The curious case of “Interest is payable on repayment of Erroneous Refund”

[Navjot Singh]

Be it wrongly availed refund of Capital Goods by the taxpayers or the chaos created by Rule 96(10), the department has bombarded the taxpayers with the notices to repay the “Refund” given to the taxpayers, terming it “Erroneous”.

1. What’s the law for demanding “Interest” in the Law?

Section 50 of the CGST Act, 2017 is the only section that speaks about the Interest payable in a few situations.

Said section mentions two scenarios wherein the interest can be demanded: -

1. Section 50(1) – Tax Short Paid or Not Paid
2. Section 50 (3) – Input Tax Credit wrongly availed and Utilized

Now, earlier there was no mechanism prescribing the manner through which the interest shall be calculated. Thus, vide NOTIFICATION NO. 14/2022–Central Tax dated 05-07-2022, Rule 88B of the CGST Rules, 2017 was introduced with retrospective effect i.e. w.e.f. 01.07.2017.

This is to be understood that, Interest is paid on the arrears of the taxes or wrongly availed and utilized credit is Compensatory or Penal?

In the case of COMMISSIONER OF INCOME TAX III VERSUS KAYPEE MECHANICAL INDIA PVT. LTD. - 2014 (4) TMI 829 - GUJARAT HIGH COURT wherein the Gujarat High Court explicitly stated that the assessee paid interest on delayed payment of service tax and that this expenditure was incurred by the assessee during business and exclusively for business. Therefore, it was held that the payment made by the assessee cannot be construed to be a payment made for violation of any law.

Also, the Supreme Court in MAHALAKSHMI SUGAR MILLS COMPANY VERSUS COMMISSIONER OF INCOME-TAX, DELHI - 1980 (4) TMI 1 - SUPREME COURT, clearly provided that payment of interest is compensatory and cannot be equated with the character of penalty.

This is important especially when you categorize the refund as “Errernouos”, as the levy of interest will be there on the Erroneous refund as well when there is an ambiguity surrounding it?

 

2. What is the Erroneous Refund?

The said term is not defined in GST law but has been mentioned in Sections 73 and 74 of the CGST Law, 2017.

The term “erroneous” has been defined by the Black’s Law Dictionary as “involving error; deviating from the law”.

Further, the Judgment of the Apex Court in MALABAR INDUSTRIAL CO. LTD. VERSUS COMMISSIONER OF INCOME-TAX - 2000 (2) TMI 10 - SUPREME COURT held that incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous.

30. The learned Sr. counsel submits that this Court in RAJENDRA SINGH VERSUS SUPERINTENDENT OF TAXES - 1989 (7) TMI 317 - GAUHATI HIGH COURT , held that “erroneous” means involving error; deviating from law. The Division Bench of this Court in the said judgment held that

“Erroneous assessment” refers to an assessment that deviates from the law and is therefore invalid, and is a defect that is jurisdictional, and does not refer to the judgment of the assessing officer in fixing the amount of valuation of the property. Similarly ‘erroneous judgment’ means: ‘One rendered according to course and practice of Court, but contrary to law, upon a mistaken view of the law, or erroneous application of legal principles”.

The larger Bench in the case of COMMISSIONER OF INCOME TAX VERSUS SHRI JAWAHAR BHATTACHARJEE, - 2012 (4) TMI 222 - GAUHATI HIGH COURT, held therein that incorrect assumption of facts or incorrect application of law as also non-application of mind and condition to follow natural justice will satisfy the requirement of the order being “erroneous”.

Now, take an example of Rule 96(10), wherein a few of the categories are barred from taking the refund through “with payment of IGST” If they have availed the exemption of IGST.

Now, in these kinds of refunds, wherein the taxpayer takes a valid Authorization from DGFT, then files returns in GST with true information then filed Shipping Bills with true information. Now after the due assessment of the Shipping Bill, the refund through the automatic route was granted.

Now, said refund can be termed as “Errneous”? especially when the Government vide Notification No. 16/2020 – Central Tax dated 23-03-2020 prescribed that, if the taxpayer takes only BCD Exemption and pays the IGST on imports then Rule 96(10) does not apply.

Now, can it be said that the previously taken refunds by the taxpayers are “Erroneous”?

This is a non liquet! (When there is no proper applicable law)

Even then the levy of Interest will be there?

 

3. Provision for Interest payable on Erroneous Refund?

There was no manner by the law through which the “Repayment” of Erroneous Refund has been prescribed.

From the above-mentioned points, it is clear that the situation is not that clear. This chaos is ignited by a recently introduced rule i.e. Rule 86(4B), through which it was defined that the taxpayer can regularise the issue of Rule 96(10) by repayment of the IGST Refund along with Interest against which the Taxpayer will get the Recredit of the IGST.

Now, since this matter is very important for a lot of Exporters who are already facing the heat of impugned “Recovery of Erroneous Refund”.

More light has been ignited by the Circular No. 174/06/2022-GST dated 06.07.2022, which clarified that re-credit of the amount in the electronic credit ledger can be done once the taxpayer deposits the erroneously refunded amount along with interest and penalty.

When a statute levies a tax, it does so by inserting a charging section by which a liability is created or fixed and then proceeds to provide the machinery to make the liability effective.

It, therefore, provides the machinery for the assessment of the liability already fixed by the charging section and then provides the mode for the recovery and collection of tax, including penal provisions meant to deal with defaulters.

Provision is also made for charging interest on delayed payments, etc. Ordinarily, the charging section which fixes the liability is strictly construed but that rule of strict construction is not extended to the machinery provisions which are construed like any other statute.

As held by the Apex Court in the matter of BIRLA CEMENT WORKS & JK. SYNTHETICS LTD. VERSUS COMMERCIAL TAXES OFFICER AND STATE OF RAJASTHAN - 1994 (5) TMI 233 - SUPREME COURT , any provision made in a statute for charging or levying interest on delayed payment of tax must be construed as substantive law and not adjectival law.

The Gujarat High Court in CCE. & C., SURAT-I VERSUS UKAI PRADESH SAHAKARI KHAND UDYOG MANDLI LTD. - 2010 (12) TMI 996 - GUJARAT HIGH COURT , while dealing with the provisions of the Central Excise Act read with the Sugar Export Promotion Act, 1958, also held that interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf.

Further, in the case of MAHINDRA & MAHINDRA LTD. (AUTOMOTIVE SECTOR), VERSUS THE UNION OF INDIA, THE SETTLEMENT COMMISSION, ADDITIONAL BENCH, CUSTOMS & CENTRAL EXCISE, MUMBAI, THE COMMISSIONER OF CUSTOMS (IMPORT), MUMBAI, THE ADDITIONAL DIRECTOR GENERAL, DGCEI, MUMBAI 2022 (10) TMI 212 - BOMBAY HIGH COURT held that Government cannot include interest in the settlement arrived at by it on the ground that the petitioner has derived financial benefits by not paying the correct rate of duty when it was due. Deriving financial benefits itself cannot be ground to order payment of interest in the absence of any statutory provisions for payment of interest.

Thus, it may be observed the issue of interest on repayment of an erroneous refund should be seen from Actus legis nemini facit injurium (The act of law injures no one).

Those who are facing the heat of Rule 96(10) might approach the doors of the High Court for suitable clarity in their ongoing litigation.

CA. Navjot Singh