Facts of the Case

The petitioner, M/s. Yentop Manickam Edible Oils Private Limited, had paid service tax on ocean freight under the Reverse Charge Mechanism (RCM) for the month of May 2017.

Subsequently, relying upon the Gujarat High Court judgment in SAL Steel Ltd. vs Union of India, which declared the levy of service tax on ocean freight under RCM as ultra vires the Finance Act, 1994, the petitioner filed a refund application seeking refund of ₹5,27,310.

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

The petitioner challenged the rejection order before the Madras High Court under Article 226 of the Constitution.

Issues Involved

  1. Whether rejection of the refund claim merely because the Gujarat High Court judgment was under challenge before the Supreme Court was legally sustainable.
  2. Whether the Supreme Court's judgment in Union of India vs Mohit Minerals Pvt. Ltd. required reconsideration of refund claims relating to service tax paid on ocean freight.
  3. Whether the refund authority failed to apply its mind by ignoring the effect of the Supreme Court decision.

Petitioner's Arguments

The petitioner contended that:

  • Service tax on ocean freight had been paid under Reverse Charge Mechanism.
  • The levy itself had been declared invalid by the Gujarat High Court in SAL Steel Ltd.
  • Subsequently, the Supreme Court, in Union of India vs Mohit Minerals Pvt. Ltd., affirmed the legal position regarding the invalidity of ocean freight levy.
  • Although Mohit Minerals arose under the GST regime, the principles laid down therein had a direct bearing on service tax levied on ocean freight.
  • The refund rejection ignored the Supreme Court judgment despite its applicability.
  • The impugned order therefore suffered from complete non-application of mind.

Respondent's Arguments

The Revenue submitted that:

  • The refund application had originally been rejected because, at that point, the Gujarat High Court judgment was pending consideration before the Supreme Court.
  • After the Supreme Court delivered the judgment in Mohit Minerals Pvt. Ltd., the refund claim relating to ocean freight could be re-examined.
  • The Department expressed its willingness to reconsider the refund in accordance with the law laid down by the Supreme Court.

Court Order / Findings

The Madras High Court observed that:

  • The impugned refund rejection was based solely on the premise that the Gujarat High Court judgment had been challenged before the Supreme Court.
  • The authority failed to examine the relevance and applicability of the subsequent Supreme Court judgment in Union of India vs Mohit Minerals Pvt. Ltd.
  • The Supreme Court decision had a significant bearing on the legality of the levy of service tax on ocean freight.
  • Ignoring the binding judgment of the Supreme Court amounted to non-application of mind.

Accordingly, the Court:

  • Set aside the Order-in-Original dated 13.10.2022.
  • Directed the Assistant Commissioner to re-examine the refund claim in accordance with law.
  • Directed the authority to specifically consider the applicability of the Supreme Court judgment in Mohit Minerals Pvt. Ltd.
  • Ordered completion of the exercise within eight weeks from receipt of the Court's order.

Important Clarification

  • A refund claim relating to service tax paid on ocean freight cannot be rejected merely because an earlier High Court judgment was once under challenge.
  • Authorities must consider subsequent binding judgments of the Supreme Court while deciding refund applications.
  • Failure to examine the effect of the Supreme Court's decision amounts to non-application of mind and renders the order liable to be set aside.
  • The judgment reinforces that refund authorities must decide claims after considering the latest legal position rather than relying on outdated reasoning.

Important Case Laws

  • Union of India & Another vs Mohit Minerals Pvt. Ltd. (Supreme Court)
  • SAL Steel Ltd. & Others vs Union of India (Gujarat High Court)
  • Mohit Minerals Pvt. Ltd. vs Union of India
  • Canon India Pvt. Ltd. vs Commissioner of Customs
  • Mangalore Chemicals & Fertilizers Ltd. vs Deputy Commissioner

Sections Involved

  • Article 226 of the Constitution of India
  • Sections 64, 66B, 67 & 94 of the Finance Act, 1994
  • Reverse Charge Mechanism (RCM) on Ocean Freight
  • Refund provisions under the Finance Act, 1994
  • Ocean Freight Service Tax under Reverse Charge Mechanism

Link to download the order -https://www.mytaxexpert.co.in/uploads/1783944632_943compressed.pdf

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