The Madras High Court in the case of Eveready Industries India Ltd. v. CESTAT, Chennai [2016-TIOL-676-Mad-CX] has held that refund granted by an authority cannot be denied by way of issuance of Show Cause Notice (SCN) in cases where the order has not been subject to review.
In this case, the assessee was clearing goods on payment of duty after paying duty on provisional basis. While finalizing the provisional assessment, the original authority disallowed the abatement on cash discount. On appeal to Commissioner (Appeals), the abatement on cash discount was allowed and the Order-in-Original was set aside. Consequent to the order of Commissioner (Appeals), the assessee filed a refund claim which was sanctioned to them by the Assistant Commissioner. There was no appeal filed by the Department against the order of the Commissioner (Appeals) allowing abatements as well as against the order of the Assistant Commissioner granting refund. In this background, an SCN was issued to recover the erroneous refund on the ground of unjust enrichment, by the same Assistant Commissioner who granted refund.
The assessee argued that once refund has been granted by way of an order and when the same has attained finality, it is not open to the Department to issue SCN proposing to deny the same, when the order has not been reviewed by a superior authority.
Power to issue SCN and power to review an order are two independent powers?
It was argued by the Department that the power to issue SCN and the power to review an order are two independent powers which are invoked for different purposes and therefore, there is no requirement to take recourse to review for issuance of SCN. In this regard, the Department placed reliance on the decision of the Hon’ble Supreme Court in Union of India v. Jain Shudh Vanaspathi Ltd. [1996 (86) ELT 460 (SC)].
No power to revoke refund suo motu
Relying on Jain Shudh Vanaspathi (supra) the Tribunal confirmed the findings in the Order-in-Original on the ground that a show cause notice can be issued even in cases where the order has not been reviewed by a superior authority.
The Madras High Court however set aside the order of the Tribunal holding that once refund has been granted in accordance with law by the adjudicating authority, there is no power under the Act to revoke the refund suo motu. Further, the High Court held that the same authority can issue SCN only when there is direction by a superior authority by exercising the power of review. The High Court also held that once an application of refund is allowed under Section 11B of the Central Excise Act, an SCN for recovery of ‘erroneous refund’ cannot be issued unless the refund has been held to be ‘erroneous’ by another authority. The High Court also distinguished the decision of the Supreme Court in Jain Shudh Vanaspati on facts, stating that in those proceedings, the assessee had indulged in fraud and the Supreme Court held that fraud ‘vitiates all’.
Impact of the above judgment
This decision sets out the correct position of law and has also distinguished the decision of the Supreme Court in Jain Shudh Vanaspati which was rendered in completely different set of facts and circumstances and has been time and again relied upon by the Department. The judgment further gives a significant finding that when an authority exercises a power under a section, it must be presumed that it has been done in accordance with law and therefore, another authority in a parallel proceeding cannot act upon it on the premise that it is erroneous, unless a superior authority holds so.
[The author is an Associate, Tax Practice, Lakshmikumaran & Sridharan, Chennai]