COSTS BEYOND STATUTORY INTEREST: JUDICIAL ATTITUDES TO REFUND DELAYS AND THE TURNING POINT IN SOFTWAREONE INDIA By G. Jayaprakash, Advocate (Former Central Excise Officer)

I. Introduction

Refunds under tax laws are a constitutional obligation, not a concession. Article 265 of the Constitution mandates that no tax shall be levied or collected except by authority of law. Once a levy is struck down, or excess payment established, the State cannot withhold money without authority.

Indian tax statutes recognise this by providing not only for refund but also for interest on delayed refunds—acknowledging that unlawful retention of money amounts to unjust enrichment by the State. Yet practice has shown a striking gap: taxpayers often secure refunds only after prolonged litigation, and even then, must initiate fresh battles to recover statutory interest.

Courts have repeatedly reaffirmed the statutory right to interest, but rarely impose costs for departmental harassment. This judicial leniency fuels administrative indifference. The Delhi High Court’s ruling in Pr. Commissioner of Income Tax-7 Deputy Commissioner of Income Tax & Anr., National Faceless Assessment Centre Delhi & Anr Joint Commissioner of Income Tax. Versus Sumitomo Corporation India (P) Ltd., Wickwood Development Ltd., Microsoft India (R&D) Pvt. Ltd., JCB India Limited, Smart Cube India Pvt Ltd., Telstra India Private Limited, Contata Solutions Private Limited, Swarovski India Private Limited, Axalta Coating Systems India Private Limited, Ramtech Consulting, Softwareone India Pvt. Ltd., Smart Cube India Pvt Ltd., Aditya Talwar, At Kearney India Private Limited, Karl Storz Endoscopy India Private Limited, (Vice Versa) - 2024 (9) TMI 157 - DELHI HIGH COURT marks a critical shift: not only was statutory interest awarded, but the Court also imposed Rs. 50,000 costs on the Department. The judgment raises an urgent question: should only the institution bear liability, or should individual officers also be held personally accountable?

II. Statutory Framework for Interest on Refunds

• Section 11BB, Central Excise Act, 1944 and Section 27A, Customs Act, 1962: mandate interest if refund is not made within three months of application.
• Section 56, CGST Act, 2017: prescribes 6% interest on delayed refunds, rising to 9% where refund arises from adjudication or appeal.

These provisions are mandatory. Parliament’s intent is unambiguous: delayed refunds must attract financial consequences.

III. Judicial Development Before GST

1. Ranbaxy Laboratories Ltd. Versus Union Of India and Ors. - 2011 (10) TMI 16 - Supreme Court
   Interest accrues after three months from filing the refund application, not from later adjudication.
2. Sandvik Asia Limited Versus Commissioner Of Income-Tax And Others - 2006 (1) TMI 55 - Supreme Court
   Recognised taxpayer entitlement to compensation for inordinate delays, even hinting at “interest on interest.” Later clarified in Commissioner of Income Tax, Gujarat Versus Gujarat Fluoro Chemicals - 2013 (10) TMI 117 - Supreme Court (LB)  that Sandvik was confined to exceptional delay, not a general right.
3. EICHER MOTORS LTD. Versus UNION OF INDIA - 1999 (1) TMI 34 - Supreme Court
   Held MODVAT credit is a vested right, underscoring the property dimension of tax entitlements.
4. High Courts (e.g., Shreeji Colour Chem, Riba Textiles) reiterated these principles but avoided imposing costs.

Pattern: Courts ensured statutory interest but sidestepped penalising the Department.

IV. Refund Interest in the GST Era

Despite a new framework, administrative behaviour has not changed. Refunds are routinely withheld on audit objections or procedural grounds. Interest is sanctioned only after litigation. Courts apply Ranbaxy principles, but cost orders remain rare, preserving a culture of impunity.

V. The SoftwareOne India Case – A Watershed

Facts:

• Refund claims filed between March–August 2017.
• Commissioner (Appeals) allowed refunds on 12 March 2019.
• Refund actually disbursed only on 28 September 2021.
• Department wrongly treated a 2020 implementation application as the filing date.
• CESTAT corrected this in October 2022, holding interest accrues from 2017 application dates.
• Statutory interest of Rs. 3.74 crore paid only after writ petitions.

High Court’s Decision:

• Taxpayer forced into litigation for over five years despite a clear appellate order.
• Department ordered to pay Rs. 50,000 as costs, even after interest liability was settled.

Significance:

• Rare recognition that harassment through delay warrants costs in addition to statutory interest.
• Symbolically important, though modest in quantum.

VI. Why Costs Matter

1. Deterrence – Without costs, officials obstruct refunds with impunity.
2. Equity – Taxpayers incur litigation expenses not covered by statutory interest.
3. Constitutional Values – Delays violate Article 14 (equality), Article 265 (no tax without authority), and Article 300A (property rights).
4. Judicial Economy – Endless litigation over settled law clogs courts.

VII. The Silence on Costs – Indian Judicial Attitudes

Courts traditionally defer to the State, treating statutory interest as sufficient compensation. But this institutional leniency creates moral hazard:

• The exchequer bears the financial burden.
• Individual officers face no consequences.
• Taxpayers remain uncompensated for legal fees, mental stress, and business disruption.

VIII. Comparative Jurisprudence

• UK – The tort of misfeasance in public office allows damages against officials for deliberate abuse.
• EU (CJEU) – Compensation is mandated where refunds are unreasonably delayed, recognising taxpayers’ right to effective remedies.
• US – IRS refund delays attract interest and penalties. Under 26 USC §7430 and the Equal Access to Justice Act, courts may award litigation costs if the government’s stance was not “substantially justified.”

These systems embed accountability beyond institutional liability.

IX. Constitutional Dimensions

1. Article 14 – Arbitrary denial of timely refunds discriminates among taxpayers.
2. Article 265 – Retention of tax without authority is a continuing illegality.
3. Article 300A – Taxpayers’ money is property; mere statutory interest may not amount to “just compensation.”
4. Article 19(1)(g) – Refund delays indirectly restrict the fundamental right to carry on trade by blocking working capital.

Thus, awarding only statutory interest falls short of constitutional compliance.

X. Who Should Bear Costs – Department or Officers?

Conventional Approach

Courts impose costs on the Department, i.e., the public treasury. Relief reaches the taxpayer, but officers are insulated.

The Case for Personal Liability

• Officers have no disincentive under current practice.
• Article 300 allows the State to recover from officials responsible for mala fide or negligent acts.
• Courts have imposed personal costs in other contexts:
  • K. K. Baskaran v. State (Madras HC) – misuse of power.
  • RTI contempt cases – costs against defaulting officers.
  • State of Punjab v. Jagdev Singh Talwandi (SC) – individuals may be held financially liable.
  • The Middle Path

1. Department pays costs upfront to the taxpayer.
2. Government conducts inquiry and recovers from responsible officials.
   This balances taxpayer justice with officer accountability.

XI. Conclusion and Recommendations

The SoftwareOne ruling marks a turning point. By awarding costs, the Delhi High Court recognized that litigation fatigue merits redress beyond statutory interest. The next challenge is to ensure personal accountability of officers who obstruct refunds despite settled law. More fundamentally, courts must acknowledge the real loss suffered by taxpayers: statutory interest at 6% is inadequate when overdraft rates are nearly double. To check the arbitrariness and ego of authorities who delay or deny refunds without justification, it is imperative that courts impose costs, rather than routinely recording “no order as to costs.”