Revenue Cannot Demand Interest On Delayed Duties Yet Deny It On Refund: Telangana High Court

The Telangana High Court recently held that the Revenue is bound to compensate a taxpayer for amounts wrongfully collected and retained as interest on alleged central excise duty liability arising from a customs notification, even where such amounts were recovered under an amnesty scheme.

The court said, “the Revenue cannot act in contradicting ways, i.e., on one hand demanding interest from the assessee for the delay in payment of duties and on other hand refusing to pay interest on the amount that was wrongly collected. This would be unfair and unjust, on the part of the Department, since the delay was caused entirely by the Revenue retaining the funds and they are bound to compensate the assessee.”

A Division Bench of Justice P. Sam Koshy and Justice Suddala Chalapathi Rao allowed the appeal filed by Virchow Laboratories Ltd., holding that when amounts are collected without authority of law and retained for long periods, the revenue is obligated to compensate the taxpayer.

The controversy stemmed from a demand raised in mid-January 1997, when the department compelled the appellant to deposit Rs. 31,52,256/- under an amnesty scheme, alleging violation of a 1992 customs notification and threatening to obstruct export clearances.

The amount was paid under protest on January 31, 1997. Although the appellant filed a refund claim on June 2, 1997, the authorities rejected the same, forcing the appellant into prolonged litigation.

Eventually, the Customs, Excise, and Service Tax Appellate Tribunal held that the appellant was not liable to pay the amount and directed a refund.

However, the refund was issued only on July 2, 2006, after more than nine years, and the department declined to grant any interest, contending that the amount represented “interest” and that awarding further interest would amount to impermissible “interest on interest.”

Challenging this stand, the appellant argued that the amount was wrongfully extracted and retained for an inordinate period, entitling it to compensation in the form of interest.

The department, however, maintained that Section 11BB of the Central Excise Act applies only to refunds of duty and not to amounts collected as interest and that granting such relief would amount to awarding interest on interest.

Rejecting the Revenue's contentions, the High Court held that even in the absence of an express statutory provision, it is settled law that when an amount is wrongfully collected or withheld without authority, the Revenue is bound to compensate the taxpayer.

The bench observed that “the interest of Rs.31,52,256/- on the duty paid was forcefully collected from the assessee, even though the Revenue was not entitled to collect the same and for a considerable period from 1997 to 2006, the said amount was kept with the revenue, and only in the year 2006, the said amount was refunded to the assessee.”

It further noted that Section 11BB of the Central Excise Act, 1944 mandates payment of interest for delayed refunds from the expiry of three months from the date of receipt of the refund application until the actual refund is made.

Allowing the appeal, the court directed the Revenue to pay interest at 7.5% per annum from June 2, 1997 to March 9, 2006, and further interest at 6% per annum on the unpaid interest amount for the period from March 9, 2006 to November 29, 2011.

However, the bench declined to grant additional interest for the period after November 29, 2011, noting that the matter remained pending before the Court and the Revenue could not be penalised for that period.

For Appellant: Advocate Muthuma Rajendran, counsel representing Sri Karthik Ramana Puttamreddy

For Respondent: Advocate Ramakrishna Reddy, Senior Standing Counsel for the Central Board of Excise and Customs (CBEC)