Bombay High Court Allows Microsoft's Plea Against ₹1.40 Crore VAT, CST Interest Demand

The Bombay High Court has ruled in favour of Microsoft Corporation (India) Pvt. Ltd. in a dispute over interest on VAT and CST payments.

The court held that the company could not be treated as having delayed payment when it had paid tax within the time allowed for its six-monthly returns.

“The present is a case where the tax has been paid in terms of the timeline prescribed by the Act and the rules as indicated earlier,” a Division Bench of Justice M.S. Karnik and Justice Sandesh D. Patil ruled.

The bench was hearing the company's challenge to two appellate orders dated February 14, 2025, concerning FY 2013-14 under the Maharashtra Value Added Tax Act, 2002 (MVAT Act) and the Central Sales Tax Act, 1956 (CST Act).

The orders confirmed interest demands of about ₹1.26 crore on VAT and ₹14.07 lakh on CST on the basis that the company should have paid tax monthly instead of every six months.

The dispute was on how frequently the company was required to file returns and pay tax. Section 20 of the MVAT Act, read with Rule 17 of the MVAT Rules, sets the periodicity for filing returns. A registered dealer whose tax liability in the previous year was ₹1 lakh or less was eligible to file returns every six months.

Section 32 of the MVAT Act deals with payment of tax, while Rule 41 specifies when the tax for a return period has to be paid. For a dealer filing six-monthly returns, the tax for that period was payable by the date specified for filing the return.

The company's tax liability in FY 2012-13 was below the ₹1 lakh threshold. Its CST liability was ₹19,200, while there was no MVAT liability. The court therefore held that the company was entitled to file six-monthly returns for FY 2013-14.

Its gross sales stood at around ₹981 crore in FY 2013-14, while tax paid during the year was about ₹41.35 crore. The company continued filing six-monthly returns and paid the tax within the applicable due dates.

The tax authority later questioned this approach because of the substantial increase in the company's tax collections. It took the view that relying on the previous year's liability to make payments every six months effectively deferred payment of substantial tax revenue.

The authorities specifically pointed to April 2013, when the company collected about ₹1.45 crore in tax from customers but remitted that amount on October 28, 2013. They argued that the six-monthly return facility had therefore allowed tax payments to be deferred by up to 160 days in some months.

Interest was imposed under Section 30(2) of the MVAT Act. The provision deals with interest payable when tax is not paid within the time prescribed under the law. For the CST component, the appellate order applied Section 9(2) of the CST Act along with the MVAT interest provision.

The authority also characterised the company's reliance on the six-monthly payment facility as tax planning and unjust enrichment. The court rejected that reasoning, noting that the authority itself had accepted that the company was legally entitled to file six-monthly returns.

The bench found no statutory basis or cogent material for concluding that the company had adopted a dubious method to defer payment. Once the Rules prescribed the return frequency and corresponding payment deadline, those provisions were binding on both the assessee and the tax authorities.

The court also rejected the argument that the increase in the company's turnover and tax collections allowed the authority to effectively change the prescribed payment schedule. An authority could not alter the statutory periodicity merely on the basis of its own perception or surmises, the Bench observed.

The ruling does not strike down Section 30(2) or hold that interest can never be imposed under the provision. The court recognised that such interest is compensatory and mandatory where there is an actual failure to pay tax within the legally prescribed time.

In this case, however, the company had paid the tax within the time allowed by the Rules. The Bench therefore held that the interest levy was without authority of law and impermissible under Article 265 of the Constitution, which requires a tax to be imposed only with legal authority.

The company had separately abandoned its challenge to a ₹11.66 lakh demand concerning a mismatch in figures reported in Annexures .The writ petition was accordingly allowed in relation to the Section 30(2) interest demand, with no order as to costs.

For Petitioner: Advocates Prasad Paranjape, instructed by Lumiere Law Partners

For the State: Jyoti Chavan, Additional Government Pleader, along with Himanshu Takke, AGP