Theory of unjust enrichment :
Section 11B of the Central Excise Act, 1944 is perhaps the most important provision governing refunds. Explanation to section 11B defines the term “refund” to include rebate of duty of excise on excisable goods exported out of India or on excisable materials used in the manufacture of goods exported out of India. The definition is inclusive and therefore would govern all refunds except for which there could be a special procedure.
Section 11B was inserted with effect from 11.7.1980. The most important amendment took place on 20.9.91 wherein the theory of unjust enrichment was built into the statute. This theory postulates that only the person who has not passed on the incidence of duty will be eligible to claim the refund. The section today recognises that a buyer of goods can also claim refund. The most important decision on refund is by a Nine Member Bench of the Supreme Court in Mafatlal Industries Ltd. v. U.O.I.- 1997 (89) E.L.T. 247. The salient features of this judgment can be summarised as under :
(a) The theory of unjust enrichment is valid and constitutional. However, the theory that the manufacturer would be unjustly impoverished in case of demands has not been agreed to.
(b) All pending applications as on 20-9-1991 would be governed by this theory of unjust enrichment.
(c) Sections 11B (Excise Act) and 27 (Customs Act) are self contained codes for refunds and resort to civil suits or writs is not permissible unless the taxing provision is struck down as unconstitutional. The general theory laid down in certain judgments of both the Supreme Court and High Courts that refund could be claimed within three years of discovery of mistake has been disapproved.
(d) Unless the levy is struck down as unconstitutional, all Courts must exercise jurisdiction in terms of section 11B and refuse to grant relief if the incidence of tax has been passed on.
(e) Whatever amount is collected as duty will have to be paid to the Government. If excess is collected than that payable, it would be credited to the Consumer Welfare Fund or given as refund to the person who has borne the incidence of duty.
The Supreme Court has held in Solar Pesticides case 2000 (116) ELT 401 that refunds will not be allowed on captive consumption of inputs. However, it would be possible to get the refundeven in case of captive consumption provided it is proved that the incidence of duty is not passed on to the customers. But there is a necessity for the assessee to prove that the incidence of duty has not been passed on to the customers.
Further, the Supreme Court in the case of CCE v. Allied Photographics 2004 (166) ELT 3 has held that doctrine of unjust enrichment applies even when duty is paid under protest. It has been held that even if there is no change in price before and after assessment (i.e. before and after imposition of duty), it does not lead to the inevitable conclusion that incidence of duty has been passed on to the buyer, as such uniformity may be due to various factors.
There could be situations where the manufacturer has paid the duty and the same has been shown in the invoice issued to the buyer. The buyer failed to reimburse the duty for various reasons. In such case, it would not be proper to conclude that the incidence of the duty has not been passed on to the buyer as the CENVAT credit on inputs/capital goods can be taken based on the duty component mentioned on the invoice and not depending upon the payment to the supplier. Only acceptable evidence would be to show that the buyer has not paid the amount to the manufacturer and has not availed the CENVAT credit of duty paid or if he has taken, he has reversed it.
According to section 11B(2), the Assistant Commissioner, on being satisfied that excise duty and interest paid on such duty is refundable, shall grant refund to the applicant only in the following cases :
(a) Rebate of duty of excise on excisable goods exported out of India or on excisable materials used in the manufacture of goods which are exported out of India;
(b) Unspent advance deposits lying in balance in the applicant’s account current maintained with the Principal Commissioner/ Commissioner of Central Excise;
(c) Refund of credit of duty paid on excisable goods used as inputs in accordance with the rules made, or any notification issued, under this Act;
(d) The duty of excise and interest, if any, paid on such duty paid by the manufacturer, if he had not passed on the incidence of such duty and interest to any other person;
(e) Duty of excise and interest, if any, paid on such duty borne by the buyer if he has not passed on the incidence of such duty and interest to any other person;
(f) The duty of excise and interest, if any, paid on such duty borne by any other such class of applicants as the Central Government may, by Notification in the Official Gazette, specify.
(No notification under clause (f) shall be issued unless the Central Government is of the opinion that the incidence of duty has not been passed on by the persons concerned to any other person. No refund shall be made except herein provided).
In other cases, the Assistant Commissioner shall make an order that the whole or any part of the duty is refundable and the amount so determined shall be credited to the “Consumer Welfare Fund” established under section 12C. The following shall be credited to the Fund:
(a) the amount of duty of excise as per section 11B(2) or section 11C(2) or section 11D(2);
(b) the amount of duty of customs as per section 27(2) or section 28A(2), or section 28B(2) of the Customs Act, 1962;
(c) any income from investment of the amount credited to the Fund and any other monies received by the Central Government for the purposes of this Fund;
(d) the surplus amount referred to in sub-section (6) of section 73A of the Finance Act, 1994.
Any money credited to the Fund shall be utilized by the Central Government for the welfare of the consumers. The Central Government shall maintain or, if it thinks fit, specify the authority which shall maintain, proper and separate account and other relevant records in relation to the Fund in such form as may be prescribed in consultation with the Comptroller and Auditor – General of India.
It must be noted that as per rule 7(6) of the Central Excise Rules, 2002 refunds pertaining to finalisation of provisional assessments are also governed by the law of unjust enrichment.
Concept of unjust enrichment does not apply to refunds arising out of settlements between parties under contract – Living Media Ltd. v. U.O.I. – 1998 (104) E.L.T. 3 (S.C.).