Delhi High Court Refuses Higher Interest On Service Tax Refund Beyond Statutory 6% Rate

The Delhi High Court has dismissed an appeal seeking enhancement of interest from 6% to 12% per annum on the refund of a service tax deposit made during investigation, holding that once the statute prescribes the rate of interest payable, courts cannot award a higher rate in the absence of any challenge to the statutory provision or the notification issued thereunder.

A Division Bench of Justices Anil Kshetrapal and Shail Jain upheld a CESTAT order granting interest at 6% per annum under Section 35FF of the Central Excise Act, 1944, read with Notification No. 24/2014-C.E. (N.T.).

The appellant, Seher, had deposited ₹30.54 lakh under protest during a service tax investigation in 2012. Although the service tax demand was subsequently set aside by the CESTAT in 2022 and the amount was refunded along with interest at 6% per annum, the appellant contended that it was entitled to compensatory interest at 12% per annum as the Department had retained its money for nearly 12 years.

It relied on the Supreme Court's decision in Sandvik Asia Ltd. v. Commissioner of Income Tax and other judgments to argue that constitutional courts could award higher compensatory interest on principles of restitution and equity.

Rejecting the contention, the High Court observed that the Tribunal had rightly treated the amount deposited during investigation as a pre-deposit for the purposes of Section 35FF of the Central Excise Act and correctly awarded interest at the statutory rate of 6%.

It observed, "Once Parliament has enacted a complete statutory mechanism governing payment of interest and has authorised the Central Government to notify the applicable rate, the entitlement of an assessee has necessarily to be determined in accordance with the statutory framework."

The bench further held that where a statute creates the right to interest and also prescribes the applicable rate, the entitlement cannot ordinarily travel beyond the statutory framework. Since the appellant had neither challenged the validity of Section 35FF nor the notification prescribing the 6% rate, the Court held it could not enhance the rate of interest merely because the appellant considered it inadequate.

The Court also held that the appellant's reliance on Sandvik Asia was misplaced, noting that the decision had subsequently been explained by the Supreme Court in Commissioner of Income Tax v. Gujarat Fluoro Chemicals Ltd., which clarified that an assessee is entitled only to such interest as is specifically provided under the statute.

As such, the High Court dismissed the appeal.

For Appellant: Advocates Rajat Mittal, Priyanshu, Subham Kumar and Shivam Kamra

For Respondent: Advocate Anushree Narain, SSC with Naman Choula,