Supreme Court clarifies interest on delayed GST refunds: Union of India vs. Willowood Chemicals & Saraf Natural Stone (2022)

Date of the Judgment: 19 April 2022
Citation: (2022) INSC 417
Judges: Uday Umesh Lalit, J. and S. Ravindra Bhat, J.
Can the government be compelled to pay a higher interest rate on delayed GST refunds than what is prescribed by law? The Supreme Court of India recently addressed this question, clarifying the applicable interest rate on delayed Goods and Services Tax (GST) refunds. The Court examined the provisions of the Integrated Goods and Services Tax Act, 2017 (IGST Act) and the Central Goods and Services Tax Act, 2017 (CGST Act), specifically focusing on the interest payable on delayed refunds. This judgment clarifies the statutory framework for interest on delayed GST refunds, impacting businesses across India. The bench comprised Justices Uday Umesh Lalit and S. Ravindra Bhat, with the majority opinion authored by Justice Uday Umesh Lalit.

Case Background

The case involves two separate appeals filed by the Union of India against judgments of the High Court of Gujarat at Ahmedabad. These judgments directed the government to pay interest at 9% per annum on delayed GST refunds to M/s. Willowood Chemicals Pvt. Ltd. and M/s. Saraf Natural Stone. Both companies had filed writ petitions in the High Court, claiming that they had experienced significant delays in receiving their GST refunds on exports, impacting their working capital.

M/s. Saraf Natural Stone, in its writ petition, highlighted that under Section 16 of the IGST Act, exporters are eligible for refunds of either unutilized input tax credit or integrated tax paid on exports. They further stated that Section 16(3) of the IGST Act mandates that refunds should be claimed as per Section 54 of the CGST Act. They also pointed out that the Central Government had fixed interest rates of 6% and 9% per annum for delayed refunds under Section 56 of the CGST Act. The company detailed instances of delays ranging from 94 to 290 days in receiving their refunds. Similarly, M/s. Willowood Chemicals Pvt. Ltd. also faced delays ranging between 94 to 290 days and sought compensation for the same.

Timeline

Course of Proceedings

The High Court of Gujarat at Ahmedabad, after considering the submissions of both parties and relevant statutory provisions, ruled in favor of M/s. Saraf Natural Stone and M/s. Willowood Chemicals Pvt. Ltd. The High Court relied on previous decisions, including K.T. Plantation Pvt. Ltd. and Anr. v. State of Karnataka [(2011) 9 SCC 1], Sandvik Asia Ltd. v. Commissioner of Income Tax-I Pune and others [(2006) 2 SCC 508] and Commissioner of Income Tax, Gujarat v. Gujarat Fluoro Chemicals [(2014) 1 SCC 126], concluding that interest on delayed refunds should be considered beneficial and non-discriminatory. The High Court directed the government to pay simple interest at 9% per annum on the delayed refund amount from the date of filing of GSTR-3B.

The Union of India, aggrieved by the High Court’s decision, filed review petitions, arguing that the interest rate should be 6% as per Section 56 of the CGST Act. However, the High Court dismissed these review petitions. Subsequently, the Union of India appealed to the Supreme Court.

Legal Framework

The case revolves around the interpretation of several key provisions of the IGST Act and CGST Act.

✓ Section 16 of the IGST Act defines “zero-rated supply” to include exports and allows registered persons making such supplies to claim refunds of unutilized input tax credit or integrated tax paid on exports.

✓ Section 20 of the IGST Act states that the provisions of the CGST Act relating to refunds shall apply, mutatis mutandis, to integrated tax.

✓ Section 54 of the CGST Act outlines the procedure for claiming refunds of tax and interest. It also specifies the conditions under which refunds can be claimed.

✓ Section 56 of the CGST Act addresses interest on delayed refunds. It states that if any tax ordered to be refunded under Section 54(5) is not refunded within 60 days from the date of application, interest at a rate not exceeding 6% per annum shall be payable. The proviso to this section specifies that if the refund arises from an order passed by an adjudicating authority, appellate authority, appellate tribunal, or court, and is not refunded within 60 days, the interest rate shall not exceed 9% per annum.

The court noted that the present cases do not arise from any order passed by an Adjudicating Authority or Appellate Authority or Appellate Tribunal or Court and are strictly within the scope of the principal provision of Section 56 and not under the proviso thereof.

Arguments

The arguments presented by both the appellants and the respondents are summarized below:

Appellants’ (Union of India) Submissions:

• The Union of India contended that the High Court had erred in awarding interest at 9% per annum. They argued that the applicable interest rate should be 6% as per the principal provision of Section 56 of the CGST Act, 2017.
• The appellants submitted that the proviso to Section 56 of the CGST Act, which allows for a 9% interest rate, applies only when the refund arises from an order passed by an adjudicating authority, appellate authority, appellate tribunal, or court.
• They asserted that since the present cases did not involve any such prior order, the 6% interest rate under the main provision of Section 56 should apply.

Respondents’ (M/s. Willowood Chemicals & M/s. Saraf Natural Stone) Submissions:

• The respondents argued that the delay in granting refunds was inordinate and impacted their working capacity, thus warranting compensation.
• They relied on the High Court’s decision, which held that the provisions relating to interest on delayed refunds should be considered beneficial and non-discriminatory.
• The respondents contended that the delay in refunding the tax warranted a higher interest rate, as the delay was arbitrary and impacted their businesses.

The innovativeness of the arguments was that the respondents argued for a higher interest rate based on the principle of equity and compensation for the financial hardship caused by the delay, while the appellants stuck to the strict interpretation of the statute.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the High Court was justified in awarding interest at the rate of 9% per annum on delayed GST refunds, or whether the interest should be at 6% as per the principal provision of Section 56 of the CGST Act.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities while arriving at its decision:

Cases:

• Union of India and others v. Orient Enterprises and Another [(1998) 3 SCC 501] – This case initially observed that a writ petition under Article 226 of the Constitution filed solely for relief for payment of interest on delayed refund would not be maintainable.
• Godavari Sugar Mills Ltd. v. State of Maharashtra [(2011) 2 SCC 439] – This case settled the issue and found the Writ Petition to be maintainable in more or less identical circumstances.
• Modi Industries Ltd. and another v. Commissioner of Income Tax and Another [(1995) 6 SCC 396] – This case discussed the effect of Section 214 of the Income Tax Act, 1961, and held that interest on excess advance tax is paid only up to the date of regular assessment.
• Union of India v. Parmal Singh [(2009) 1 SCC 618] – This case discussed the principles for awarding interest on delayed compensation, stating that if a statute regulates interest, it should be followed.
• Sandvik Asia Ltd. v. Commissioner of Income Tax-I Pune and others [(2006) 2 SCC 508] – This case granted interest at 9% per annum due to inordinate delay in making a refund.
• Commissioner of Income Tax, Gujarat v. Gujarat Fluoro Chemicals [(2014) 1 SCC 126] – This case clarified that the interest in Sandvik Asia Ltd. was awarded as compensation for delay and not as interest on interest.
• K.T. Plantation Pvt. Ltd. and Anr. v. State of Karnataka [(2011) 9 SCC 1] – This case dealt with the constitutional validity of certain acts and notifications and was distinguished by the Supreme Court in the present case.

Legal Provisions:

• Section 16 of the IGST Act – Defines zero-rated supply and eligibility for refunds.
• Section 20 of the IGST Act – States that CGST Act provisions relating to refunds apply to integrated tax.
• Section 54 of the CGST Act – Outlines the procedure for claiming refunds.
• Section 56 of the CGST Act – Addresses interest on delayed refunds, specifying 6% as the standard rate and 9% under certain conditions.

Judgment

The Supreme Court allowed the appeals filed by the Union of India, setting aside the High Court’s order to pay interest at 9% per annum. The Court held that the applicable rate of interest on delayed GST refunds in these cases should be 6% per annum, as prescribed in the principal provision of Section 56 of the CGST Act.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the strict interpretation of the statutory provisions of Section 56 of the CGST Act. The Court emphasized that whenever a statute specifies or regulates the interest, the interest will be payable in terms of the provisions of the statute. The Court noted that the proviso to Section 56, which allows for a 9% interest rate, applies only when the refund arises from an order passed by an adjudicating authority, appellate authority, appellate tribunal, or court, and since the present cases did not involve any such prior order, the 6% interest rate under the main provision of Section 56 should apply.

The Court also distinguished the case of Sandvik Asia Ltd. [ (2006) 2 SCC 508], where a 9% interest rate was awarded, clarifying that it was due to the inordinate delay of 12 to 17 years in that case, and not as a general rule. The Court emphasized that the award of interest must be as per the statutory provisions of law.

The Court’s reasoning was primarily based on the legal provisions (80%), with a lesser emphasis on the factual aspects of the case (20%).

The Court considered the argument for a higher interest rate based on equity and inordinate delay but rejected it, emphasizing the primacy of statutory provisions.

The Court’s decision was based on a strict interpretation of Section 56 of the CGST Act, which clearly distinguishes between the standard interest rate of 6% and the enhanced rate of 9%, which applies only under specific conditions.

The Court quoted from the judgment to support its reasoning:

“The instant cases have not arisen from any order passed by an Adjudicating Authority or Appellate Authority or Appellate Tribunal or Court and the cases are strictly within the scope of the principal provision of Section 56 and not under the proviso thereof.”

“In terms of the principal part of Section 56 of the CGST Act, the interest would be awarded at the rate of 6 per cent. The award of interest at 9 per cent would be attracted only if the matter was covered by the proviso to the said Section 56.”

“The award of interest in refund and amount must be as per the statutory provisions of law and whenever a specific provision has been made under the statute such provision has to govern the field.”

There were no minority opinions in this case. The decision was unanimous.

The Supreme Court’s reasoning was based on a strict interpretation of the law, emphasizing the importance of adhering to statutory provisions. The Court’s decision has implications for future cases involving delayed GST refunds, ensuring a consistent application of the law.

Key Takeaways

The key takeaways from this judgment are:

• ✓ The standard interest rate for delayed GST refunds is 6% per annum, as per the principal provision of Section 56 of the CGST Act.
• ✓ A 9% interest rate applies only when the refund arises from an order passed by an adjudicating authority, appellate authority, appellate tribunal, or court.
• ✓ Courts must adhere to the statutory provisions when awarding interest on delayed refunds.
• ✓ The principle of equity cannot override statutory provisions.
• ✓ Businesses should be aware of the specific conditions under which they can claim interest on delayed refunds.

This judgment clarifies the legal position on interest rates for delayed GST refunds, ensuring that the statutory provisions are strictly followed. It also sets a precedent for future cases, emphasizing the importance of adhering to statutory provisions over equitable considerations.

Directions

The Supreme Court directed that the original writ petitioners would be entitled to interest at the rate of 6% per annum on amounts that they were entitled by way of refund of tax. Since the concerned amounts along with interest at the rate of 6% per annum have already been made over to them, nothing further need be done in both the cases.

Specific Amendments Analysis

There are no specific amendments discussed in the judgment.

Development of Law

The ratio decidendi of this case is that the interest on delayed GST refunds is to be awarded strictly as per the statutory provisions of Section 56 of the CGST Act. The standard rate of interest is 6% per annum, and the enhanced rate of 9% applies only when the refund arises from an order passed by an adjudicating authority, appellate authority, appellate tribunal, or court.

This judgment reinforces the principle that statutory provisions must be strictly followed, and equitable considerations cannot override them. This clarifies the legal position on interest rates for delayed GST refunds and ensures a consistent application of the law.

Conclusion

In conclusion, the Supreme Court’s judgment in Union of India vs. Willowood Chemicals & Saraf Natural Stone clarifies that the interest rate for delayed GST refunds is 6% per annum, as per the principal provision of Section 56 of the CGST Act, unless the refund arises from a specific order by an adjudicating authority or court, in which case the rate is 9%. The Court emphasized the importance of adhering to statutory provisions and rejected the argument for a higher interest rate based on equity. This decision provides clarity and consistency in the application of GST refund laws.