2025 (10) TMI 1027 - HC - GST

IGST on ocean freight under reverse charge held invalid; refund confirmed and interest of Rs.71,31,225 ordered under Section 54

HC held that levy of IGST on ocean freight under the reverse charge notifications was invalid, obliging respondents to refund IGST of Rs. 2,62,37,558 ... Refund on ocean freight under reverse charge mechanism - Interest on refunds of IGST paid under reverse charge on ocean freight - Constitutional validity of N/N. 8 of 2017 and 10 of 2017 - contrary to Section 5(3) of the IGST Act and beyond the legislative competence of the respondents to issue the said notifications or not - HELD THAT:- The decision of the Supreme Court in Mohit Minerals Pvt. Ltd. [2022 (5) TMI 968 - SUPREME COURT] makes it crystal clear that a separate levy of IGST by the revenue on the component of ocean freight under the reverse charge mechanism, premised on the IGST notifications 8 and 10 of 2017, was in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation. What follows thus is that the revenue/respondents were legally obligated and liable to refund the amount of Rs. 2,62,37,558/- towards IGST paid by the Petitioner on ocean freight for the imported goods, which they eventually did. It may be apposite to refer to the decision of the Supreme Court in the case of Ranbaxy Laboratories Ltd. [2011 (10) TMI 16 - SUPREME COURT] and the following decision in Hamdard (WAQF) Laboratories [2016 (3) TMI 68 - SUPREME COURT]. The Supreme Court was considering the interpretation of Section 11 BB of the erstwhile Central Excise Act, 1994 which is in pari materia to Section 54 and 56 of the CGST Act. In this context, the Supreme Court recognized the obligation of the revenue to pay the statutory interest within a period of 3 months from the date of receipt of the application in this regard. It is not agreed with the submission that the claim of the Petitioner towards grant of interest is justified under Section 54 and 56 of the CGST Act. This is because Section 54 of the Act can only be applicable for claiming refund of any tax which is paid in accordance with and under the framework of the CGST Act and its extant provisions. The said Section would not apply in a situation where revenue or the respondents have no authority to collect the IGST paid by the Petitioner on reverse charge mechanism on the ocean freight, from the date of payment to the date of refund. This would further be in the teeth of the order of this Court dated 10 August 2022 in Writ Petition No. 8318 of 2019 (supra) where a coordinate Bench of this Court has in terms struck down notification No. 8 of 2017 read with the corrigendum dated 30 June 2017 to the extent they seek to impose IGST, to be unconstitutional. The Petitioner has made out a fit case for claiming interest of Rs. 71,31,225/- which ought to be sanctioned and paid to the Petitioner forthwith and in no event later than 4 weeks from the date of uploading of this judgment. At this juncture, we clarify that in the absence of any material placed on record by the respondents, to the contrary, there are no reason to doubt and/or disbelieve the interest quantified at Rs. 71,31,225/- claimed by the Petitioner in the present proceedings. Petition disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether interest on refunds of IGST paid under reverse charge on ocean freight is payable where the levy under delegated notifications was subsequently declared void. 2. Whether the statutory refund regime and time-limits under Section 54 read with Section 56 of the CGST/IGST framework displace or foreclose entitlement to interest where the tax collected was without authority of law. 3. Whether principles of restitution/unjust enrichment and constitutional prohibition against unauthorized taxation (Article 265) require payment of interest on amounts collected under invalid notifications irrespective of the timing of the refund application. ISSUE-WISE DETAILED ANALYSIS Issue 1: Entitlement to interest where delegated notifications imposing IGST on ocean freight were held void Legal framework: The IGST/CGST statutory scheme governs levy and reverse charge; delegated notifications attempted to impose IGST on ocean freight collected from importers. The constitutional principle prohibits taxation without authority. Precedent Treatment: A higher court's reasoning that a separate levy on the service component in a composite supply violates the statutory scheme is followed by the Court. Coordinate-bench rulings applying that higher-court reasoning to invalidate the notifications are treated as binding on the present dispute. Interpretation and reasoning: The Court concludes that the notifications imposing IGST on ocean freight (reverse charge) were unconstitutional insofar as they imposed a separate levy contrary to the composite supply concept and statutory provisions. Where the tax was never lawfully payable, amounts collected were without authority of law and required refund. Ratio vs. Obiter: The holding that the delegated notifications are invalidly imposing tax on ocean freight and that refunds are required is ratio; the application of that holding to require restitution in this petition is applied as binding law. Conclusions: Because the levy was invalid, the revenue's obligation to refund the IGST follows; entitlement to interest on amounts collected without legal authority arises as a corollary to the invalidity of the levy. Issue 2: Applicability of statutory refund time-limits (Section 54/56) to deny interest where tax was collected without authority Legal framework: Sections 54 and 56 provide for refund procedure and timelines (statutory period for disbursal and interest consequences) for refunds under the GST framework; analogous provisions in earlier indirect tax law have been interpreted to require interest where statutory timelines are not met. Precedent Treatment: The Court follows the line of authority recognizing the revenue's obligation to pay interest on refunds within prescribed timelines, and notes coordinate-bench rulings that Section 54 applies only to refunds of tax paid under the Act. Interpretation and reasoning: Section 54 is held to operate where tax was paid pursuant to the statutory scheme; it does not govern amounts collected without any lawful authority. Where the collection itself is ultra vires, reliance on Section 54 to deny interest is misplaced. The statutory refund timelines cannot be used as a shield to avoid restitutionary interest when the underlying levy is void. Ratio vs. Obiter: The determination that Section 54/56 do not preclude interest in cases of amounts collected without authority constitutes a ratio for cases with similar factual and legal posture. Conclusions: The respondents cannot deny interest by pointing to compliance with the 60-day timeline under Section 54/56 when the amount refunded was never lawfully collectible; Section 54 does not displace the restitutionary/constitutional obligation to pay interest on refunds of unlawfully collected tax. Issue 3: Operation of restitution/unjust enrichment and constitutional mandate in awarding interest on refund of unlawfully collected tax Legal framework: Principles of restitution/unjust enrichment and the constitutional prohibition on taxation without authority require returning improperly collected funds and, where appropriate, interest to prevent unjust enrichment of the revenue. Precedent Treatment: The Court relies on leading authority establishing unjust enrichment/restitution as a ground for recovery, and on prior decisions treating statutory interest obligations as flowing where refunds are due; coordinate-bench authorities confirming that amounts collected without lawful basis are not 'tax' for purposes of statutory refund provisions are also applied. Interpretation and reasoning: Since the revenue retained and utilized sums collected under an invalid levy, allowing retention without payment of interest would confer a premium on unlawful enrichment. The constitutional protection against unauthorized taxation reinforces the obligation to compensate the payer (refund plus interest) from the date of deposit until repayment. Ratio vs. Obiter: The application of restitution and constitutional restraint to require interest on refunds of unlawfully collected tax is ratio in the Court's decision and is applied to the facts before it. Conclusions: Restitutionary principles and the constitutional bar on unauthorized taxation mandate payment of interest on the refunded amount of IGST paid under an invalid reverse-charge levy; denial of interest would contravene these principles and permit unjust enrichment. Additional analysis - procedural conduct and relevance of delay in filing refund application Legal framework: Procedural directions concerning filing and processing of refund applications and timelines are considered; bona fide pursuit of refund and compliance with directions to file online are relevant to equitable determination. Precedent Treatment: The Court rejects submissions that failure to file within a particular period disentitles a taxpayer from interest where the underlying levy is void, relying on the primacy of substantive illegality over procedural timelines when the tax was not lawfully collectible. Interpretation and reasoning: The petitioner's attempts to seek refund and follow administrative directions (including filing on the online portal as directed) are treated as bona fide; procedural lapses do not negate entitlement to interest where statutory/constitutional illegality of the levy is established. Ratio vs. Obiter: The conclusion that procedural timing will not defeat restitutionary interest in cases of unlawful tax collection is ratio for similar fact patterns. Conclusions: Procedural timelines and the manner of filing do not defeat the petitioner's right to interest where the tax was collected without legal authority and refund was directed; entitlement to interest remains despite any administrative delay so long as the claim is bona fide and the levy is invalid. Relief and directions Legal framework & reasoning: Combining the above conclusions, the Court orders sanction of the quantified interest sum, finding no material on record to dispute the petitioner's computation, and prescribes a short timeline for disbursal. Ratio vs. Obiter: The direction to sanction the specific interest amount is operative and binding in the present matter; the broader principles articulated on applicability of statutory refund provisions, restitution, and constitutional constraints form the governing ratio. Conclusions: Interest on the refunded amount is payable and must be sanctioned and paid within the timeframe specified by the Court; no costs awarded.