2025 (9) TMI 123 - AT - Central Excise

Interest demand on provisional refund quashed; refund recalculated under special value-addition rate, no interest payable under Section 11A/11AA

M/s. Godrej Consumer Products Limited Versus Commissioner of C.G.S.T. and Central Excise, Guwahati

CESTAT KOLKATA - AT allowed the appellant's appeals, setting aside the demand for recovery of interest on the full provisional refund. Tribunal held the ... Recovery of interest on the provisional refund sanctioned - erroneous refunds or not - Section 11AA of CEA - fixation of special rates as per Para 2D of the Notification No. 20/2008-CE dated 27.03.2008 - HELD THAT:- In the present case, it is an undisputed fact that the appellant had opted for fixation of special rates as per Para 2D of the Notification No. 20/2008-CE dated 27.03.2008 within the prescribed time period. The Hon’ble Gauhati High Court in Godrej Consumer Products Limited [2020 (10) TMI 1401 - GAUHATI HIGH COURT] directed the Department to decide on pending special value addition rate applications and not to proceed with recovery and accordingly, the Ld. Principal Commissioner determined appellant’s application for special value addition rates. Thus, it is observed that refund liable to be sanctioned to the appellant has to be taken in accordance with the special rate fixed subsequently. Thus, consequent to fixation of special rate, the Ld. Assistant Commissioner vide orders dated 14.07.2022 and 15.07.2022 sanctioned refund as per fixation of special value addition rates. The said refund sanctioned to the appellant pursuant to fixation of value addition rate was adjusted against outstanding dues of the appellant, on account of sanction of provisional refunds as per the orders of the Hon’ble High Court of Gauhati and the Hon’ble Apex Court. It is relevant to observe that after adjustment, the excess refund sanctioned to the appellants was Rs. 50,96,571/- only. Thus, it is clear that if at all any interest is payable on the excess refund sanctioned to the appellant, the same should have been demanded only on the net-excess refund paid after adjustment. However, it is observed that the lower authorities have upheld the demand of recovery of the entire provisional refund sanctioned as per the orders of the Hon’ble High Court of Gauhati and the Hon’ble Apex Court. Thus, under these facts and circumstances, the order of the lower authorities demanding recovery of interest on the entire amount of provisional refund sanctioned, is legally not tenable. Liability of interest on the excess refund sanctioned to the appellant - HELD THAT:- The fact is noted that the demand for recovery of interest has been charged upon the appellant without issuance of any Show Cause Notice under Section 11A of the Central Excise Act. In this regard, it is agreed with the submission of the appellant that issuance of Show Cause Notice is a pre-requisite before recovery of any demand - it is evident that the present demand for recovery of interest, without issuance of Show Cause Notice and providing reasonable opportunity to the appellant to present its case, tantamounts to violation of principles of natural justice. Accordingly, the demand confirmed for recovery of interest in the impugned order is liable to be set aside on this ground itself - Section 11AB of the Central Excise Act, which existed up to 08.04.2011, contained a specific provision to levy interest on the amount ‘erroneously refunded’ to the assessee. However, such specific provision does not find a place in the newly introduced Section 11AA to recover interest on the ‘erroneously refunded’ amount. It is evident that as per Section 11AA ibid., any person who is liable to pay duty, shall, in addition to the duty, be liable to pay interest at the rate specified in sub-section (2). The Ld. Commissioner (Appeals) has observed that provisional refund paid to the Appellant was as per the directions of the Hon’ble Supreme Court and Hon’ble High Court, against submission of surety bond and hence, the appellant is contractually bound to pay back the inadmissible refund provisionally paid to them. In this regard, we find that effectively, the appellant had received net excess refund of Rs. 50,96,571/- only (i.e. Rs. 24,00,07,627 - Rs. 23,49,11,056/-), which was re-paid by them vide challan 21.03.2023. Thus, it is observed that even as per the surety bond executed by them, the appellant has paid the net excess refund amount received by them - Even if the Department intended to invoke the surety bond for recovery of the amount of provisional refund or interest therein, it is pre-requisite on the part of the department to first raise the demand thereof under appropriate provision of law before invoking the surety bond - the demand of interest by invoking the provisions of the Surety Bond executed by the appellant is legally not tenable. The present demand of interest on entire the entire amount of provisional refund amounting to Rs. 24,00,07,627/- is not sustainable and hence the same is set aside. Regarding the interest liability on the net excess refund of Rs. 50,96,571/- received by the appellant, it is found that the excess refund received by the appellant stand re-paid by them on 21.03.2023 and there is no interest liable to be paid by the appellant on this amount, as the excess amount paid to the appellant was not ‘erroneous’. It was only a provisional refund paid as per the direction of the Hon’ble High Court. The appeals filed by the appellant is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether interest can be levied under Section 11AA of the Central Excise Act on amounts provisionally refunded pursuant to interim orders of courts, i.e., whether such provisional refunds constitute 'erroneous refund' attracting interest. 2. Whether demand for recovery of interest (if any) could be raised on the entire provisional refund amount where subsequent fixation of special value addition rates resulted in only a small net excess having been actually retained by the assessee. 3. Whether recovery of interest (or any demand) could be effected without issuance of a show cause notice / following the statutory adjudicatory procedure under Section 11A (and related provisions), and whether invocation of a surety bond can supplant statutory procedure for recovery of interest. 4. Whether omission of the specific phrase 'erroneously refunded' in substituted Section 11AA (w.e.f. 08.04.2011) excludes interest liability on erroneously refunded amounts, or whether the terms 'duty' and the linkage with Section 11A preserve interest liability for erroneous refunds. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Liability to pay interest on provisional refunds granted pursuant to court interim orders Legal framework: Section 11AA prescribes interest on delayed payment of 'duty' (as defined by nexus with Section 11A) from the date duty becomes due until payment. Section 11A provides the mechanism for issuance of notice and determination of duty where duty is not levied/paid/short-levied/short-paid or erroneously refunded. Precedent treatment: Court authority recognizes that interim judicial directions leading to provisional refunds do not ipso facto render those refunds 'erroneous' in the sense required for recovery as if grant were without judicial imprimatur; further authorities require statutory procedure (show cause) before adverse recovery action. Interpretation and reasoning: The Tribunal observed that provisional refunds were sanctioned pursuant to interim orders of courts and subsequently adjusted after fixation of special value addition rates directed by court. Given that provisional refunds flowed from court orders (including orders affirmed by the Supreme Court), such payments cannot be characterised as 'erroneous refunds' for purposes of charging interest as if the department had unilaterally erred. The Tribunal emphasized the factual matrix: the right to apply for special value addition rates existed and applications had been filed, and the final admissible refund was determined after statutory adjudication, leaving only a small net excess actually retained by the assessee. Ratio vs. Obiter: Ratio - provisional refunds made under court orders are not to be treated as 'erroneous refunds' attracting interest on the full provisional amount; interest, if at all, must relate to any actual net excess after final adjudication. Obiter - general observations on the nature of judicially-ordered provisional refunds versus departmental errors. Conclusion: Interest cannot be levied on the full provisional refund amount sanctioned pursuant to court interim orders; at most interest could be considered on any net excess actually retained after final determination. Issue 2 - Scope of recovery where subsequent fixation of special rates reduces entitlement and results in only net small excess Legal framework: Adjudication under Section 11A and interest under Section 11AA must be applied to the duty finally determined; adjustments are permissible to account for amounts admitted as refundable upon final determination. Precedent treatment: Administrative practice and judicial pronouncements require recovery to be in accordance with final adjudication figures; demand should correspond to net excess if any. Interpretation and reasoning: The Tribunal reviewed the administrative orders fixing special value addition rates and the consequent recalculation/adjustment of refunds. After adjustment, only a net excess of Rs. 50,96,571/- remained and was repaid by the assessee. The Tribunal held that demanding interest on the entire provisional refund (rather than on the net excess) ignored the factual adjustment and was legally untenable. Ratio vs. Obiter: Ratio - recovery (and any interest) must be limited to the actual net excess after final adjudication and adjustments; demanding interest on the gross provisional refund is not sustainable. Obiter - comments on timelines for fixation of special rates and the role of delayed departmental action. Conclusion: The department could not validly demand interest on the entire provisional refund; any recoverable interest must be confined to the net excess actually paid and retained (which here was repaid by the assessee), and therefore no interest was payable. Issue 3 - Requirement of show cause notice / statutory procedure and limits of surety bond Legal framework: Section 11A lays down the procedural requirement for issuance of show cause notice and adjudication for recovery of duty; principles of natural justice and settled precedent require notice and opportunity to be heard before adverse recovery orders are passed. Surety bonds cannot override statutory recovery mechanisms. Precedent treatment: Supreme Court authority and Tribunal decisions hold that a show cause notice and adherence to statutory procedure are pre-requisites to recovery; failure to issue a show cause notice violates natural justice even if some other provision might be invoked. Interpretation and reasoning: The Tribunal found that the demand for recovery of interest was made without issuance of any show cause notice under Section 11A. Reliance on bond/surety to recover amounts not provided for in the statute was rejected: a bond cannot extend beyond the statutory mandate, and invoking a bond does not relieve the department of the obligation to first raise a demand under the appropriate statutory provision. The Tribunal invoked authorities holding that fair procedure must be read into statutes where the statute is silent to protect affected persons' rights. Ratio vs. Obiter: Ratio - recovery of interest/duty without issuance of show cause notice and adherence to Section 11A procedure is contrary to law and breaches natural justice; invoking a surety bond cannot substitute for statutory adjudication. Obiter - procedural observations on when a bond may be lawfully invoked after proper demand and adjudication. Conclusion: The demand for recovery of interest without a show cause notice (and without following Section 11A procedure) was unlawful; therefore the interest demand was set aside on procedural grounds, and recovery by invoking the surety bond was held not tenable absent statutory demand and adjudication. Issue 4 - Effect of omission of the phrase 'erroneously refunded' from Section 11AA (post-substitution) on interest liability Legal framework: Comparison of pre-08.04.2011 Section 11AB (which explicitly mentioned 'erroneously refunded') with substituted Section 11AA (which refers generically to 'duty' and links to Section 11A) and interpretive principle that provisions must be read in context to avoid absurd consequences. Precedent treatment: Interpretive approach requires reading linked provisions together; a plain literal omission should not lead to outcomes that render other provisions ineffective or produce absurdity. Interpretation and reasoning: The Tribunal rejected the appellant's contention that omission of the phrase 'erroneously refunded' removed interest liability on erroneous refunds. It reasoned that Section 11A provides for issuance of show cause notices for recovery in cases including erroneous refunds and that Section 11AA's reference to 'duty' must be read in conjunction with Section 11A, thereby encompassing erroneous refunds. The Tribunal noted that interpreting the omission to exclude erroneous refunds would create an absurdity - allowing issuance of notices without any power to adjudicate - and therefore the consolidated language under Section 11AA remains broad enough to cover recovery and interest in respect of erroneous refunds when adjudicated under Section 11A. Ratio vs. Obiter: Ratio - omission of the specific phrase does not exclude erroneous refunds from the operation of Section 11AA when read with Section 11A; interest under Section 11AA can apply to amounts adjudicated as duty due, including erroneous refunds. Obiter - textual and contextual remarks on statutory construction to avoid absurd results. Conclusion: Section 11AA, when read with Section 11A, continues to permit levy of interest on amounts determined to be due (including those arising from erroneous refunds) subject to statutory procedure; however, interest cannot be levied in the absence of proper adjudication and procedural compliance. Overall Disposition and Consequent Principles 1. The demand for interest on the entire provisional refund sanctioned pursuant to interim court orders was set aside because such judicially directed provisional refunds are not 'erroneous' in the sense that would justify interest on the gross amount; only any net excess after final adjudication could, in principle, attract interest. 2. Recovery of interest without issuance of a show cause notice under Section 11A (and without adjudicatory process) violated principles of natural justice and settled law; such procedurally defective demands are liable to be quashed. 3. Invocation of surety/bond cannot bypass statutory requirements; a bond cannot be used to recover amounts for which no proper statutory demand and adjudication under the Act exist. 4. The omission of the phrase 'erroneously refunded' from Section 11AA does not, in context, preclude interest liability in respect of amounts adjudicated as due under Section 11A; statutory provisions must be read together to avoid absurd consequences. Nonetheless, applicability of Section 11AA is contingent on proper statutory procedure being followed.