Presentation on Unjust Enrichment - Indirect Taxation: Doctrine, Basic Understanding in context of excise and service tax with relevant case laws and reference of law dictionaries.

1. A STUDY ON UNJUST ENRICHMENT
CHIRAG KAGZI
13 April 2015

2. What is unjust?
Unjust can be defined as something which is not in accordance with the accepted
standards of fairness or justice and which is also unfair.
What is enrichment?
When a person gains something from another, then it is said that the person is enriched.
This enrichment can be both just and unjust. A student receives graduation present from
his parents for the graduation; it is also an enrichment which is just. When a person
wrongfully uses others property at the expense of other, then it is unjust.
What is Unjust Enrichment?
According to Wikipedia, Unjust enrichment is where one person is unjustly or by chance
enriched at the expense of another, and an obligation to make the restitution (restoration
of something lost or stolen to its proper owner) arises, regardless of liability for
wrongdoing.
What is Unjust Enrichment?
A STUDY ON UNJUST ENRICHMENT
Page 2

3. Meaning of Unjust Enrichment
According to Black Law Dictionary:
“The retention of a benefit conferred by another, without offering compensation, in
circumstances where compensation is reasonably expected.
A benefit obtained from another, not intended as a gift and not legally justifiable for
which the beneficiary must make restitution”.
According to Encyclopaedic Law Lexicon:
“The principle of unjust benefit implied that the person having passed on the burden of
tax to another, directly or indirectly, would not be entitled to get the refund, even if
such refund is permissible. Having passed on the burden of tax to another person, directly
or indirectly, it would be clearly a case of unjust enrichment if the importer/seller is
then able to get the refund of the duty paid from the government notwithstanding the
incidence of tax having already been passed to the purchase”.
A STUDY ON UNJUST ENRICHMENT
Page 3

4. Meaning of Unjust Enrichment
According to Oxford Law Student Dictionary:
“A cause of action developed at the common law and equity, whereby, roughly, a person
who is unjustly enriched, either by receipt of value from the plaintiff in circumstances
where he or she ought to return it, or by profiting from a wrong done to the plaintiff, is
required to pay over the value of that enrichment to the plaintiff”.
 So the basic meaning is that it would be unjust to allow one person to retain a benefit
received at the expense of another person. There is a legal maxim also that Nemo
Debet Locupletari ex Aliena Jactura which means that no one should grow rich out of
another person’s loss. The unjust enrichment has been stated to have three things:
• That the defendant has been enriched by the receipt of benefit;
• He must have been enriched at the expense of plaintiff;
• Allowing defendant to keep the benefit will be unjust.
A STUDY ON UNJUST ENRICHMENT
Page 4

5. Unjust Enrichment and Indirect Taxation
Introduction
A general equitable principle that no person should be allowed
to profit at another's expense without making restitution for the
reasonable value of any property, services, or other benefits that
have been unfairly received and retained.
Section 11B of Central Excise Act, 1944:
While claiming any refund, applicant have to prove that burden
of such duty paid had not been passed on by him to any other
person.
Section 12B of Central Excise Act, 1944:
“Presumption that the incidence of duty bas been passed on to
the buyer: Every person who has paid the duty of excise on any
goods under this Act shall, unless the contrary is proved by him,
be deemed to have passed on the full incidence of such duty to
the buyer of such goods”.
A STUDY ON UNJUST ENRICHMENT
Page 5

6. Doctrine of Unjust Enrichment
The doctrine of unjust enrichment is applicable for the case of granting the refund. In the
context of refund in Central Excise/Service Tax, the principle of unjust enrichment is the
first and foremost principle which is kept in mind by the sanctioning authorities.
The assessee having passed on the incidence of duty/tax to his customers has no locus
standi to claim refund of duty having wrongly paid. Refund of duty should, therefore, be
paid to the customer who has borne the burden of duty. Since it is practically not feasible
to identify such customers on individual basis, the amount of refund is credited to
"Consumer Welfare Fund" in accordance with Section 12C of the Central Excise Act, 1944.
The principle of unjust enrichment has been held as valid and constitutional by the Apex
Court in the famous case of Mafatalal Industries Ltd Vs. UOI , 1997. Wherein Jeevan
Reddy, J. in para 99 in Mafatlal Industries Ltd.’s case has observed as follows:
"….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."
A STUDY ON UNJUST ENRICHMENT
Page 6

7. Doctrine of Restitution
The juristic basis of the obligation is not founded upon any contract or tort but upon a
third category of law, namely, quasi-contract or the doctrine of restitution.
Unjust Enrichment Vs. Refund
Section 11B of the Central Excise Act which was introduced with effect from 17-11-1980,
and was amended on 20-9-1991, sets out the conditions subject to which refund can be
claimed. Apart from requiring that claim be filed within the time allowed under the
provisions of Act which is six months from the relevant date; that the application be in the
prescribed form that it be accompanied by document or other evidence to establish that
the amount of duty of excise in relation to which refund is claimed was collected from or
paid by the claimant and incidence of such duty had not been passed on by the claimant to
any other person; the claimant is also required to rebut the presumption contained in
Section 12B of the Act which provides that it shall be presumed unless contrary is proved
that the incidence duty had been passed on to the buyer.
A STUDY ON UNJUST ENRICHMENT
Page 7

8. Analysis
The language used in law is not capable of being construed as having reference to the
ultimate consumer of the product. What has to be demonstrated by the claimant is that
the burden of the duty paid had not been passed on by him to any other person. The
passing on will occur only if the person who claims refund of duty as shifted the burden to
another. There can be no passing on of the incidence of the duty if he merely reduces his
burden by receiving the refund. The possibility that the dealer who has obtained goods
from the manufacturer may charge to his buyer the full amount of the duty ignoring the
refund received by the manufacturer cannot be a ground for denying refund to the
manufacturer.
The primary object of the provision which is intended to deter or prevent unjust
enrichment is to prevent enrichment of the person who has paid duty and who seeks
refund of the same. It is not directed at the buyer who has entered into arms length
transactions with manufacturer and has sold the goods to sub-dealers, retailers or
consumers.
The word 'buyer' used in Section 12B also cannot be construed as referring to the ultimate
consumer. The buyer referred to therein in the normal circumstances is the buyer who
buys the goods from the person who has paid duty.
A STUDY ON UNJUST ENRICHMENT
Page 8

9. Background of Unjust Enrichment
Section 11B of the Central Excise Act, 1944 inherited the concept of "unjust enrichment"
during 1991. This is based on the equitable principle that, when the incidence of duty had
been originally passed on to the buyers/customers (by way of collecting the duty through
the invoices), then in the event of refund of any such duty, it shall not be given to the
assessee who has paid it to the Government, but in turn, shall be given to the person who
has really borne the incidence of such duty. But this concept of "unjust enrichment" has
been caught in a legal labyrinth (maze) and seems to have thoroughly lost its direction,
purpose and object.
Section 12 B of the CE Act creates a legal fiction that the manufacturer, has deemed to
have passed on the full incidence of duty to the buyer, unless the contrary is proved. In
other words, the buyer of the goods is deemed to have borne the incidence of the duty
paid by the manufacturer. This legal fiction creates two crucial bottlenecks in many cases,
namely, who is the "buyer" under Section 12 B of the Act and what would be the status of
the "refunds" in case of "Post-clearance adjustments!“
“Post-clearance adjustments can be either by way of raising a credit note, issuing a cheque or by way of adjusting the running account to
the extent of the duty. By doing so, the manufacturer is reclaiming the duty incidence back from the buyer and thus appears to qualify for
the refund, negating the doctrine of "unjust enrichment”.
A STUDY ON UNJUST ENRICHMENT
Page 9

10. Consumer Welfare Fund
Section 12C of Central Excise Act, 1944:
(1) There shall be established by the Central Government a fund, to be called the
Consumer Welfare Fund;
(2) There shall be credited to the fund, in such manner as may be prescribed:
(a) the amount of duty of excise referred to in sub section (2) of section 11B or
subsection (2) of Section 11C or sub-section (2) of Section 11D;
(b) the amount of duty of customs referred to in sub-section (2) of section 27 or sub-
section (2) of Section 28A, or sub-section (2) of Section 28B 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 purpose of this Fund;
(d) The surplus amount referred to in sub-section (6) of Section 73A of the Finance Act,
1994.
Section 12D of Central Excise Act, 1944:
Utilisation of the Fund: Any money credited to the Fund shall be utilised by the Central
Government for the welfare of the consumers in accordance with such rules as that
Government may make in this behalf.
A STUDY ON UNJUST ENRICHMENT
Page 10

11. Departmental Circular/Clarification:
Departmental Circular,Clarification.docx
A STUDY ON UNJUST ENRICHMENT
Page 11

12. By:-
Chirag Kagzi