Facts of the Case

The petitioner, M/s. Yentop Manickavel Sons Edible Oils Private Limited, had paid service tax on ocean freight under the Reverse Charge Mechanism (RCM) for the month of June 2017. Subsequently, it filed a refund application on the ground that the levy of service tax on ocean freight had been declared invalid by the Gujarat High Court in SAL Steel Ltd. vs. Union of India.

The Assistant Commissioner rejected the refund application through Order-in-Original dated 13.10.2022 solely on the ground that the Gujarat High Court judgment had not attained finality because the Union of India had challenged it before the Supreme Court.

Aggrieved by the rejection order, the petitioner approached the Madras High Court under Article 226 of the Constitution seeking quashing of the order and refund of the service tax paid on ocean freight.

Issues Involved

  1. Whether the refund claim for service tax paid on ocean freight under Reverse Charge Mechanism could be rejected merely because the Gujarat High Court judgment had been challenged before the Supreme Court.
  2. Whether the adjudicating authority ought to have considered the Supreme Court's judgment in Union of India vs. Mohit Minerals Pvt. Ltd. while deciding the refund application.
  3. Whether rejection of the refund claim without examining the applicability of the Supreme Court's decision amounted to non-application of mind.

Petitioner's Arguments

  • The petitioner submitted that service tax on ocean freight paid under Reverse Charge Mechanism was liable to be refunded in view of the Gujarat High Court judgment declaring the levy invalid.
  • It was further argued that after passing of the impugned order, the Supreme Court in Union of India vs. Mohit Minerals Pvt. Ltd. affirmed the principles relating to the invalidity of levy on ocean freight.
  • The petitioner contended that although the Supreme Court judgment arose under the GST regime, the principles laid down therein had a direct bearing on the levy of service tax on ocean freight.
  • Therefore, the rejection order deserved to be set aside.

Respondent's Arguments

  • The Department stated that the refund claim had initially been rejected because, at that time, the Gujarat High Court judgment had been challenged before the Supreme Court and had not attained finality.
  • The Revenue fairly submitted before the Court that in light of the subsequent Supreme Court judgment in Mohit Minerals Pvt. Ltd., the refund claim could be re-examined afresh.

Court Order / Findings

The Madras High Court observed that the impugned order had been passed without considering the relevance and applicability of the Supreme Court judgment in Union of India vs. Mohit Minerals Pvt. Ltd.

The Court held that rejection of the refund application solely on the ground that the Gujarat High Court judgment was under challenge, without examining the effect of the Supreme Court decision, clearly reflected non-application of mind.

Accordingly, the Court:

  • Set aside the Order-in-Original dated 13.10.2022.
  • Directed the Assistant Commissioner to reconsider the petitioner's refund claim.
  • Ordered that the reconsideration must specifically examine the applicability of the Supreme Court judgment in Mohit Minerals Pvt. Ltd. with regard to levy of service tax on ocean freight.
  • Directed the authority to complete the exercise within eight weeks from the date of receipt of the High Court's order.

Important Clarification

  • A refund claim cannot be rejected merely because an earlier High Court judgment had been challenged before the Supreme Court, especially when the Supreme Court has subsequently pronounced on the issue.
  • Authorities deciding refund claims are required to consider subsequent binding judgments of the Supreme Court before passing orders.
  • Failure to consider relevant Supreme Court precedents amounts to non-application of mind, making the order liable to be set aside.
  • The High Court did not grant the refund directly but directed a fresh examination in accordance with law.

Sections / Provisions Involved

  • Article 226 of the Constitution of India
  • Finance Act, 1994
  • Reverse Charge Mechanism (RCM) relating to Ocean Freight
  • Rules 2(1)(d), 6(7CA) and Explanation V under the Service Tax Rules (as challenged in earlier litigation)
  • Principles laid down by the Supreme Court in Union of India & Another vs. Mohit Minerals Pvt. Ltd.
  • Refund provisions under the indirect tax laws


Link to download the order https://www.mytaxexpert.co.in/uploads/1783944094_942compressed.pdf

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