Interest Payable on Unconstitutional Ocean Freight GST Refund as Retention Violates Article 265.

Interest Payable on Unconstitutional Ocean Freight GST Refund as Retention Violates Article 265.

Issue

Whether the government is liable to pay interest on the refund of a tax (IGST on ocean freight) that was collected without the authority of law, and whether the standard procedural limits of the GST Act (like the 60-day refund window) apply to such a refund.

Facts

• The levy of IGST on ocean freight under reverse charge (vide Notifications 8/2017 and 10/2017) was previously held to be unconstitutional, as it lacked legislative authority.
• The assessee sought a refund of this unconstitutionally collected IGST, along with interest.
• The department refunded the principal amount but refused to pay interest.
• The department argued that the refund was subject to the normal procedural provisions of the CGST Act (like the 60-day processing window), which would mean no interest was due.
• The assessee contended that the refund was not a statutory one, but a constitutional one, as the tax was collected in violation of Article 265.

Decision

• The Bombay High Court ruled decisively in favour of the assessee.
• It held that since the IGST was collected without legal sanction, its refund is not governed by the procedural provisions of the CGST Act.
• The court found that the government’s retention of the unlawfully collected tax violated Article 265 (no tax shall be levied or collected except by authority of law).
• Denying interest on this amount would allow the government to be unjustly enriched, which is contrary to constitutional principles.
• The refund was held to be a form of “restitution,” and the department was ordered to pay the quantified interest of ₹71.31 lakh immediately.

Key Takeaways

• Constitutional vs. Statutory Refund: A clear distinction exists. A refund of a tax collected without authority of law (unconstitutional) is not a statutory refund under Section 54/56.
• Article 265 is Paramount: The retention of an unconstitutional tax is a violation of Article 265. The government has no right to retain such funds.
• Interest as Restitution: In such cases, interest is not a statutory benefit but a constitutional remedy to prevent the unjust enrichment of the State.
• Statutory Timelines Do Not Apply: The department’s defense of a 60-day interest-free window is invalid, as those rules apply only to refunds of taxes that were lawfully collected in the first place.