COMPENSATION FOR DELAYED REFUND OF UNUTILIZED INPUT TAX CREDIT

[Mr. M. GOVINDARAJAN]

Refund

Section 54 of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) provides for the refund of tax by the Department.  The refund is to be made within 60 days from the date of receipt of the application.  If the refund is not made within the stipulated period interest is payable, according to Section 56 of the Act, not exceeding 6% in respect of such refund from the date immediately after the expiry of sixty days from the date of receipt of application under the said sub-section till the date of refund of such tax. 

Where any claim of refund arises from an order passed by an Adjudicating Authority or Appellate Authority or Appellate Tribunal or court which has attained finality and the same is not refunded within sixty days from the date of receipt of application filed consequent to such order, interest at such rate not exceeding 9% as may be notified by the Government on the recommendations of the Council shall be payable in respect of such refund from the date immediately after the expiry of sixty days from the date of receipt of application till the date of refund.

A registered person making export of goods outside India is entitled in terms of Section 16 of the Integrated Goods and Services Tax  Act, 2017 (‘IGST Act’ for short)  to claim refund of either unutilized input tax credit of export of goods under bond or letter of undertaking or refund of integrated tax paid on export of goods. In terms of Section 20 of the IGST Act, any claim for refund is to be governed by the provisions of the Act which would apply mutatis mutandis as if they were enacted in the IGST Act. The application for refund, therefore, is required to be preferred in accordance with Section 54 of the Act. According to Section 56 of the Act, if an applicant is not refunded any tax ordered to be refunded by the Proper Officer under Section 54(5) within 60 days from the receipt of the application, interest at such rate not exceeding 6% would become payable after the expiry of 60 days from the date of receipt of application till the date of refund of such tax. The proviso to said Section prescribes that where any claim of refund arises from an order passed by an Adjudicating Authority or Appellate Authority or Appellate Tribunal or Court and if the same is not refunded within 60 days from the date of receipt of an application filed consequent to such an order, the rate of interest payable would be 9%.

Delay in refund

Despite there is a clear provision that the refund shall be done within 60 days from the date of receipt of application, there is huge delay in granting the refund by the Department to the eligible registered person.  If the interest amount is high then the registered person will suffer to run his business in a smooth way.

Issue

The issue to be discussed in this article is whether in case of delay in refund the registered person is entitled to compensation and/or higher rate of interest with reference to decided case law.

Case law

In UNION OF INDIA & ORS. VERSUS M/S. WILLOWOOD CHEMICALS PVT. LTD. & ANR. AND UNION OF INDIA & ORS. VERSUS M/S. SARAF NATURAL STONE & ANR. [2022 (4) TMI 980 - SUPREME COURT] two appeals were filed by the Department against the orders of High Courts which directed the GST Department to pay 9% interest  for their delayed refund on unutilized input tax credit. 

The second writ petitioner stated the following before the High Court-

• In terms of Section 16 of the IGST Act  a registered person making exports of goods outside India, shall be eligible to claim, refund of either unutilized input tax credit on export of goods under bond or letter of undertaking or refund of Integrated tax paid on export of goods.
• Section 16(3) of the IGST Act, provides that refund should be claimed in accordance with the provisions of Section 54 of the Act or the rules made there under. Section 20 of the IGST Act further provides that provisions of Act relating to refunds shall, mutatis mutandis, apply, so far as may be, in relation to Integrated tax as they apply in relation to central tax as if they are enacted under this Act.
• Rule 2 of the Integrated Goods and Services Tax Rules, 2017 provides that the Central Goods and Services Tax Rules, 2017, for carrying out the provisions specified in Section 20 of the IGST Act shall, so far as may be, apply in relation to Integrated tax as they apply in relation to Central tax.
• the Central Government vide Notification No.13/2017- Central Tax, dated 28.06.2017 and Notification No.6/2017 – Integrated tax dated 28.06.2017 has fixed the rate of interest from the 1st day of July, 2017 at 6% p.a. and 9% p.a. for the purposes of Section 56 and proviso to Section 56 of CGST Act, 2017 respectively. 
• It received the refund of integrated tax paid on export of goods after substantial period of delay.

Nearly 15 refunds were sanctioned to the petitioners but the said refunds have been paid with the delay ranging from 94 days to 120 days.  The contention of the writ petitioners is that the inaction on the part of the Department leading to inordinate delay in granting refunds was per se arbitrary and that the inordinate delay impacted the working capacity of the Writ Petitioners thereby reducing their ability to conduct business and as such appropriate compensation ought to be awarded along with interest for delay.  Therefore the writ petitioner prayed that the Department may be directed to grant suitable compensation as well as enhanced interest for the delay in granting the refund. 

The High Court held that the provisions relating to an interest of belated payment of refund have been consistently held as beneficial and nondiscriminatory. It is true that in the taxing statute the principles of equity may have little role to play, but at the same time, any statute in taxation matter should also meet with the test of constitutional provision.  The department has not explained in any manner the issue of delay as raised by the writ applicants by filing any reply.  The High Court held that the writ applicants are entitled to 9% per annum interest from the date of filing of the return.  In the first case also the High Court held that the writ applicant is entitled to get 9% interest. 

Against this order the Department filed review petitions in both the cases.  It was contended that the Court has directed the respondent authority to pay simple interest on the delayed payment at the rate of 9% per annum from the date of filing of the GSTR-3B.   Section 56 of the CGST Act the net Interest at the rate of not exceeding 6% may be given whereas by order dated 10.07.2011 this High court was pleased to give interest at the rate of 9%.  The review petitions were dismissed by the High Court.

Against the said orders the appellants filed the present appeal before the Supreme Court.  The Supreme Court observed that the appellants do not dispute the eligibility of the respondents for receiving interest for delayed payment of claims but their submission is that in terms of the relevant statutory provision, the interest could be awarded at the rate of 6 % and not 9 % per annum.  Therefore the Supreme Court directed the Department to make good payment of interest at the rate of 6 per cent.  The order of the Supreme Court was complied with by the Department.

However the Supreme Court analyzed the case in detail.  The Supreme Court analyzed the provisions of Section 16 and 20 of the IGST Act.  The Supreme Court also analyzed the provisions of section 56 of the Act which deals with the procedure of refund.  The Supreme Court further observed that in the instant cases the refunds have not arisen from any order passed by an Adjudicating Authority or Appellate Authority or Appellate Tribunal or Court.  Therefore the Supreme Court held that the cases are strictly within the scope of the principal provision of Section 56 and not under the proviso thereof. 

The Supreme Court considered the issue whether the High Court is justified in granting 9% of interest for the belated refund.  The Supreme Court also analyzed some of the judgments of Supreme Court.  The Supreme Court, in one case, observed that there cannot be any doubt that the award of interest on the refunded amount is as per the statutory provisions of law as it then stood and on the peculiar facts and circumstances of each case. When a specific provision has been made under the statute, such provision has to govern the field. Therefore, the court has to take all relevant factors into consideration while awarding the rate of interest on the compensation.

Since the delay in the instant case was in the region of 94 to 290 days the matter has to be seen purely in the light of the concerned statutory provisions. In terms of the principal part of Section 56 of the Act, the interest would be awarded at the rate of 6%. The award of interest at 9% would be attracted only if the matter was covered by the proviso to the said Section 56. The High Court was in error in awarding interest at the rate exceeding 6% in the instant matters.

The Supreme Court directed that the original writ petitioners would be entitled to interest at the rate of 6% per annum on amounts that they were entitled by way of refund of tax. Since the concerned amounts along with interest at the rate of 6% per annum have already been made over to them, nothing further need be done in both the cases.

Conclusion

The Act provides two types of interest for the belated refund under Section 56.  If the refund is not made within 60 days from the date of receipt the interest will be given not exceeding   6% on the refund amount. 

The proviso to section 56 provides that if the refund order is made the Adjudicating Authority, Appellate Authority or Appellate Tribunal or Court, the refund is to be made within 60 days from the date of receipt of application.  If there is a delay of refund beyond 60 days then the interest is payable not exceeding 9%.

The Act or the IGST Act do not provide for the payment of compensation for the inordinate delay in giving refund.  The maximum refund is 6% or 9% under section 56(1) of the Act or proviso to Section 56(1).