Supreme Court Reverses Direct Refund of Unconstitutional Ocean Freight Tax

1. The Core Dispute: Unjust Enrichment vs. Class Restitution

The petitioner, a power distribution company, paid IGST and Service Tax on ocean freight for natural gas imports on a CIF (Cost, Insurance, and Freight) basis. Following the landmark Mohit Minerals judgment, which declared the levy unconstitutional, the petitioner sought a refund of approximately ₹19.29 Crores.

The Conflict: The petitioner admitted that the tax incidence had already been passed on to consumers through electricity tariffs approved by the Gujarat Electricity Regulatory Commission (GERC).
High Court’s Novel Approach: The High Court allowed the refund but ordered the company to keep it in a separate account to be adjusted in future tariffs for consumers, bypassing the statutory “Consumer Welfare Fund” route.

2. Legal Analysis: The Rigidity of Section 54 and Section 57

The Supreme Court set aside the High Court’s order, emphasizing that courts cannot create “alien modalities” for refunds that contradict the express language of the statute.

I. The Doctrine of Unjust Enrichment

Under Section 54(8)(e), a refund is paid directly to the applicant only if they prove they have not passed on the tax burden to any other person.

The Ruling: Since the company admittedly recovered the tax from its electricity consumers, paying the refund back to the company would result in “Unjust Enrichment”—where the company gets paid twice (once by the consumers and once by the government).

II. The Role of the Consumer Welfare Fund

Section 57 mandates that any amount found refundable, which does not meet the exceptions of Section 54(8), must be credited to the Consumer Welfare Fund.

Statutory Command: The Court held that the High Court was not justified in inventing a procedure (future tariff adjustments) not contemplated by the Act. The law requires the money to go to the Fund to be used for the welfare of consumers at large, not just the specific class of consumers of one company.

3. Final Verdict: Refund Diverted to the State

The Supreme Court ruled that the “sanctity of the statutory scheme” must be maintained over judicial discretion in tax matters.

Verdict: The High Court’s judgment was set aside.
Directive: The company was ordered to transfer ₹19,28,86,868 back to the authorities within three months to be credited to the Consumer Welfare Fund.
Impact: This establishes that even when a tax is declared unconstitutional, the refund is still governed by the statutory principle of unjust enrichment.

Key Takeaways for Corporate Taxpayers

The “Passed-On” Barrier: If you have included the GST amount in your invoice or sale price, your chances of receiving a cash refund are near zero; the amount will go to the Consumer Welfare Fund.
Accounting Treatment: To claim a refund successfully, you must demonstrate that the tax amount was treated as a “Receivable” in your books and not charged as an “Expense” or passed to the Profit & Loss account.
Interest on Unconstitutional Levy: While the principal may go to the Welfare Fund, some High Courts (like Orissa and Bombay) have allowed interest to be paid to the taxpayer as compensation for the deprivation of capital, though this remains a contested legal area.

SUPREME COURT OF INDIA

Union of India

Torrent Power Ltd.^*

Sanjay Kumar and K. Vinod Chandran, JJ.

SLP Appeal (C) No. 13084 OF 2025

FEBRUARY 10, 2026

S. Dwarakanath, A.S.G., Gurmeet Singh Makker, AOR, Sarthak Karol, Digvijay Dam, Ms. Divya Jyoti Singh, Raghav Sharma, Rajat Vishnaw, S. Vijay Adithya, Mudit Bansal, Prabhakar Yadav and Abhyudey Kabra, Advs. for the Petitioner. V. Lakshmikumaran, Ms. Nitum Jain, Ms. Neha Choudhary, Ms. Medha Sinha, Swastik Mishra, Advs. and Ms. Charanya Lakshmikumaran, AOR for the Respondent.

ORDER

1. Leave granted.

2. The Union of India and its Assistant Commissioner of Central Goods and Services Tax at Ahmedabad are in appeal, aggrieved by the judgment dated 23.10.2024 passed by the High Court of Gujarat/Torrent Power Ltd. v. Union of India (Gujarat)/[2025] 95 GSTL 437 (Gujarat), Ahmedabad, in relation to the refund of Rs.19,28,86,868/- (Rupees nineteen crores twenty eight lakhs eighty six thousand eight hundred sixty eight only).

3. Torrent Power Ltd., the respondent-company, is a generator and distributor of power in the State of Gujarat. It is not in dispute that the respondent-company collected from its consumers the amounts payable towards Integrated Goods and Services Tax, pursuant to Notification No. 10/2017-Integrated Tax (Rate), dated 28.06.2017 issued by the Revenue. The said notification was, however, held to be unconstitutional by the High Court, vide the judgment Mohit Minerals Pvt. Ltd. v. Union of India (2020) 74 GSTR 134. The judgment was confirmed by this Court, when the appeals arising therefrom were dismissed by this Court, vide the judgment Union of India v. Mohit Minerals Private Limited. (2022) 10 SCC 700. The amounts paid under and pursuant to the invalidated notification, therefore, became refundable.

4. However, the issue presently is as to whether the High Court was justified in coming up with a procedure, not contemplated by the statute, for refund of such amounts to the class of consumers, who purportedly bore the burden of the tax collected from June, 2017, till the notification was set aside in January, 2020.

5. We may note, in this regard, that Section 54(5) of the Central Goods and Services Act, 2017¹, provides that, upon receipt of an application for refund, the officer is to satisfy himself that the whole or part of the amount claimed as refund is actually refundable and if found to be so, he is required to make an order accordingly and the amount so determined is to be credited to the Consumer Welfare Fund,referred to in Section 57 of the CGST Act. It is only by way of exception under Section 54(8) of the CGST Act that the amount found to be refundable is not credited to the aforestated fund and is paid to the applicant.

6. Section 54(8)(e) of the CGST Act provides to the effect that, notwithstanding anything contained in Sections 54(5), the refundable amount shall, instead of being credited to the fund, be paid to the applicant, if such amount is relatable to the tax and interest, if any, or any other amount paid by the applicant, if he had not passed on the incidence of such tax and interest to any other person.

7. In the present case, as it is an admitted fact that the incidence of the tax that was collected, pursuant to the Notification dated 28.06.2017, was passed on by the respondent-company to the consumers, the exception envisaged by Section 54(8) (e) did not even apply.

8. Despite the same, the High Court accepted the offer made by the respondent-company, by way of an affidavit, stating that it would open a separate designated bank account in a scheduled bank and the refunded amount of Rs. 19,28,86,868/- (Rupees nineteen crores twenty eight lakhs eighty six thousand eight hundred sixty eight only) would be transferred to the said account. The respondent-company undertook that it would not utilize the amount credited in the said account and would offer the same as revenue for the purpose of determination of tariff by the Gujarat Electricity Regulatory Commission under the Electricity Act, 2003.

9. The intention of the respondent-company was that it would go before the Commission and ask for reduction of the charges to be levied on the consumers, so as to adjust the refunded amount, thereby ensuring that the consumers, who suffered the levy of the tax imposed earlier, would be recompensed. However, we may note that this gargantuan exercise would involve more than a crore of consumers situated in two cities, Ahmedabad and Surat. Further, it would be an equally unworkable exercise for the authorities concerned to verify whether the consumers who actually bore the burden of the levy of tax were the beneficiaries of such refund.

10. Further, we must also note that this procedure, which was suggested by the respondent-company and accepted by the High Court by way of the impugned judgment/order, introduces an altogether alien modality for disbursal of a refund, which is not contemplated by Section 54 of the CGST Act and the Rules framed therein.

11. We are, therefore, of the opinion that the judgment under challenge is not sustainable on facts and in law. The same is, accordingly, set aside.

12. The respondent-company shall transfer Rs.19,28,86,868/- (Rupees nineteen crores twenty eight lakhs eighty six thousand eight hundred sixty eight only) to the authorities concerned so as to be credited to the Consumer Welfare Fund, referred to in Section 57 of the CGST Act. The respondent-company shall complete this exercise within a period of three months from today.

13. The appeal is allowed in the aforestated terms.

14. Pending application(s), if any, shall stand disposed of.