Facts of the Case

The petitioner, M/s. Manickavel Edible Oils Private Limited, filed a writ petition challenging the Order-in-Original dated 13.10.2022, whereby the respondent rejected its refund claim for service tax paid under the Reverse Charge Mechanism (RCM) on ocean freight pertaining to May 2017.

The petitioner had initially discharged service tax liability on ocean freight under RCM and subsequently sought a refund relying upon the judgment of the Gujarat High Court in SAL Steel Ltd., which had declared the relevant provisions imposing such levy as ultra vires the Finance Act, 1994. However, the refund application was rejected solely on the ground that the Gujarat High Court judgment had been challenged before the Supreme Court and had not attained finality.

During the pendency of the writ petition, it was brought to the notice of the Court that the Supreme Court had already affirmed the legal position in Union of India v. Mohit Minerals Pvt. Ltd. by judgment dated 19.05.2022, which had a direct bearing on the levy of tax on ocean freight.

Issues Involved

  1. Whether the rejection of the refund claim solely because the Gujarat High Court judgment was pending challenge before the Supreme Court was legally sustainable.
  2. Whether the Supreme Court's decision in Union of India v. Mohit Minerals Pvt. Ltd. was required to be considered while deciding the petitioner's refund claim relating to service tax paid on ocean freight under RCM.
  3. Whether the refund claim required fresh adjudication in light of the binding decision of the Supreme Court.

Petitioner's Arguments

  • The petitioner submitted that the service tax paid on ocean freight under the Reverse Charge Mechanism was refundable since the legal basis of such levy had been declared invalid by the Gujarat High Court in SAL Steel Ltd.
  • It was further contended that the Supreme Court had subsequently affirmed the legal position in Union of India v. Mohit Minerals Pvt. Ltd., and although that judgment arose under the GST regime, its reasoning substantially affected the validity of the levy of service tax on ocean freight.
  • Therefore, the impugned order rejecting the refund claim without considering the Supreme Court judgment was legally unsustainable.

Respondent's Arguments

  • The respondent contended that the refund claim had originally been rejected because the Gujarat High Court judgment in SAL Steel Ltd. had not attained finality when the impugned order was passed.
  • Before the High Court, the respondent fairly submitted that the refund claim could be re-examined by taking into consideration the Supreme Court's judgment in Mohit Minerals Pvt. Ltd., particularly regarding the levy of tax on ocean freight.

Court Order / Findings

The Madras High Court observed that the impugned order had been passed without considering the binding judgment of the Supreme Court in Union of India v. Mohit Minerals Pvt. Ltd., despite the fact that the said judgment directly dealt with the levy of tax on ocean freight.

The Court held that rejecting the refund application merely because the Gujarat High Court judgment had been challenged before the Supreme Court, without examining the applicability and effect of the Supreme Court's subsequent decision, clearly reflected non-application of mind.

Accordingly, the High Court:

  • Set aside the Order-in-Original dated 13.10.2022;
  • Directed the respondent authority to re-examine the refund claim strictly in accordance with law;
  • Directed the authority to specifically consider the applicability of the Supreme Court judgment in Union of India v. Mohit Minerals Pvt. Ltd. while deciding the refund claim relating to service tax on ocean freight;
  • Ordered completion of the exercise within eight weeks from the date of receipt of the Court's order.

Important Clarification

  • A refund claim relating to service tax paid on ocean freight under the Reverse Charge Mechanism cannot be rejected merely because an earlier High Court judgment was under challenge before the Supreme Court.
  • Once the Supreme Court has delivered a binding decision on the issue, the adjudicating authority must examine the refund claim in light of that judgment.
  • Failure to consider a binding Supreme Court decision amounts to non-application of mind, warranting judicial interference.
  • Authorities deciding refund claims must apply the latest binding precedent before rejecting such claims.

Sections / Provisions Involved

  • Article 226 of the Constitution of India
  • Finance Act, 1994
    • Section 64
    • Section 66B
    • Section 67
    • Section 94
  • Reverse Charge Mechanism (RCM) relating to Ocean Freight
  • Relevant Service Tax Rules concerning levy on Ocean Freight

Important Related Case Laws

  • Union of India & Another v. Mohit Minerals Pvt. Ltd. (Supreme Court)
  • SAL Steel Ltd. & Others v. Union of India (Gujarat High Court)
  • Mohit Minerals Pvt. Ltd. v. Union of India (Ocean Freight RCM jurisprudence)

Link to download the order -https://www.mytaxexpert.co.in/uploads/1783942819_938compressed.pdf

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