Facts of the Case

The petitioner, LM Wind Power Blades (India) Pvt. Ltd., furnished eight bank guarantees aggregating to ₹4,73,26,512 during the period from 17.10.2018 to 26.10.2018 as security for release of goods. Subsequently, being aggrieved by orders passed by the GST authorities, the petitioner preferred statutory appeals and deposited various amounts, including the prescribed pre-deposit.

The petitioner contended that the GST authorities illegally encashed the aforesaid bank guarantees. Aggrieved by such encashment, the petitioner approached the Bombay High Court by filing W.P. No. 6968 of 2019. By final order dated 15.09.2020, the Bombay High Court directed the GST authorities to refund ₹4,73,26,512 covered by the eight encashed bank guarantees together with applicable statutory interest, within four weeks from receipt of the order.

The Revenue did not prefer an appeal against that decision. Instead, it filed Review Petition No. 98390 of 2020, which was dismissed by the Bombay High Court on 04.10.2021. Consequently, the direction for refund together with applicable statutory interest attained finality and became binding upon the authorities.

Thereafter, the petitioner initiated contempt proceedings in C.P. No. 318 of 2021. Pursuant thereto, the GST authorities issued a letter dated 22.10.2021 calling upon the petitioner to submit a refund application under Section 54 of the CGST Act read with Rule 89 of the CGST Rules. The petitioner submitted its reply dated 06.11.2021 and enclosed the refund application. It specifically maintained that the refund applications were filed only at the instance and insistence of the authorities and without prejudice to its right to claim interest.

On 05.01.2022, the third respondent refunded ₹4,73,26,512 but rejected the petitioner’s claim for interest. The petitioner thereafter submitted another application dated 31.05.2022. A show cause notice dated 30.06.2022 was issued proposing rejection of the interest claim.

Despite the petitioner’s detailed reply dated 14.07.2022 and supporting documents, the Assistant Commissioner passed the impugned order dated 28.07.2022 rejecting the claim for interest. The petitioner therefore approached the Karnataka High Court under Article 226 of the Constitution of India.

Issues Involved

The principal issues before the High Court were whether the petitioner was entitled to interest on ₹4,73,26,512 for the period during which the amount covered by the encashed bank guarantees remained with the GST authorities; whether such entitlement could be denied merely because the refund did not arise under Section 54 of the CGST Act; whether Sections 54, 56 and 115 of the CGST Act governed or restricted the claim; whether interest could be granted even in the absence of an express statutory provision; and what would constitute a reasonable rate and period of interest in the facts of the case.

Petitioner’s Arguments

The petitioner argued that the Bombay High Court had expressly directed refund of ₹4,73,26,512 together with applicable statutory interest, and that the said judgment had attained finality after dismissal of the Revenue’s review petition.

It was submitted that the authorities could not subsequently interpret, dilute or disregard the binding judicial direction by refusing interest. According to the petitioner, the refund applications filed under Section 54 of the CGST Act and Rule 89 of the CGST Rules were submitted only because the authorities insisted upon that procedural route and were expressly without prejudice to the petitioner’s right to interest.

The petitioner further contended that the authorities had illegally retained and withheld money legally belonging to it, thereby depriving it of the use, utilisation and benefit of ₹4,73,26,512 for a substantial period. Accordingly, interest was payable not merely on the basis of statutory provisions but also under the principles of restitution and compensation.

In support of its claim, the petitioner relied upon the following judicial precedents:

  • Areva T & D India Limited vs Commissioner of Customs, 2013 (290) E.L.T. 496 (Mad.)
  • Sandvik Asia Private Limited vs Commissioner of Income Tax, Pune-I, (2006) 2 SCC 508
  • Hello Mineral Water (Private) Limited vs Union of India, 2004 (174) E.L.T. 422 (All.)
  • Sri Jagdamba Polymers Limited vs Union of India, 2013 (289) E.L.T. 429 (Guj.)
  • E.BizCom Private Limited vs Commissioner of Central Excise, Customs & Service Tax, 2017 (49) S.T.R. 389 (All.)
  • Team HR Services Private Limited vs Union of India, 2020 (38) G.S.T.L. 457 (Del.)
  • Ranbaxy Laboratories Ltd. vs Union of India & Others, (2011) 10 SCC 292

These authorities were cited to support the proposition that wrongful withholding or delayed refund of money may justify payment of interest and that interest may be awarded in appropriate circumstances even where the statutory framework is not the sole source of entitlement.

Respondents’ Arguments

The respondents opposed the writ petition and reiterated the contentions contained in their statement of objections. Their case was that the petition lacked merit and deserved dismissal.

The impugned order proceeded substantially on the basis that Sections 54, 56 and 115 of the GST Act were not applicable to the petitioner’s claim and that there was no provision under the Act or Rules specifically providing for payment of interest where amounts realised through encashment of bank guarantees were subsequently directed to be refunded.

The authorities also reasoned that interest under Section 56 concerning delayed refunds would ordinarily arise where refund was not made within 60 days from receipt of a refund application in the statutory framework associated with Section 54. Since the petitioner’s refund did not arise through an order under Section 54, the interest claim was sought to be denied.

The impugned order further contained a finding concerning availability of the amount with the petitioner during the relevant period, which the High Court subsequently found to be factually incorrect and contrary to the record.

Court Order / Findings

The Karnataka High Court held that the order dated 28.07.2022 rejecting the petitioner’s interest claim was contrary to law and facts and deserved to be set aside.

The Court found that the amount of ₹4,73,26,512 had remained with the respondents until it was refunded on 05.01.2022. The Court noted that the Bombay High Court had expressly directed refund of the amount together with applicable statutory interest. Therefore, the third respondent’s conclusion that the petitioner was not entitled to interest in terms of that judgment was clearly erroneous.

The Court further observed that the Bombay High Court, while dealing with the refund dispute, had expressly referred to statutory provisions concerning appeals and interest, including Sections 54, 56 and 115 of the GST Act. Consequently, the direction to refund the amount together with applicable statutory interest could not be ignored.

A particularly significant finding was that the petitioner’s entitlement to refund did not arise by virtue of an order under Section 54. Therefore, the Court held that neither Section 54 nor Section 56 governed the claim in the conventional manner suggested by the authorities. Rather, the entitlement to interest flowed from the specific directions of the Bombay High Court.

The High Court further held that even in the absence of an express statutory provision, the petitioner would be entitled to interest at a reasonable rate because the respondents had illegally retained and withheld money legally belonging to the petitioner.

The Court applied the principles of restitution and compensation, observing that the petitioner had been deprived of the use, utilisation and benefit of ₹4,73,26,512 during the relevant period. Such wrongful deprivation justified an award of interest.

The Court also rejected as factually incorrect the finding that the amount covered by the encashed bank guarantees remained available to the petitioner. Once the eight bank guarantees were encashed, the respondents had appropriated the amount and prevented the petitioner from enjoying its use and benefit until the actual refund on 05.01.2022.

Accordingly, the High Court partly allowed the writ petition, set aside the impugned order dated 28.07.2022, and directed the concerned respondents to pay interest at 6% per annum on ₹4,73,26,512 for the period from 29.03.2019 to 05.01.2022, as expeditiously as possible and in any event within two months from receipt of a copy of the order.

Important Clarification

This judgment makes an important distinction between a conventional statutory refund under Section 54 of the CGST Act and a refund arising pursuant to a binding judicial direction concerning amounts illegally retained by the authorities.

The Court clarified that since the petitioner became entitled to refund of the bank-guarantee amount not by virtue of an order under Section 54, the claim for interest could not simply be rejected by applying the conventional 60-day framework associated with Sections 54 and 56.

The entitlement to interest was supported by three independent considerations: first, the express and binding direction of the Bombay High Court requiring refund together with applicable statutory interest; second, the principle that reasonable interest may be awarded where authorities illegally retain money even in the absence of an express statutory provision; and third, the principles of restitution and compensation for deprivation of the use and benefit of money.

Thus, the decision should not be read as holding that every GST refund automatically attracts 6% interest from the date of payment or deposit. The ruling turned on the specific facts involving illegal encashment and retention of bank-guarantee amounts, a binding prior judicial direction, and wrongful deprivation of the petitioner’s funds.

Sections / Provisions Involved

Article 226 of the Constitution of India — Writ jurisdiction of the High Court.

Section 54 of the Central Goods and Services Tax Act, 2017 — Statutory framework governing refund of tax and other amounts.

Section 56 of the Central Goods and Services Tax Act, 2017 — Interest on delayed refunds.

Section 115 of the GST Act — Referred to in the proceedings and in the reasoning concerning the statutory provisions considered in the prior Bombay High Court judgment.

Rule 89 of the Central Goods and Services Tax Rules, 2017 — Procedure for filing refund applications.

Link to download the order -https://www.mytaxexpert.co.in/uploads/1783150180_831compressed.pdf

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