The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata, has directed the tax department to pay 12% annual interest on ₹50 lakh deposited by the assessee during a central excise investigation nearly three decades ago. The interest must be calculated from the date of each deposit until the date the principal amount was refunded and paid within eight weeks of receipt of the order.

The Bench of R. Muralidhar (Judicial Member) and K. Anpazhagan (Technical Member) observed that once the underlying excise demand was set aside, the money deposited during investigation could no longer be treated as excise duty. The department had no legal claim to retain it without compensating the company for the period it held the funds.

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The dispute began with an investigation into the company’s availment of MODVAT credit. Between July 27, 1996, and February 1, 1997, assessee deposited ₹50 lakh in five instalments: three payments of ₹15 lakh each and two payments of ₹2.5 lakh each. These payments preceded the show-cause notice, which was issued on May 2, 2000, seeking to deny MODVAT credit of ₹78,91,213 for the period April 1, 1995, to January 28, 1996.

The demand was confirmed, challenged and remanded for fresh adjudication. After it was confirmed again, CESTAT set it aside in January 2020 and allowed the appeals with consequential relief. In that order, the tribunal found that the adjudicating authority had failed to follow its remand directions. It also held that the demand was time-barred, noting that the company had submitted credit records and invoices to the department during the relevant period.

The assessee applied for a refund on February 25, 2020. The department sanctioned the return of the ₹50 lakh principal by an order dated June 17, 2020, but granted no interest. The Commissioner (Appeals) upheld the denial, reasoning that Section 11BB of the Central Excise Act provides for interest only when a duty refund is delayed beyond three months after a refund application. Since the refund had been sanctioned within that period, the Commissioner found no interest payable.

Before CESTAT, the company argued that the central question was the character of the money paid in 1996–97. It was an investigation-stage deposit made before any show-cause notice, the company submitted, and should attract interest from the respective dates of payment rather than only after a refund application. The department maintained that the refund was timely and that the payments were not appeal pre-deposits under Section 35F that would attract interest under Section 35FF.

The tribunal rejected the department’s reliance on Section 11BB. It held that the provision governing delayed refunds of duty could not determine interest on these investigation deposits after the excise demand had been set aside. The company’s use of the prescribed refund form did not change the nature of the payments, particularly when they had been made during the investigation and contested throughout the proceedings.

CESTAT observed that the January 2020 decision setting aside the demand had not been further challenged by the department. The refund of the principal had also been granted. In those circumstances, the bench held, the department had no legal claim to the ₹50 lakh from the dates it was deposited.

The bench further rejected the suggestion that the absence of a statutory interest provision applicable to deposits made in 1996–97 allowed the department to deny interest altogether. Relying on judicial decisions concerning the return of investigation deposits, including the Calcutta High Court’s approach to the rate of interest, it fixed interest at 12% per annum.

Setting aside the Commissioner (Appeals)’ order, CESTAT directed the department to calculate interest separately from the date of each of the five deposits until the date the ₹50 lakh was refunded. The company had also sought further interest for the period after the principal refund, arguing that the interest itself had remained unpaid. The operative directions, however, grant 12% interest on the deposited amounts up to the date of their refund; they do not expressly award further interest on the unpaid interest.

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