Interest is payable on Erroneous Refund - Madras High Court

This is to update you about an important decision by Madras High Court (HC) in the case of Razack Trading Company, W.P.(MD) No.15302 of 2022. The Court held that interest is liable to be paid on erroneous GST-ITC refund where ITC was wrongly availed.

Facts

• The Petitioner wrongly availed ITC on Basic Customs Duty (‘BCD’) paid during pre-GST period. The same ITC was transitioned by filing TRAN-1 in the GST period. The Petitioner then claimed refund for the same, which was also sanctioned by the Department.
• Subsequently, the Department directed the petitioner to pay erroneous refund along with interest and penalty.
• The Petitioner argued that there is no interest levying provision for erroneous refund under GST laws.

HC Decision

• The Hon’ble HC interpreted the expression ‘along with interest payable thereon under section 50’ used under Section 73 and 74.
• Based on above expression in Section 73 & 74, the Court concluded that restitution (compensation) is provided under GST laws for erroneous refund.

GABA & CO. | Comments

• With greatest respect to the Hon’ble High Court, we humbly disagree with the decision from GST law standpoint. It is well settled, judicially, that interest cannot be levied without any specific imposition under any tax law.
• Further, the expression ‘along with interest payable thereon under section 50’ does not denote levy of interest. In strict legal sense, the expression is merely a provision ‘by reference’. It is only Section 50 which deal with levy of interest and there is no levy on erroneous refund. Thus, in our humble view, interest cannot be levied on erroneous refund under GST law.
• Having said above, one interesting angle which the Court may have analysed but not reflected in the order is ‘Restitution under the common law’. While submitting the refund, sometimes the officer asks for undertakings and bonds that if refund is found to be erroneous, it will be paid back along with interest. In such cases, interest can be decided based on such bond or undertaking, under the common law.
• Now a days, officers are asking for affidavits that in case of erroneous refund, the amount will be paid back along with "rate of interest specified under Section 50 of CGST Act". This is being done so as to claim Restitution later.

Hope you find the above update useful. Please feel free to drop us a message for any clarification, query or feedback.

Disclaimer:

The views expressed in the update are strictly personal, based on our understanding of the underlying law. We are not responsible for any injury, loss or cost arising to any person who refers this update and acts or refrains from any act accordingly. We would suggest that a detailed legal advice must be sought before relying on this update.