2025 (7) TMI 422 - HC - Customs

Refund with interest in terms of Section 27 A of the Customs Act 1962 - grant of interest from 02.08.1999 - jurisdiction for the claim of EPCG benefit in terms of Notification No.28/97- Cus dated 01.04.1997 - HELD THAT - Both the Customs and the Income Tax Acts provide for the grant of interest in cases where refunds have become due to the assessee. The Supreme Court in Gujarat Fluoro Chemicals 2013 (10) TMI 117 - SUPREME COURT (LB) settles the proposition that the statute cannot be pressed into service to grant interest on interest if there are no enabling provisions. However and as a measure of equity the Court has also observed the assessee should be properly and adequately compensated if the demand raised is seen to be unconscionable or there is an unreasonable delay in the grant of refunds. The consistent stand of the Appellant is that it is entitled for concessional rate of duty as the goods imported constitute Capital Goods as per its assessment supported by the licence issued by the DGFT. This has however been negated by the Departmental authorities and the question that thus arises is as to whether the Assessing authorities under the Act may adopt a stand diametrically opposed to that taken by the DGFT. The identical question arose before the Supreme Court in Titan Medical Systems Pvt.Ltd. Vs. Collector of Customs New Delhi 2002 (11) TMI 108 - SUPREME COURT as to whether once an advance license had been issued by the licensing authority it is proper for the Customs Department to eschew the same on the premise that the license has been obtained on a misrepresentation of facts. There is no justification in the Department having made the Appellant litigate the issue needlessly despite the CBEC having categorically confirmed as early as in 2002 that the Customs Department must align with the stand of the DGFT and DG (Tourism) in matters of imports by hotels. The licence where the imports have been classified as capital goods has not been revoked or withdrawn and it is nobody s case that the licence has been obtained on a wrongful or fraudulent basis - the long drawn litigation from 1999 till now 2025 was misconceived and needless and the Appellant is entitled to compensation for having been put through it all. The substantial question of law in favour of the appellant and adverse to the Revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court considered two core legal questions arising from orders passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT):

(i) Whether the Tribunal erred by failing to appreciate that the Commissioner (Appeals) had already allowed the refund claim with interest under Section 27A of the Customs Act, 1962, limiting the Tribunal's role to deciding interest from 02.08.1999 onwards.

(ii) Whether the Customs Department acted without jurisdiction by denying the Export Promotion Capital Goods (EPCG) benefit under Notification No.28/97-Cus dated 01.04.1997, and consequently, whether the appellant was entitled to compensatory interest from the date of duty payment, referencing the Supreme Court decision in Sandvik Asia Ltd. v. Commissioner of Income Tax.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Tribunal's appreciation of refund and interest under Section 27A of the Customs Act

The appellant had received a refund of duty paid under protest along with interest under Section 27A, which mandates interest on delayed refunds beyond 90 days from the refund application date. The appellant sought additional interest from the date of duty payment as compensation for the prolonged delay.

The Court noted that the Tribunal had not addressed the claim for compensatory interest separately, having already granted statutory interest under Section 27A. The Court observed that the statutory scheme only provides for interest on delayed refunds and does not envisage interest on interest or additional compensation beyond the statutory interest.

Given the long delay from 1999 to 2025, the Court declined to remit the matter back to the Tribunal and proceeded to decide the issue on merits. It held that the appellant had received the statutory interest due and was not entitled to further interest under the statute itself.

Issue (ii): Jurisdiction and entitlement to EPCG benefit and compensatory interest

Legal framework and precedents: The EPCG scheme under Notification No.28/97-Cus permits concessional import duty rates on capital goods imported for export promotion. The definition of "capital goods" includes plant, machinery, equipment, and accessories required for rendering services, including hotel and tourism industries, as clarified in the Explanation and Annexure to the Notifications.

The Customs Department denied the benefit on the ground that the imported goods (lighting and light fittings) did not constitute capital goods. The appellant had a valid EPCG license issued by the Directorate General of Foreign Trade (DGFT) classifying the goods as capital goods, which was not withdrawn or revoked.

The Court referred to Circular No.62/2002 issued by the Central Board of Excise & Customs (CBEC), which directed Customs authorities to align with the DGFT and DG (Tourism) in extending EPCG benefits to service providers such as hotels, including consumer items like lighting equipment.

Judicial precedents relied upon include the Supreme Court judgment in Titan Medical Systems Pvt. Ltd. v. Collector of Customs, which held that Customs authorities cannot take a stand contrary to the licensing authority unless the license is revoked for misrepresentation. The Court also relied on the CESTAT and Supreme Court decisions in Appu Hotels Ltd. confirming that lighting equipment imported by hotels qualifies as capital goods under EPCG Notifications.

Court's interpretation and reasoning: The Court held that the Customs Department acted without jurisdiction in denying the EPCG benefit, as the licensing authority's classification was binding and supported by the 2002 CBEC Circular. The Department's contrary stand was inconsistent with the Circular and judicial precedents.

The Court emphasized that the long-drawn litigation spanning over two decades was misconceived and unnecessary, given the clear legal position and binding Circular. The appellant was entitled to the concessional duty rate from the beginning.

Claim for compensatory interest: Although statutory interest under Section 27A was granted, the appellant sought compensatory interest for the prolonged and unjustified denial of benefits. The Court examined the Supreme Court decisions in Sandvik Asia Ltd. and Gujarat Fluoro Chemicals, which clarified that interest on interest is not permissible under the statute, but compensation may be awarded in cases of unconscionable delay or unreasonable conduct by the revenue.

The Court found that the Department's conduct in denying the benefit despite the license and Circular amounted to unreasonable delay and unjustified litigation. Therefore, the appellant was entitled to compensation as a matter of equity.

Treatment of competing arguments: The Revenue argued that the statute does not allow interest on interest and that statutory interest had been granted. The Court accepted this but distinguished the present case on grounds of equity and fairness due to the Department's persistent denial of the benefit and the binding nature of the license and Circular.

Conclusions: The Court answered the second substantial question of law in favour of the appellant, holding that the Customs Department acted without jurisdiction and that the appellant was entitled to compensation for the prolonged denial of EPCG benefits.

3. SIGNIFICANT HOLDINGS

"The denial of concessional rate of Duty by the Department is misconceived and contrary to both the Circular as well as the judgements."

"It is not open to the Customs Department to dispute classification of the goods imported and the view taken by the Department is diametrically opposed to the licence and the 2002 Circular."

"The long drawn litigation from 1999 till now, 2025, was misconceived and needless and the Appellant is entitled to compensation for having been put through it all."

"The statute cannot be pressed into service to grant interest on interest if there are no enabling provisions. However, as a measure of equity, the assessee should be properly and adequately compensated if the demand raised is seen to be unconscionable or there is an unreasonable delay in the grant of refunds."

Core principles established include:

• The binding effect of licensing authority's classification of goods under EPCG scheme on Customs authorities, barring revocation or cancellation of the license.
• The mandatory alignment of Customs Department with DGFT and DG (Tourism) as per CBEC Circular to avoid conflicting stands.
• The limitation of statutory interest under Section 27A to interest on delayed refunds and exclusion of interest on interest unless explicitly provided.
• The entitlement to equitable compensation in cases of unreasonable delay or unconscionable conduct by revenue despite absence of statutory provisions for interest on interest.

Final determinations:

• The first substantial question regarding interest under Section 27A was rendered infructuous and not pursued further.
• The second substantial question was answered in favour of the appellant, holding that the Customs Department acted without jurisdiction in denying EPCG benefits and that the appellant was entitled to compensation for the delay and litigation endured.
• The Civil Miscellaneous Appeals were allowed with directions for consequence to be given within eight weeks.