Doctrine of unjust Enrichment Applies to Capital Goods Captively Consumed - Supreme Court
THE doctrine of unjust enrichment is a just and salutary doctrine. No person can seek to collect the duty from both ends. In other words, he cannot collect the duty from his purchaser at one end and also collect the same duty from the State on the ground that it has been collected from him contrary to law. The power of the Court is not meant to be exercised for unjustly enriching a person. The doctrine of unjust enrichment is, however, inapplicable to the State. State represents the people of the country. No one can speak of the people being unjustly enriched - The Supreme Court in Mafatlal Industries Ltd and Others vs. Union of India and Others -
This, in essence, is the concept of unjust enrichment which has been implemented through Court orders earlier and by Law since 1991. Section 11B of the Central Excise Act stipulates that refund can be granted only if the incidence of duty is not passed on to any other person.
A Nine Member Constitution Bench of the Supreme Court upheld this law in the celebrated and much misunderstood Mafatlal case. The Mafatlal judgement consisted of 305 paras and adjudicating authorities have been quoting out of context extracts from the huge judgement. This judgement is a must read classic for any student of tax laws.
Is the Concept of unjust enrichment applicable to captive consumption? When you sell your goods, you can pass on the incidence of duty, but if you don't sell your goods and captively consume them, how do you prove that you have not passed on the incidence of duty? In Mafatlal in para 98, it was specifically mentioned, "The situation in the case of captive consumption has not been dealt with by us in this opinion. We leave that question open." Further in para 148, it was mentioned, "It is made clear that whatever is stated in this judgment will not apply in the cases of goods which are captively consumed."
The Mafatlal judgement was delivered on 19.12.1996. Though it almost brought an end to the refund regime in Indirect Taxes, the question of captive consumption remained unanswered for quite some time - until it reached the Supreme Court.
In Union of India vs. Solar Pesticides Pvt. Ltd. reported in , the issue before the Supreme Court was whether the doctrine of unjust enrichment is applicable in respect of raw material imported and consumed in the manufacture of a final product. The Supreme Court remembered the observation in Mafatlal that this issue was left open and proceeded to decide the issue. The Court allowed the Revenue Appeal and held, the principle of unjust enrichment incorporated in Section 27 of the (Customs) Act would be applicable in respect of imported raw material and captively consumed in the manufacture of a final product.
Now basically the Solar pesticides as well as Mafatlal dealt with raw materials and finished goods; what about capital goods used in manufacture of excisable goods. If I have paid excess duty on capital goods bought by me for which I have paid excess duty.
Is the concept of unjust enrichment applicable in the case of refund of duty paid on 'capital goods' used captively?. This question was obviously not answered either in Mafatlal or Solar Pesticides . An appeal filed by the Revenue in 2003 was decided by the Supreme Court recently.
In this case, at the Tribunal stage, the revenue relied on the Solar Pesticides case, but Tribunal distinguished Solar Pesticides on the ground that the Supreme Court in the said case was not concerned with the issue of unjust enrichment in connection with capital goods used captively. Remember in Solar Pesticides the issue was whether the doctrine of unjust enrichment is applicable in respect of raw material imported and consumed in the manufacture of a final product.
In the present case the Supreme Court observed, "This case (Solar Pesticides), therefore, makes it clear that the principle of unjust enrichment is applicable even when the goods are used for captive consumption. No doubt, in the said case the goods with which the Court was concerned was raw material, imported and consumed in the manufacture of the final product. The question is as to whether this principle would be extended to capital goods also, as it was in respect of raw material. This was left open in Mafatlal Industries case. As it falls for determination in the present case, we are addressing this issue".
The Supreme Court allowed the Revenue appeal holding that the doctrine of unjust enrichment is applicable in the case of refund of duty paid on 'capital goods' used captively.
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