INTEREST ON DELAYED REFUNDS – JUDICIAL INTERPRETATION

[Dr. Sanjiv Agarwal]

If any duty/tax ordered to be refunded under section 11B(2) of Central Excise Act, 1944, to any applicant is not refunded within three months from the date of receipt of application, interest at the applicable rate shall be paid, subject to conditions laid down under section 11BB of the Central Excise Act, 1944.

The following judicial pronouncements on payment of interest on delayed refunds provide direction on the issues of eligibility or otherwise on payment of interest - 

In CCE, Pune-III v. Ballarpur Industries Ltd. 2008 (7) TMI 94 - HIGH COURT BOMBAY , it was held that interest payable u/s 11BB of Central Excise Act, 1944 on expiry of three months from the date of receipt of application and that explanation appearing below section 11BB does not have any effect or connection with date from which interest becomes payable. The explanation is to introduce a deeming fiction which is relevant for sub-section (2) of section 11BB.

In Swaraj Mazda Ltd v. Union of India 2008 (7) TMI 420 - HIGH COURT OF JUDICATURE AT BOMBAY . it has been held that unless finding is recorded that application which was filed by assessee petitioner u/s 11B of Central Excise Act 1944 cannot be termed as application made u/s 11B. The liability to pay interest other expiry period of three months from date of receipt of such application cannot be denied by the department.

In Ranbaxy Laboratories Ltd. v Union of India 2011 (10) TMI 16 - Supreme Court of India, it was held that liability of revenue to pay interest under section 11 BB commences from the date of expiry of three months from the date of receipt of application for refund under section 11B(1) and not from expiry of said period from the date on which order of refund is made.

The language of Section 11BB of the Act is clear and admits of no ambiguity, inasmuch as the revenue becomes liable to pay interest at the prescribed rate on refunds on the expiry of three months from the date of receipt of application under section 11B(1) of the Act and such liability continues till the refund of duty. According to deeming fiction of explanation in section 11BB that where refund order is made by appellate authority, such order shall be deemed to be order u/s 11B(2), it does not postpone the date from which interest becomes payable u/s 11BB. The court held that “Section11B of the Act comes into play only an order for refund has been made under Section11B of the Act. Section 11BB of the Act lays down that in case only duty paid is found refundable and if the duty is not refunded within a period of three months from the date of receipt of the application to be submitted under sub-section (1) of Section11B of the Act, then the applicant shall be paid interest at such rate, as may be fixed by Central Government, on expiry of a period of three months from the date of receipt of the application. The Explanation appearing below proviso to section 11BB introduces a deeming fiction that where the order for refund of duty is not made by the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise but by an Appellate Authority or the Court, then for the purpose of this Section the order made by such higher Appellate Authority or by the Court shall be deemed to be an order made under sub-section (2) of Section 11B of the Act. It is clear that the Explanation has nothing to do with the postponement of the date from which interest becomes payable under Section 11BB of the Act. Manifestly, interest under Section 11BB of the Act becomes payable, if on an expiry of a period of three months from the date of receipt of the application for refund, the amount claimed is still not refunded. Thus, the only interpretation of Section 11BB that can be arrived at is that interest under the said Section becomes payable on the expiry of a period of three months from the date of receipt of the application under sub-section (1) of Section 11B of the Act and that the said Explanation does not have any bearing or connection with the date from which interest under Section 11BB of the Act becomes payable.” [Also see Union of India v. UP Twiga Fiber Glass Ltd 2009 (8) TMI 966 - SUPREME COURT OF INDIA ; J.K. Cement Works v. Asstt. CCE & C 2004 (2) TMI 78 - HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR.

In Pace Marketing Specialties v. CCE  2011 (8) TMI 796 - ALLAHABAD HIGH COURT, it was held that the bank guarantee furnished is not to be treated as duty deposit in advance, but as security. After determination of duty, encashment of bank guarantee will amount to duty paid as bank guarantee looses its character of security. In absence of notification for rate of interest, the appellant will be entitled to interest @12% p.a., after three months from the date of receipt of application.

In Pioma Industries v. Union of India 2011 (6) TMI 643 - GUJARAT HIGH COURT, it was held that once the respective parties have construed the said order in a particular manner and have proceeded accordingly, merely because the petitioner is the beneficiary of the said order, the revenue cannot be heard to say that the order covers only the amount deposited and thus interest @ 12% p.a is payable to the petitioner on the whole amount deposited. Interest on interest is not payable as the issue of interest was debatable and cannot be taken as any lapse or inaction on part of Department.

In Kwality Ice Cream Company v. Union of India 2012 (1) TMI 88 - Delhi High Court , where demand for interest was raised after three years of payment of demand of duty, it was held to be time barred holding that the period of limitation prescribed for claim of principal amount should also apply to the claim for interest thereon. [Also see CCE v. TVS Whirlpool Ltd.1999 (10) TMI 701 - SUPREME COURT OF INDIA].