CESTAT: Interest on Delayed Refunds Of Service Tax Paid By Mistake Must Be Paid At The Rate Of 12% Per Annum
Pranav B Prem
The Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), presided by Justice Ashok Jindal (Judicial Member), has held that when service tax is paid mistakenly on exempt services, the refunded amount cannot be treated as tax or duty under Section 11B of the Central Excise Act, and hence interest on delayed refunds must be paid at the rate of 12% per annum.
The appellants—Gajendra Singh Sankhla, M/s I.P. Singh Construction Co., and M/s P.S. Builders—had all paid service tax on the construction of individual and independent residential houses during the period 2012–2013 and 2014–2015. This was despite the fact that such construction services were not taxable prior to 01.07.2012 and were expressly exempted thereafter under Notification No. 25/2012-ST dated 20.06.2012. Upon realization of this error, the appellants filed refund claims, which were initially rejected by the lower authorities. However, this Tribunal allowed the refunds on merits, limitation, and unjust enrichment by a detailed order dated 04.07.2023.
Following that favorable order, the appellants filed refund claims along with a demand for interest at the rate of 12% per annum. While the refunds were sanctioned, interest was granted only at 6% by invoking Section 11BB of the Central Excise Act. Challenging this reduced rate, the appellants returned before the Tribunal seeking enhancement of interest.
In support of their appeal, the appellants argued that the amounts paid were not tax in the legal sense but rather revenue deposits made under a mistake of law. Therefore, Section 11B of the Central Excise Act—which governs refunds of duty or tax—is not applicable. Instead, they asserted their entitlement to 12% interest on the refunded amount, relying heavily on the judgment of the Karnataka High Court in Commissioner of Central Excise v. KVR Construction [2012 (26) S.T.R. 195 (Kar.)], which held that service tax paid under a mistaken belief was not “tax” within the meaning of the Act. This view was later upheld by the Supreme Court in 2018.
The Tribunal agreed with this position and found that the provision of Section 11B was not applicable, since the payments in question were never legally due and thus did not qualify as “service tax”. It reiterated that once the payment was made under a mistaken belief and later found not to be legally due, it became a revenue deposit—making Section 11BB (which governs interest on refund of duty) also inapplicable.
The Tribunal reviewed a long line of precedents that supported the appellants’ case. These included:
Raj Construction v. CE, CGST Jaipur [2022 (66) G.S.T.L. 450 (Trib.)]
Ambience Hospitality Pvt. Ltd. v. CCE [2019 (21) G.S.T.L. 400 (Trib.)]
Tripura Cricket Association v. Union of India [2023 (2) Centax 147 (Tripura)]
The Tribunal noted that in all these decisions, it had been consistently held that any amount paid without authority of law cannot be retained by the department and must be refunded with appropriate interest. The right to refund is governed not by statutory refund provisions like Section 11B but by general principles of equity, Article 265 of the Constitution, and Section 72 of the Indian Contract Act.
The Revenue, on the other hand, had relied on the decision in Triumph International (India) Pvt. Ltd. v. Commissioner of GST & CE, Chennai [2024 (7) TMI 300 – CESTAT Chennai] , which upheld a 6% interest cap under Section 11BB. However, the Tribunal found that this decision did not directly apply, as it failed to address how Section 11B was inapplicable in cases involving mistaken payments. The Tribunal clarified that the Triumph International case dealt with a scenario involving legitimate tax payments, not mistaken payments on exempt services.
Ultimately, the Tribunal held that since the amounts were never payable as tax and were deposited by mistake, they must be treated as revenue deposits. Consequently, the interest payable must be at the rate of 12% per annum. Citing its own recent ruling in Indus Towers Ltd [Final Order No. 60101 of 2025 dated 24.01.2025] , the Tribunal directed the Revenue to pay interest at this higher rate to the appellants. Accordingly, all appeals were allowed, and the orders granting only 6% interest were modified to provide for 12% interest per annum on the refunded amounts.
Appearance
For Appellant: Om P. Agarwal, Chartered Accountant
For Respondent: Kuldeep Rawat, Authorized Representative (DR)
Cause Title: Gajendra Singh Sankhla V. Commissioner of CGST
Case No: Service Tax Appeal No. 50876 Of 2024 (SM)
Coram: Shri. Ashok Jindal [Member (Judicial)]
[Read/Download order]
