable value was liable to be refunded?
- Whether the doctrine of unjust enrichment would apply when the amount was paid under a mistake of law and not as a statutory levy?
- Whether the authorities had correctly rejected the refund claim without examining the aspect of passing on the burden?
Petitioner’s Arguments
The petitioner contended that the freight charges were never a part of the assessable value as per Rule 5 of the Central Excise (Valuation) Rules, 1975. The duty paid on such freight charges was a result of a mistaken understanding of law and, therefore, should be refunded. It was argued that the excise law permits refund in such cases and that the question of unjust enrichment does not arise because the amount was paid without authority of law and could not be retained by the government. The petitioner also relied on the decision of the Supreme Court in Mafatlal Industries Ltd. v. Union of India to submit that the government is not entitled to retain tax illegally collected.
Respondent’s Arguments
The Department argued that the petitioner had collected the excise duty from customers and thus passed on the burden, making the refund claim unsustainable under Section 11B of the Central Excise Act, 1944 due to the bar of unjust enrichment. It was also contended that there was no evidence to show that the burden had not been passed on, and that the presumption of unjust enrichment had not been rebutted.
Analysis of the Law
The Court examined Rule 5 of the Central Excise Valuation Rules, 1975, which excludes actual freight charges from the assessable value if the goods are sold for delivery at a place other than the factory gate and the freight is shown separately. The Court noted that the petitioner had indeed satisfied this criterion and the excise duty was collected under a mistaken understanding of law.
It further relied on the Supreme Court’s interpretation in Mafatlal Industries to affirm that when a tax is paid under a mistake of law, especially when there is no statutory liability, the doctrine of unjust enrichment cannot be applied in a blanket manner. The Court emphasised that public authorities are not entitled to retain amounts not due to them.
Precedent Analysis
The judgment made detailed reference to:
- Mafatlal Industries Ltd. v. Union of India (1997) – It was held that where duty/tax is paid under mistake of law, the refund must be granted unless barred under statute, and the principle of unjust enrichment would not apply in such cases.
- CCE v. Roofit Industries Ltd. (2015) – The Supreme Court clarified that freight charges shown separately are not to be included in the assessable value for excise purposes if the conditions of Rule 5 are met.
- Sahakari Khand Udyog Mandal Ltd. v. CCE (2005) – The Supreme Court ruled that refund must be denied if unjust enrichment is evident, but this does not override the general principle that no tax can be collected without authority of law.
The Court distinguished between cases where statutory levies are made and where amounts are collected under an erroneous interpretation or mistake of law.
Court’s Reasoning
The Court held that the duty paid on freight charges was not statutorily leviable and thus was refundable. The presumption of unjust enrichment, though rebuttable, was inapplicable in this case because there was no legal basis for the levy in the first place. The Court remarked:
“The government cannot enrich itself at the expense of the citizen by retaining amounts that were never due to it in law. To allow so would violate Article 265 of the Constitution which mandates that no tax shall be collected except by authority of law.”
The Court found that the authorities had mechanically applied the principle of unjust enrichment without examining the underlying legal mistake. The burden was not on the petitioner to disprove unjust enrichment when the payment itself was not lawfully due.
Conclusion
The High Court quashed the impugned order passed by the Commissioner (Appeals) and directed the refund of excise duty paid on freight charges along with interest under Section 11BB of the Central Excise Act, 1944. The Court reiterated that no tax can be retained by the government if it was collected without the authority of law, and unjust enrichment principles would not apply where there is a mistake of law.
Implications
This ruling strengthens the jurisprudence around refund of taxes paid under mistake of law. It sets a clear precedent that where a taxpayer pays tax without a legal obligation, especially based on a misunderstanding of rules, they are entitled to a refund. It also limits the application of the unjust enrichment doctrine where no tax was legally due. This judgment will be beneficial for manufacturers and traders who have erroneously paid excise on excluded components such as freight.
Precedents Referred
- Mafatlal Industries Ltd. v. Union of India (1997) – Basis for refund of taxes paid under mistake of law.
- CCE v. Roofit Industries Ltd. (2015) – Clarified exclusion of freight from assessable value.
- Sahakari Khand Udyog Mandal Ltd. v. CCE (2005) – Application of unjust enrichment in refund matters.
FAQs
Q1. Can excise duty paid on freight charges be refunded?
Yes, if the freight charges are not part of the assessable value and excise duty is collected under a mistake of law, the taxpayer is entitled to a refund.
Q2. Does the doctrine of unjust enrichment bar such a refund?
Not necessarily. If the tax was paid without statutory backing, unjust enrichment principles do not apply.
Q3. Is the government allowed to retain taxes paid under mistake of law?
No. Article 265 of the Constitution prohibits collection or retention of tax without authority of law.
