Refund of Tax Collected Without Authority of Law


As postulated by Article 265 of the Constitution of India, a tax shall not be levied, except with the authority of law. A tax shall be valid only if it is relatable to statutory power emanating from a statute. Where the levy and collection of tax is without authority of law, Article 226 of the Constitution of India would come to the aid of an aggrieved party, even where the assessment order has not been challenged by appeal or revision, to undo a collection of tax made without an authority of law.

In ‘Solonah Tea Co. Limited V. Superintendent of Taxes, Nawgong’ – 1987 (12) TMI 3 – SUPREME Court it was held that in a society governed by rule of law taxes should be paid by citizens as soon as they are due in accordance with law. Equally, as a corollary of the said statement of law it follows that taxes collected without the authority of law as in this case from a citizen should be refunded because no state has the right to receive or retain taxes or monies realized from citizens without the authority of law.

In ‘U.P. Pollution Control Board and others V. Kanoria Industrial Limited and others’ – 2001 (1) TMI 83 – SUPREME Court the respondents were required to pay water cess under Water (Prevention and Control of Pollution) Cess Act, 1977. The respondents raised a protest since sugar industries and distilleries are not industries covered by Entry 15 of Schedule I of the Act, they are not liable to file any return or make payment of water cess. The State Government rejected their objections. The respondents paid the cess but some of them filed writ petitions, challenging the levy of the cess, which were dismissed. On appeal the Supreme Court reversed the decision of the High Court holding that sugar manufacturing industries do not fall in Entry 15 of Schedule I of the Act.

Thereafter the respondents made a representation to the Board seeking the refund of amount collected without authority of law. The State Government rejected the refund claim. Therefore they filed a writ petition before the High Court. The State Government contested that the respondents are not entitled to refund as the amounts paid have already been deposited with the Government of India. The High Court directed to refund the amount stated to have been paid by them. The UP Pollution Control Board filed a special leave petition before the Supreme Court. The Supreme Court held that where levy and collection of tax/cess is unconstitutional or without authority of law, a writ seeking refund is maintainable.

The Supreme Court held that in the cases on hand where facts are not in dispute, collection of money as cess was itself without the authority of law; no case of undue enrichment was made out and the amount of cess was paid under protest; the writ petitioners filed within a reasonable time from the date of declaration that the law under which tax/cess was collected was unconstitutional. There is no good reason to deny a relief of refund to the citizens in such cases on the principles of public interest and equity. However it must not be understood that in all cases where collection of cess, levy or tax is held to be unconstitutional or invalid, the refund should necessarily follow and it is not automatic consequence. It may be refused on several grounds depending on facts and circumstances of the given case.

In ‘Idea Cellular Limited V. Union of India’- 2015 (4) TMI 286 – PUNJAB & HARYANA HIGH COURT the petitioners provided cellular services and for the said purpose, activates SIM cards. The State of Haryana collected VATR from the petitioner on the basis of assessment order dt. 22.2.2006 and 26.3.2008 on the premise that activation of SIM card is a sale. The Supreme Court in ‘Bharat Sanchar Nigam Limited and another V. Union of India and others’ – 2006 (3) TMI 1 – Supreme court and in ‘Idea Mobile Communication Limited V. Commissioner of Central Excise & Customs, Cochin’ – 2011 (8) TMI 3 – SUPREME COURT OF INDIA held that the activation of SIM is a service and not a sale. The petitioner approached the State of Haryana for refund of the amount of VAT but as no action was taken in the matter filed a writ petition which was disposed of directing the respondents to decide the petitioner’s representation for refund. The representation was rejected by the Authority on the ground that the petitioner did not challenge its liability before the Assessing Authority and the petitioner did not file any appeal against the assessment order and as the petitioner has charged VAT from its customers, the amount cannot be refunded.

The petitioner submitted the following before the High Court-

The Supreme Court having held that activation of SIM card is not a sale, the question before the adjudicating authorities was not whether the petitioner did or did not challenge its liability to pay VAT or didor did not file appeal does not arise;
Whether the State of Haryana could continue to retain the amount of VAT collected after the Supreme Court had held that the petitioner is not liable to pay VAT;
The VAT paid by the petitioner and retained by the State of Haryana is not relatable to any statutory provision and therefore must be refunded to the petitioner;
If the State of Haryana refund the VAT amount, the petitioner would be doubly taxed as the Service Tax Department has raised a demand for deposit of service tax for the period which the petitioner has deposited VAT;
The State Government cannot retain the tax, collected without the authority of law;
There is no question of unjust enrichment as all that the petitioner asserts and prays for is that as assessment orders and tax collected are without authority of law, the assessment orders may be declared as non est and the tax collected may be forwarded to the service tax Department.
The State of Haryana submitted the following-

The assessment orders have become final and as such the writ petition is not maintainable;
The petitioner deposited VAT in accordance with the interpretation of the law prevalent on the time of assessment about its eligibility to tax, cannot seek quashing of assessment orders or refund;
The Haryana VAT Act does not contain any provision that allows the respondents to refund the amounts deposited by the petitioner;
In case the State of Haryana is directed to refund the amount to the petitioner, it would be a case of unjust enrichment, a course prohibited by law.
The Union of India, i.e., service tax department contended the following-

The Supreme Court in ‘BSNL’ case (supra) has clarified that the gross total amount received by the operator, from the subscriber, for activation of SIM card, is eligible to service tax;
The petitioner is obliged to deposit service tax and whether the assessee has paid the VAT to the State of Haryana, for this period, is irrelevant;
The amount paid by the petitioner to the Haryana VAT Department may not be construed as a final determination of the petitioner’s liability towards service tax or a discharge of the petitioner’s liability.
The High Court considered the submissions made by the parties to this case. The first question considered by the Court is whether the State of Haryana has collected VAT on activation of SIM cards, without authority of law. The State of Haryana does not deny that the collection of VAT on activation of SIM cards is not relatable to any statutory provision. The collection of VAT on the sale of SIM cards, not being relatable to any statutory provision, must be held to be without authority of law and as a consequence non est.

The High Court considered the second question as to whether the Haryana VAT contains any provision that empowers the State to refund the tax. The High Court perused the provisions of Section 20 of the Haryana VAT Act. It reveals that it does not provide for refund of tax in the scenario, obtaining in the present case. A court, in such a situation, must rise above these inherent impediments and ensure that the State does not levy or appropriate tax without authority of law and if so collected is called upon to refund the amount deposited. The argument that refund of this amount would amount to unjust enrichment of the petition is without the foundation in fact or in law. The Union of India has raised a demand for service tax for the period for which the State of Haryana has levied and collected VAT. If the petitioner is called upon to pay VAT and service tax, the High Court held, that it would the case of double taxation. The High Court directed to forward the amount retained by the Haryana State to the Service Tax Department which would adjudicate the liability of the petitioner under service tax provisions.

Against this order the State of Haryana filed a special leave petition to appeal before the High Court. The Supreme Court condoned the delay and admitted for appeal. The Supreme Court will decide the appeal in due course of time.

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