Interest on Refund of Amounts Deposited under Protest during Customs Investigation

This is a neutral professional article. The judgment is analysed in the context of its factual background, issues framed, and conclusions reached by the Court.

2026 (7) TMI 1565 - CESTAT KOLKATA

1. At a Glance

The central question is the rate of interest payable where an amount deposited during a customs investigation is refunded after the demand for which it was retained does not survive. In 2026 (7) TMI 1565 - CESTAT KOLKATA, the Tribunal held that the assessee was entitled to interest at 12% per annum on the refundable investigation deposit, rather than the 6% rate granted by the departmental authorities.

The decision turns on a material distinction. A statutory pre-deposit made for maintaining an appeal under Section 129E is governed by the specific interest mechanism in Section 129EE and the notified rate fixed under that provision. An amount paid during investigation, although it may later be appropriated towards a confirmed demand, does not automatically become a Section 129E pre-deposit merely because a portion of the overall deposit was treated as such for appellate purposes.

Within the territorial jurisdiction concerned, the Tribunal followed the jurisdictional High Court ruling reproduced in the order. That ruling held that, in the absence of a statutory provision fixing interest on refund of an investigation deposit, interest at 12% per annum was payable. The Tribunal therefore set aside the grant of interest at 6% on the investigation deposit.

• Interest at 12% was allowed on the refundable amount deposited during investigation.
• The 6% notification issued for Section 129EE was treated as confined to the statutory field occupied by that provision.
• The outcome rests on the classification and legal character of the payment, not merely on its subsequent appropriation as duty.
• The decision recognises that jurisdictional High Court precedent binds the Tribunal on the relevant question of law.

2. Background & Context

The assessee imported goods and cleared them after payment of assessed customs duty. During a subsequent investigation into the classification of those goods, the department required a further amount to be deposited pending investigation. The assessee made that payment under protest.

The adjudicating authority thereafter confirmed the differential duty demand and appropriated the investigation deposit towards that demand. In appellate proceedings, the demand confirmation was set aside, and the departmental challenge did not succeed. The assessee consequently sought return of the amount deposited during investigation, together with interest for the period of retention.

A part of the amount was treated as the mandatory 7.5% appellate deposit. The dispute in the appeal was confined to the balance that had been deposited during investigation. Refund was granted, but interest was allowed only at 6% per annum. The assessee contended that the governing rate for the investigation deposit was 12% per annum.

This distinction is significant because customs law contains separate provisions concerning: refund of duty or interest; interest on delayed refund under the refund provision; mandatory deposits for appeals; and interest on refund of the statutory appellate deposit. Treating all refundable amounts as falling under one interest regime can obscure these distinct statutory fields.

3. Key Issues / Provisions

Nature of an investigation deposit

The first issue was whether the amount paid during investigation retained the character of a deposit, notwithstanding its later appropriation upon adjudication. The Tribunal proceeded on the basis that, once the demand was set aside, retention of the investigation deposit lacked legal authority. Its refund was therefore consequential to the failure of the demand.

Refund claim framework under Section 27

Section 27 of the Customs Act, 1962 permits a person claiming refund of duty or interest paid or borne by that person to apply to the Assistant Commissioner or Deputy Commissioner within one year from payment. The material proviso states that "the limitation of one year shall not apply where any duty or interest has been paid under protest."

Section 27(1B)(b) further provides that where duty becomes refundable as a consequence of an appellate or judicial order, the one-year period is computed "from the date of such judgment, decree, order or direction." Section 27(2) requires the refunding authority to determine whether the duty and interest paid are refundable, subject to the statutory rules concerning payment to the claimant or credit to the Fund.

Interest on delayed statutory refund under Section 27A

Section 27A of the Customs Act, 1962 applies where "any duty ordered to be refunded under sub-section (2) of section 27" is not refunded within three months from receipt of the Section 27(1) application. It provides for interest at a rate not below 5% and not exceeding 30% per annum, as fixed by the Central Government, from the day after expiry of the three-month period until refund.

The Explanation to Section 27A deems an appellate or court order of refund against an order under Section 27(2) to be an order passed under Section 27(2) for this purpose. The provision is thus linked textually to a refund ordered under Section 27(2).

Mandatory appellate deposit and Section 129EE

Section 129E of the Customs Act, 1962 makes payment of a prescribed percentage of disputed duty or penalty a condition for entertainment of specified appeals. In the relevant categories, the provision requires a deposit of 7.5% or 10%, subject to a maximum of rupees ten crores.

Section 129EE of the Customs Act, 1962 specifically concerns "Interest on delayed refund of amount deposited under section 129E." It directs payment of interest where an amount deposited under Section 129E is refundable pursuant to an appellate order. Interest runs "from the date of payment of the amount till, the date of refund of such amount," at a rate not below 5% and not exceeding 36% per annum as notified by the Central Government.

Notification No. 70/2014-Customs (N.T.) fixes the Section 129EE rate at 6% per annum. Its operative language is expressly limited to fixing the rate "for the purpose of the said Section."

4. Detailed Analysis

The Tribunal's classification-based approach

The Tribunal did not treat the entire refundable amount as a statutory appellate deposit. It recorded that the mandatory 7.5% portion had been regarded as a pre-deposit, whereas the remaining amount had been deposited during investigation. The latter amount was the subject of the interest-rate dispute.

The distinction determined the result. Section 129EE speaks in precise terms of an "amount deposited by the appellant under section 129E." The investigation deposit did not derive its character from Section 129E. Its payment preceded, and was independent of, the statutory requirement for entertaining an appeal. The notification issued under Section 129EE could consequently not be applied merely because an investigation deposit was later appropriated against a demand or because part of the payment was treated as an appellate pre-deposit.

Effect of the jurisdictional High Court ruling

The Tribunal followed the jurisdictional High Court ruling extracted in the order. The ruling rejected the proposition that the 6% notification under Section 129EE supplied the interest rate for all delayed refunds. It drew a temporal and statutory distinction between an express statutory provision governing delayed refund of pre-deposit and a deposit made during investigation for which no statutory rate had been prescribed.

The Tribunal held that a jurisdictional High Court's interpretation of the relevant legal question is binding on the Tribunal within that jurisdiction. It therefore concluded that the assessee was eligible for 12% interest on the investigation deposit and that the departmental order granting 6% interest was legally unsustainable.

Restitution and absence of authority to retain the amount

The reasoning is consistent with the settled restitutionary principle that an amount retained by the revenue without legal authority must be restored once the foundation for its retention fails. Interest in this setting operates as compensation for the deprivation of use of money and prevents the revenue from benefiting from prolonged retention of an amount that could not ultimately be appropriated.

The character of the payment remains important. A payment described as a deposit under protest during investigation is analytically distinct from a voluntary discharge of an admitted tax liability. Where the underlying demand is annulled, the appropriation of the deposit does not alter the consequence that the amount must be returned.

Supporting and contrasting judicial treatment

2016 (9) TMI 1405 - ALLAHABAD HIGH COURT treated amounts deposited during investigation and subsequently appropriated as pre-deposits made under protest rather than payments of leviable duty. It held that retention after the demand failed was without authority and awarded 12% interest, computed from three months after the appellate order. The authority supports the proposition that investigation deposits may attract restitutionary interest when their retention becomes unlawful.

2007 (11) TMI 318 - HIGH COURT OF JUDICATURE AT BOMBAY also recognised the conceptual distinction between a pre-deposit and duty. On the materials considered in that case, it held that the refundable pre-deposit carried interest at 12% per annum. The decision illustrates the judicial approach that a deposit made to secure or pursue a challenge cannot be equated uncritically with final duty liability.

2002 (3) TMI 69 - HIGH COURT OF JUDICATURE AT KOLKATA addressed refund of a pre-deposit where no statutory interest rate was fixed. It held that the label "deposit" does not defeat entitlement to interest where governmental retention would result in unjust enrichment. The rate fixed there was 18% per annum, demonstrating that courts have historically adopted different compensatory rates in the absence of a governing statutory rate.

The position differs where the payment is unquestionably an amount deposited under Section 129E. In 2023 (12) TMI 1340 - DELHI HIGH COURT, the court applied Section 129EE and held that interest on refund of a statutory pre-deposit must be paid at the notified rate of 6%, not at 12%. That decision does not conflict with the present result: it confirms that the notified rate controls within the statutory domain of Section 129EE. The Tribunal's conclusion rests on the finding that the disputed balance was an investigation deposit outside that domain.

Scope of the ruling

The ruling should not be read as a universal declaration that every refundable amount attracts interest at 12%. The applicable interest basis depends on the legal source and character of the payment, the statutory provision invoked, the period concerned, and binding precedent within the relevant territorial jurisdiction. The present conclusion is specifically directed to delayed refund of the investigation deposit after the demand and its appropriation ceased to survive.

5. Practical Implications

• Taxpayers should preserve contemporaneous evidence showing that an investigation-stage payment was made under protest and was not an admission of duty liability.
• Refund applications should identify separately any amount that constitutes a Section 129E appellate deposit and any balance deposited during investigation. A composite description of all payments as "pre-deposit" may invite an incorrect application of Section 129EE.
• Where Section 27 is invoked, the claim should address the one-year limitation, the exception for payments under protest, and the computation rule applicable where refund follows an appellate or judicial order.
• Interest claims should identify the asserted statutory or restitutionary basis, the proposed commencement date, and the specific period of retention. The rate cannot be assumed solely from the existence of the 6% notification under Section 129EE.
• Departmental authorities and litigants must apply the jurisdictional High Court's view on the classification and interest consequences of investigation deposits, unless displaced by a binding superior authority.

6. Key Takeaways

• An investigation deposit refundable after the failure of the demand may be governed by principles distinct from the statutory regime for appellate pre-deposits.
• Section 129EE and the 6% rate under Notification No. 70/2014-Customs (N.T.) apply to amounts deposited under Section 129E; their application depends on satisfying that statutory description.
• Section 27 and Section 27A provide the statutory refund framework for duty and interest, including the three-month trigger in Section 27A, but their textual scope must be assessed against the nature of the refundable amount.
• Where there is no statutory rate expressly governing an investigation deposit, the jurisdictional judicial position on compensatory interest assumes central importance.
• On the facts determined in 2026 (7) TMI 1565 - CESTAT KOLKATA, the proper rate for delayed refund of the investigation deposit was 12% per annum, and not 6% per annum.

Full Text:

2026 (7) TMI 1565 - CESTAT KOLKATA