The Bombay High Court recently adjudicated a case[1] it termed as ‘peculiar’ and ordered that the Revenue Department should refund the tax paid by petitioner under protest. The High Court invoked the doctrine of unjust enrichment and precedents on taxes paid under a mistake of law to support its conclusion.
Facts
The facts of the case are straightforward: the petitioner, The Hongkong and Shanghai Banking Corporation, filed a writ petition regarding an amount of Rs 56,19,84,075/- it deposited with the Revenue Department. The petitioner claimed that the payment was without any authority in law and not a tax payable by the petitioner. The Revenue Department undertook audit of petitioner’s books and accounts from March 2007 to April 2012 and raised certain objections on non-payment of service tax by the petitioner for ‘interchange income’. As a fallout of the objections, despite no showcause notice being issued by the Revenue Department or a demand being raised, the petitioner deposited Rs 56,19,84,075/- as tax under protest. The petitioner’s letter that accompanied the deposit clearly stated that the payment of tax was ‘under protest’ and as a matter of good faith to co-operate with the Revenue Department. The petitioner was categorical in its assertion that it was not liable to pay service on the interchange income and payment of tax was only to buy peace with the Revenue Department.
After the deposit of the said amount, the Revenue Department never took any steps to ascertain the tax liability of the petitioner as no showcause notice was issued to the petitioner as regards its interchange income regarding which objections were raised during the audit. Since the Revenue Department never took any steps for ascertaining the tax liability of the petitioner, the petitioner filed an application for a refund of the amount citing lack of action by the Revenue Department and arguing that the payment was made under protest and should not be considered as payment of tax regarding interchange income.
The petitioner argued that the retention of the said amount by the Revenue Department would amount to violation of Article 14 of the Constitution as well as Article 265 of the Constitution, the latter forming the crux of its case.
The Revenue Department’s reason for rejecting the application for refund was that the matter regarding levy of service tax on interchange fee had been referred to a Supreme Court bench and admissibility of refund can only be considered after the bench pronounces its final verdict. The Supreme Court in Citibank N.A. case[2]had delivered a split verdict on taxability of interchange fee and the matter had been referred to a larger bench which had yet to pronounce its verdict. Citing the pendency of the matter before a larger bench of the Supreme Court, the Revenue Department denied a refund.
Bombay High Court Decides
The Bombay High Court ordered a refund of the tax paid under protest by the petitioner. As per the High Court, for the Revenue Department to satisfy requirements of Article 265 of the Constitution, i.e., ‘No tax shall be levied or collected except by authority of law’, it needs to demonstrate that it has power to withhold/appropriate the amount towards tax. However, i was not the case as in the impugned case the amounts were received by the Revenue Department by fortuitous circumstance wherein the petitioner voluntarily deposited the amount.
The Bombay High Court reasoned that since the payment of tax by the petitioner was under protest, it did not preclude the Revenue Department from taking steps to realise the tax and in the absence of such steps such as issuance of showcause notice, the payments made by the petitioner retained the character of tax under protest and not tax collected under authority of law under Article 265 of the Constitution. (paras 25-27) In the absence of any provisions under Finance Act, 1994 – under which service on interchange income was supposedly due – which authorized the Revenue Department to retain the said amounts, the High Court held that retaining such amounts violated Article 265 of the Constitution. The High Court cited relevant precedents to reiterate that even if the amounts were paid under a mistake of law, the petitioner was allowed to claim refunds. And it further underlined that the refusal to refund the tax paid under protest would amount to unjust enrichment on behalf of the Revenue Department.
What about the pending case before the Supreme Court? The Bombay High Court held that it was not relevant to the issue of refund more so because no show cause notice was issued for the period in question. (para 30) Also, the High Court endorsed petitioner’s argument that even if a recovery is initiated against the petitioner, it is not the case that the Revenue Department will not be in a position to recover the dues given that the petitioner is a reputed bank with large scale operations in the country.
The Department’s stubborn refusal to refund the amount paid in the impugned case was curious, if not surprising. The reason that a case on taxability of interchange income is pending before the Supreme Court was flimsy to begin with. Even if the Supreme Court in the pending case eventually decides in favor of the Revenue Department, there was nothing to stop it from recovering the said tax dues from the petitioner as the High Court rightly pointed out. And if the Revenue Department was convinced of the taxability, why was no showcause notice issued in the first place after auditing the petitioner’s books? I guess we will never know the answer to this.
Conclusion
The Bombay High Court’s conclusion rested on three important points: first, that the amount paid by the petitioner was not under any law, but under protest and lack of action by the Revenue Department ensured that the payment retained the character of tax under protest; second, that retention of tax under protest would amount to violation of Article 265 of the Constitution since a tax can only be collected under a authority of law and any tax paid under protest or a mistake of law is liable to be refunded; third, the High Court also alluded to the doctrine of unjust enrichment and held that if the Revenue Department does not refund the tax paid under protest it would amount to unjust enrichment, a concept that loosely ties in with the mandate of Article 265, but is articulated separately by Courts.
[1] The Hongkong and Shanghai Banking Corporation v Union of India 2023:BHC-OS:13826-DB.
[2] Commissioner of GST and Central Excise v M/s Citibank N.A. Civil Appeal No. 8228 of 2019 dated 09.12.2021.