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Tax Collected Without Authority Of Law To Be Refunded!

Published on Mon, May 18,2015 | 19:22, Updated at Mon, May 18 at 19:22Source : 

By: Nand Kishore, Partner – Taxation, HSA Advocates


In transactions involving services and supply of goods, a tax dispute often arises with regard to what would/ should be considered the taxable event: service or sale of goods or both?

Instances of such disputes have arisen in the advertising industry wherein letting out of hoardings to companies and advertisers for advertisement has been treated as “sale of space for advertisement” by the Central Government attracting service tax.  On the other hand, the State Government argues that such activities amount to “transfer of right to use” thereby VAT should be levied instead.  

The E-Commerce industry is facing a similar issue.  An e-commerce company provides an online marketplace where sellers (including manufacturers, retailers etc.) advertise their products along with product specifications and pricing. This activity is currently treated as a service and companies are duly paying service tax on the service charges received from the buyer or the seller.  In this regard, some of the companies applied before the Advance Ruling Authority (“ARA”) to deliberate and resolve upon the nature of activities being carried out.  The AAR has clearly ruled that the above activities amount to service and would be liable to service tax.  Despite this, VAT departments in certain States have claimed that the activities of e-commerce companies amount to dealing in goods and have, therefore, sought registration under the State VAT laws.

In such cases, the Taxpayer is doubly taxed for the same transaction - and on the very same consideration, under both service tax laws and State VAT laws.  Typically, the Taxpayer challenges one of levies (either service tax or VAT).  The adjudication is a very long drawn process and in most cases attains finality in the Supreme Court.   If the Taxpayer succeeds, his position gets vindicated and there is no additional tax liability.  However, if the Taxpayer loses, an anomalous situation arises, whereby:

a)      he becomes liable to discharge the fresh tax liability to the concerned department along with interest and in some cases penalty; and

b)     having paid tax under an erroneous levy earlier and having not challenged the previous assessment order, the refund claim by the Taxpayer is rejected by the authorities on the ground of limitation and / or unjust enrichment.  Most tax provisions do not provide for refund of tax in cases where the tax has been collected without authority of law.  This also becomes a ground for rejecting refund claims.

Either way, the above scenario results in double taxation.  Further, considering that the VAT and Service tax rates are as high as 12.5 per cent, the Taxpayer ends up paying a whopping 25 per cent of his receipt as tax! Also, the latter levy cannot be recovered from the consumer and thus becomes a heavy cost to be borne by the Taxpayer.

High Court Ruling

In a major relief recently, March 23, 2015 Punjab & Haryana High Court in the case of ‘Idea Cellular Ltd. v Union of India & Ors.’, ruled that any tax which was collected erroneously and without authority of law ought to be refunded to the Taxpayer.  

Idea Cellular is a telecom service provider and as part of its business activates SIM cards.  The issue was whether the activation charges amount to sale of goods or provision of services.  The Supreme Court in the case of State of ‘UP v Union of India’ held that activation of sim cards amounts to sale.  Accordingly, Idea Cellular was subjected to VAT by the Haryana VAT authorities.  However, subsequently, the Constitutional Bench of the Supreme Court in the case of ‘Bharat Sanchar Nigam Limited v Union of India’ (“BSNL case”) overruled its earlier decision and held that activation of sim cards amounts to provision of service and would attract service tax.

Pursuant to the BSNL case, the service tax department demanded service tax from Idea Cellular for the very same transaction i.e. “activation of sim cards” and or the very same turnover whereon VAT was discharged earlier.

Ideal cellular filed a claim for refund of the VAT collected without authority of law by the Haryana VAT authorities.  The claim was rejected by the VAT authorities on the following grounds:

a)      no provision under the Haryana VAT laws provides for refund of VAT in the event VAT has been collected without authority of law; and

b)     the refund is hit by unjust enrichment since Idea Cellular has charged the tax from its customer

Ideal Cellular challenged the above rejection of refund, by way of a writ petition, before the High Court.  The High Court ruled that as a result of the decision of the Constitution Bench of the Supreme Court in the BSNL case, the “activation of sim cards” amounts to services.  Thus, the VAT collected by the Haryana VAT authorities is without authority of law and is unconstitutional. 

Further, the High Court held that though the provisions of the Haryana VAT laws do not provide for refund of VAT paid by a Taxpayer, that does not prevent the High Court from directing the VAT authorities to refund the erroneous VAT to the Taxpayer.  The High Court reasoned as follows:              

“…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 authority of law. As held by the Supreme Court, no State has the right to receive or retain taxes or monies realized from citizens without authority of law. To hold otherwise would, in our considered opinion, perpetuate an un-constitutional levy, an unconstitutional collection of a tax, and an unconstitutional retention of monies.”

Further, rejecting the argument of the State that the refund would result in unjust enrichment, the High Court observed that if the Taxpayer is asked to pay both service tax and VAT on the same transaction, this would amount to double taxation.  Accordingly, the High Court directed the VAT authorities to pay the amount of tax, collected without authority of law, to the credit of the service tax department in discharge of Idea Cellular’s liability.  


The above ruling is a welcome step towards avoidance of double taxation, which the Taxpayer bears.  This especially addresses the situation where due to ambiguous tax positions/ changes in law/ varying Court decisions, different tax authorities levy taxes on the same transaction at different points in time. Further, the refund of tax, which has been held to be invalid subsequently, never reaches the Taxpayer on account of technicalities of limitation and unjust enrichment which eventually results in double taxation.   

The High Court ruling directing one tax department to transfer the tax, which was collected without authority of law, to another tax department to whom the tax legitimately belongs, is indeed a novel “Idea”.  Of course, the finality of this would be subject to a decision by the Supreme Court, if the VAT authorities challenge the above High Court ruling.

This article has been authored by Nand Kishore, Partner – Taxation, at HSA Advocates. Ms. Virangana Wadhawan, Associate, has contributed to this piece.


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