Section 11B Customs and Excise Refund | No Tax Liability Nullifies Limitation Period for Deposits Made Under Protest : CESTAT Chandigarh

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Chandigarh has affirmed that when a taxpayer deposits funds under protest during investigation and the underlying tax demand is later dropped, the authorities cannot retain such amounts on technical grounds of limitation. The ruling reinforces that no tax can be levied or retained without legal authority, and deposits made under compulsion must be refunded when the basis for collection vanishes.

Background & Facts

The Dispute

The dispute arose from the assessment of service tax liability on M/s Shyama Power India Ltd, a company engaged in transmission and distribution of electricity. The Directorate General of Central Excise Intelligence (DGCEI) initiated an investigation alleging that the company’s activities attracted service tax under the categories of "erection, commissioning or installation services" and "works contract service". The company contested this, asserting that its services were exempt under Notification No. 45/2010-ST dated 20.07.2010, which provides full exemption for services relating to transmission and distribution of electricity.

Key Facts

• The company made voluntary deposits totaling Rs. 3,77,19,091/- in installments between March 2011 and July 2011 during the pendency of investigation
• These deposits were made under protest, as evidenced by letters dated 16.03.2011 and 09.05.2011 addressed to DGCEI
• No Show Cause Notice (SCN) was issued until 24.10.2011, after all deposits had been made
• The company did not admit liability at the time of deposit; the payments were explicitly made under protest
• The Commissioner of Service Tax, New Delhi, vide Order-in-Original No. 144/GB/2013 dated 07.10.2013, dropped the entire demand, holding that the services were fully exempt under Notification No. 45/2010-ST
• The company filed a refund claim on 18.11.2014, claiming the entire amount deposited
• The Assistant Commissioner sanctioned the refund vide Order-in-Original dated 27.07.2015
• The Reviewing Authority later held that the refund claim was time-barred under Section 11B of the Central Excise Act, 1944, as applied to service tax
• The Commissioner (Appeals) reversed the review order and upheld the refund
• The Revenue filed the present appeal before CESTAT

Procedural History

• March - July 2011: Deposits of Rs. 3,77,19,091/- made under protest during investigation
• 24.10.2011: Show Cause Notice issued
• 07.10.2013: Order-in-Original issued by Commissioner dropping entire demand
• 19.11.2013: Respondent received the order dropping the demand
• 18.11.2014: Refund claim filed
• 27.07.2015: Assistant Commissioner sanctioned refund
• 02.11.2015: Review Order issued by Reviewing Authority, denying refund on limitation grounds
• 19.02.2016: Commissioner (Appeals) dismissed Revenue’s appeal and upheld refund
• 22.01.2026: Hearing before CESTAT
• 26.05.2026: Final Order passed by CESTAT

The Parties' Positions

For the Revenue (Appellant):

• Argued that the deposits were not made under valid protest as the procedural requirements under Rule 31 of Central Excise Rules, 2002 were not followed
• Contended that Section 11B of the Central Excise Act, 1944 applies, and the refund claim filed on 18.11.2014 was beyond the one-year limitation period
• Alleged that the date of receipt of the adjudication order (19.11.2013) was fabricated to circumvent limitation
• Asserted that the amount was voluntarily paid and not a true "deposit under protest"

For the Respondent:

• Maintained that the deposits were made under compulsion during investigation and were clearly marked as under protest in written communications
• Argued that Section 11B does not apply to amounts deposited before adjudication, as they are not "tax paid" but mere deposits
• Relied on judicial precedents holding that deposits made under coercion retain their character as such
• Invoked Article 265 of the Constitution, asserting that retention of funds without legal authority is unconstitutional
• Submitted that the refund claim was filed within one year of receiving the order dropping the demand
• Provided independent CA certificate and JMD affidavit proving no burden was passed on to customers, negating unjust enrichment

Relief Sought

The Revenue sought reversal of the Commissioner (Appeals)’s order and denial of the refund of Rs. 3,77,19,091/-. The Respondent sought confirmation of the refund, interest on delayed payment as per CCE v. ITC Ltd, and costs.

The Legal Issue

The central question was whether Section 11B of the Central Excise Act, 1944 applies to amounts deposited under protest during investigation, prior to adjudication, when the underlying tax demand is ultimately dropped, and whether the one-year limitation period bars refund in such circumstances.

Arguments Presented

For the Appellant

The Revenue contended that the deposits did not qualify as "payment under protest" under Section 11B(1) because the procedural formalities under Rule 31 of the Central Excise Rules, 2002 - including written intimation to the Superintendent and marking of challans as "under protest" - were not followed. It argued that the proviso to Section 11B(1), which excludes the one-year limitation for payments made under protest, was inapplicable. The Revenue further asserted that the refund claim was filed more than three years after the deposits were made, far exceeding the statutory period, and that the date of receipt of the adjudication order was likely fabricated to bring the claim within limitation.

For the Respondent

The Respondent countered that the deposits were made under compulsion during investigation, and the written communications to DGCEI clearly recorded the protest. It relied on judicial precedents (CCE v. Pricol Ltd, KVR Construction v. CCE) holding that protest is inherent in coercive deposits, irrespective of formalities. It argued that Section 11B governs refunds of "tax paid" after adjudication, not deposits made before any determination of liability. The Respondent further invoked Article 265 of the Constitution, asserting that retention of funds without legal authority is void. It submitted that the cause of action for refund arose only upon the dropping of the demand on 07.10.2013, making the 18.11.2014 claim timely. The absence of unjust enrichment was substantiated by documentary evidence.

The Court's Analysis

The Tribunal examined the nature of the deposits and the applicability of Section 11B. It observed that the payments were made during investigation, before any adjudication, and without admission of liability. The Tribunal noted that the Respondent had clearly communicated its protest through letters dated 16.03.2011 and 09.05.2011, which were not disputed by the Revenue.

"The payment was made under protest and the letters dated 16.03.2011 and 09.05.2011 addressed to the DGCEI clearly recorded that the deposits were made under protest during ongoing investigation."

The Tribunal held that the requirement of formalities under Rule 31 of the Central Excise Rules is not mandatory for establishing protest in the context of investigation-stage deposits. It cited consistent judicial recognition that deposits made under compulsion carry an inherent element of protest.

The Tribunal further clarified that Section 11B applies only to amounts that have been "paid" as tax after adjudication. Since the demand was dropped entirely, the deposits never became "tax" in law. The Tribunal emphasized that retention of such amounts would violate Article 265 of the Constitution, which prohibits taxation without authority of law.

Regarding limitation, the Tribunal accepted the Respondent’s contention that the cause of action for refund arose only upon the dropping of the demand on 07.10.2013. The refund claim filed on 18.11.2014 was therefore within one year. The Revenue failed to rebut the date of receipt of the order.

On unjust enrichment, the Tribunal accepted the independent CA certificate and JMD affidavit confirming that the amount was not passed on to customers. The Tribunal held that the principle of unjust enrichment does not apply where the taxpayer has not recovered the amount from clients.

The Verdict

The Revenue’s appeal was dismissed. The Tribunal upheld the Commissioner (Appeals)’s order dated 19.02.2016, directing the refund of Rs. 3,77,19,091/- to the Respondent. The Tribunal further directed that interest at the rate of 6% per annum shall be paid on the refund amount from the expiry of three months after the refund application date (18.11.2014) until the date of actual payment, in accordance with CCE v. ITC Ltd. The Department was directed to process the refund within four weeks of the order date.

What This Means For Similar Cases

Deposits Under Protest Are Not Subject to Formalities

• Practitioners can now rely on written communications to authorities during investigation as sufficient proof of protest, even without compliance with Rule 31 formalities
• The burden shifts to the Revenue to prove absence of protest - mere absence of stamped challans is insufficient
• This applies equally to service tax, customs, and excise matters under analogous provisions

Limitation Runs from Adjudication, Not Deposit

• The one-year limitation under Section 11B begins from the date of final determination of non-liability, not from the date of deposit
• Refund claims filed within one year of the order dropping the demand are valid, even if the deposit occurred years earlier
• Taxpayers should retain all adjudication orders and correspondence to establish the trigger date for limitation

Unjust Enrichment Cannot Override Constitutional Rights

• Where no tax liability exists, retention of funds violates Article 265 regardless of procedural lapses

• Taxpayers must maintain documentary proof (CA certificates, internal affidavits) that amounts were not passed on to customers

• This creates a strong defense against Revenue’s attempts to invoke unjust enrichment to deny refunds

• Always document protest in writing during investigations - emails, letters, or cover notes suffice

• File refund claims within one year of receiving the order dropping the demand

• Never assume that deposits made under coercion are forfeitable - they are legally refundable if liability is negated