2024 (4) TMI 764 - HC - VAT and Sales Tax

Registered dealer entitled to interest on VAT refund despite transfer to electronic credit ledger

R.N. Laboratories Pvt. Ltd. Versus State of Gujarat & Ors.

Gujarat HC held that registered dealer was entitled to interest on VAT refund from date immediately following closure of accounting year (01.04.2017) ... Short payment of Interest - denial of interest from 01.04.2017 to 18.12.2020, the period during which the amount of input tax credit was lying in the electronic credit ledger of the petitioner - section 38 of the VAT Act. HELD THAT:- On perusal of provisions of subsection (2) of section 38 of the Act, it is clear that the registered dealer is entitled to refund from the date immediately following the date of closure of the accounting year to which the said the amount of refund relates till the date of payment of the amount of such refund. In the facts of the case, appellant order would be the relevant date or the end date however, the date from which the interest starts running is the date of immediately following the accounting year which is 01.04.2017 under the facts of the case. Merely because the petitioner has transferred the amount to the electronic credit ledger coupled with the fact that such amount remained unutilized till it was reversed by the petitioner by filling Form DRC-03, the transfer of amount to the electronic credit ledger was only a memorandum entry on 01.07.2017 which was reversed on 18.12.2020. For all effect and purpose, the amount was never utilized by the petitioner and the Commissioner has also rightly not granted refund of the amount input tax credit which is utilized by the petitioner. It is pertinent to note that the petitioner made claim of refund for the amount of Rs. 42,35,215/- after considering already utilized amount of Rs. 3,45,133/- and there was shortfall of Rs. 22,500/ and therefore, the Commissioner, while granting refund, has taken into consideration this aspect and granted refund of only Rs. 42,34,894/- to the petitioner. Therefore, respondent-authority is required to calculate the interest on the amount as per the order passed by the appellate-authority from 01.07.2017 till the date of order i.e. 22.05.2023. The respondent authorities are directed to refund balance amount of Rs. 8,81,322/- within a period of four weeks from the date of receipt of copy of this order - Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a dealer entitled to refund under section 38 of the VAT Act is entitled to simple interest from the date immediately following the end of the accounting year relevant to the refund, even where the amount had been transferred to the electronic input tax credit ledger under the GST regime and remained unutilized until reversal. 2. Whether transfer of input tax credit to the electronic credit ledger constitutes utilization so as to deprive the dealer of interest for the period between transfer and reversal. 3. Whether a revenue authority may unilaterally revise a refund payment order (reducing interest payable) without resort to the revisional jurisdiction provided under the VAT Act (for example section 75) and without affording hearing to the dealer. 4. The correct computation period for interest under section 38 where an appellate order grants refund of unutilized transitional credit: whether interest runs from the accounting year-end date (or the operative date in section 38) or from the date of reversal of the credit entry in the electronic ledger. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to interest under section 38 Legal framework: Section 38 grants a registered dealer, in respect of a refund due by virtue of an order other than assessment under sub-section (1), simple interest at six percent per annum from the date immediately following the date of closure of the accounting year to which the refund relates until payment. Interpretation and reasoning: The Court construed subsection (2) as entitling interest from the first day following the accounting year-end relevant to the refund (identified in the facts as 01.04.2017) up to payment. The appellate order granting refund fixes the quantum; the date from which interest runs is governed by section 38 and not displaced by administrative entries under GST. Precedent treatment: Decisions cited by the parties were considered (including authorities relied upon by the petitioner as supportive of interest accruing from the assessment/appellate-related date). The Court applied these principles to affirm the statutory entitlement to interest under section 38. Ratio vs. Obiter: Ratio - where refund is allowed under section 38(2), interest accrues from the date immediately following the accounting year-end to which the refund relates until payment, irrespective of electronic ledger entries that were never utilized. Conclusion: The dealer was entitled to interest from 01.04.2017 until payment as per section 38. Issue 2 - Effect of transfer to electronic credit ledger on entitlement to interest Legal framework: No provision in section 38 conditions interest entitlement on the physical availability or ledger status of input tax credit; entitlement is triggered by refund order and the accounting year reference in section 38. Interpretation and reasoning: The Court treated the transfer to the electronic credit ledger on 01.07.2017 as a memorandum entry which, in the absence of actual utilization, did not extinguish the dealer's substantive right to refund or interest. The fact that the credit remained unutilized until reversed by filing DRC-03 on 18.12.2020 meant there was no effective consumption of the credit that would deny interest for earlier periods. Precedent treatment: The Court rejected the State's contention that ledger transfer vests the amount with the GST department in a manner that negates interest under the VAT provision; this interpretation gave primacy to the VAT interest provision in circumstances where refund related to unutilized transitional credit. Ratio vs. Obiter: Ratio - transfer to electronic credit ledger, without actual utilization, does not operate to deprive a dealer of interest payable under section 38 for the period from the accounting year-end to payment. Conclusion: The transfer to the electronic ledger did not bar interest from running from 01.04.2017; interest must be calculated on the amount allowed by the appellate order from that statutory start date. Issue 3 - Validity of unilateral revision of refund payment order by the Assessing Authority Legal framework: Revision or modification of orders by revenue authorities is governed by specific statutory provisions (e.g., revisional jurisdiction such as section 75) and principles of natural justice; unilateral suo motu reduction of an adjudicated refund payment (particularly interest component) without following statutory revision procedure or affording hearing is impermissible. Interpretation and reasoning: The Court found that the respondent-authority had effectively reduced the interest element in the refund payment order without initiating or following revisional proceedings under the VAT Act and without affording opportunity of hearing. The Court held that such self-revision was not in accordance with the statutory scheme. Precedent treatment: The Court relied on established administrative law principles that a statutory procedure must be followed for revisional adjustment and that parties must be heard before unilateral reduction of a judicially/administratively granted entitlement. Ratio vs. Obiter: Ratio - a revenue authority cannot revise a refund payment order on its own motion to reduce the amount payable (interest component) in the absence of proper revisional proceedings and compliance with principles of natural justice. Conclusion: The respondent's self-revision of the refund payment order was unauthorized; the balance interest shortfall must be paid. Issue 4 - Correct period for computation of interest where appellate order grants refund of unutilized transitional credit Legal framework: Section 38 prescribes interest from the date immediately following the accounting year-end to which the refund relates until payment; where an order enhances or reduces refund, interest is to be adjusted accordingly. Interpretation and reasoning: The appellate order determined the refundable quantum of unutilized transitional credit. The Court held that interest must be computed on the amount fixed by the appellate order from the statutory commencement date (the day after the accounting year-end relevant to the refund), i.e., from 01.04.2017 to the date of the appellate order (22.05.2023) and until actual payment. The Court accepted the Commissioner's netting off of amounts actually utilized when granting the refund, and directed interest calculation on the allowed refundable sum. Precedent treatment: The Court noted earlier authorities invoked regarding merged assessment and appellate orders and applied their principle that interest follows the operative assessment/appellate determination but still commences from the statutory accounting year-end date. Ratio vs. Obiter: Ratio - where appellate authority grants refund of unutilized transitional credit, interest is to be computed on the refunded amount from the date fixed by section 38 (immediately following the accounting year-end) up to payment; ledger reversal dates do not displace this statutory period where the credit remained unutilized. Conclusion: Interest must be computed on the refund allowed by the appellate authority from 01.04.2017 to the date of the appellate order and paid; the shortfall of interest must be refunded to the dealer. Relief directed The Court declared the respondent's self-initiated reduction of interest in the refund payment order to be contrary to the VAT Act and directed payment of the balance interest sum within four weeks. This directive is a ratio of the decision and forms the operative relief.