The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata, has held that the Revenue cannot rely on the absence of a specific statutory provision to deny interest on money deposited by an assessee during an investigation when the underlying excise duty demand is subsequently set aside.
The Bench of R. Muralidhar (Judicial Member) and K. Anpazhakan (Technical Member) directed the department to pay interest at 12% per annum on ₹50 lakh deposited by Bengal Hammer Industries Private Limited during 1996-97. The interest must be calculated from the respective dates of deposit until the date on which the principal amount was refunded.
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The appellant/assessee was registered under the Central Excise Act, 1944 and engaged in manufacturing activities.
During the financial year 1996-97, the Directorate General of Anti-Evasion, Central Excise, Calcutta Zonal Unit, initiated an investigation against the company over the alleged wrongful availment of MODVAT credit.
During the investigation and before any show cause notice was issued, the company deposited ₹50 lakh in five instalments..
The department subsequently issued a show cause notice on May 2, 2000, alleging that the company had wrongly availed MODVAT credit of ₹78.91 lakh between April 1, 1995 and January 28, 1996.
The adjudicating authority confirmed the demand through an order dated January 28, 2004. Following an appeal by the company, the Tribunal remanded the matter for fresh adjudication.
The adjudicating authority once again confirmed the demand on January 4, 2010, prompting the company to approach the Tribunal for a second time.
The CESTAT set aside the demand and allowed the company’s appeals with consequential relief.
In that order, the Tribunal found that the adjudicating authority had failed to comply with the directions contained in the earlier remand order. It also noted that the proceedings against one of the input suppliers had already been set aside and that the decision had been sustained by the Calcutta High Court.
The Tribunal further found that the company had submitted its MODVAT records and duty-paying documents along with its monthly returns. The departmental officers had also defaced the duty-paying documents while assessing the returns.
Accordingly, there was no justification for invoking the extended limitation period. Since the show cause notice issued in May 2000 covered the period from April 1995 to January 1996, the demand was held to be time-barred and unsustainable.
The Revenue did not challenge the Tribunal’s January 2020 decision before a higher judicial forum.
Following the favourable order, Bengal Hammer Industries applied for a refund on February 25, 2020.
The Assistant Commissioner sanctioned the refund of ₹50 lakh on June 17, 2020, but did not grant any interest for the period during which the department had retained the money.
The company challenged the denial of interest before the Commissioner (Appeals). However, the appellate authority held that Section 11BB of the Central Excise Act permits interest only when the refund is delayed beyond three months from the date of receipt of the refund application.
Since the refund was granted within three months of the company’s application, the Commissioner (Appeals) concluded that no interest was payable.
Bengal Hammer Industries consequently approached the CESTAT.
The company submitted that the principal refund was no longer in dispute and that the only questions before the Tribunal were the date from which interest should be calculated and the applicable rate.
It claimed interest at 12% per annum from the respective dates of deposit until the date of actual refund.
The company argued that the ₹50 lakh paid during the investigation was not an amount of excise duty but a revenue deposit held by the department pending adjudication. Consequently, Sections 11B and 11BB, which deal with the refund of duty and interest on delayed refunds, were not applicable.
It relied on CBIC Circular No. 984/08/2014-CX dated September 16, 2014, which clarifies that a pre-deposit made for filing an appeal is not payment of duty and that its refund need not be processed as a refund of duty under Section 11B of the Central Excise Act.
The company further pointed out that Section 35FF, governing interest on the refund of pre-deposits, did not exist when the amounts were deposited in 1996-97.
In the absence of a specific statutory provision, it relied on judicial decisions granting 12% interest on amounts deposited during investigations and wrongfully retained by the government.
The department contended that the company filed its refund application on February 25, 2020 and that the amount was refunded within the prescribed three-month period.
It further argued that the money could not be treated as a statutory pre-deposit under Section 35F so as to permit the company to claim interest under Section 35FF.
The department accordingly sought dismissal of the appeal.
Rejecting the department’s contentions, the Tribunal noted that the company deposited the entire ₹50 lakh between July 1996 and February 1997, whereas the show cause notice was issued only on May 2, 2000.
The MODVAT dispute was ultimately decided in the company’s favour through the Tribunal’s January 2020 order. Since the Revenue did not challenge that order and subsequently refunded the principal amount, the company’s entitlement to the disputed MODVAT credit attained finality.
The Bench observed that this meant the company had been correct from the beginning in taking the MODVAT credit. Correspondingly, the Revenue had no legal claim over any part of the ₹50 lakh deposited during the investigation.
The Tribunal strongly disapproved of the department’s position that it could retain and use the money without paying interest merely because the company formally applied for a refund only in February 2020.
Once the excise duty demand was set aside, the Tribunal said, the money ceased to have the character of excise duty and could only be regarded as an amount deposited by the assessee.
The CESTAT also rejected the argument based on the company having applied for the refund through Form-R.
The Bench observed that the company deposited the amount during 1996-97 at the department’s insistence and continued to contest its liability until the dispute was finally resolved in January 2020.
The payment was, therefore, not voluntary.
The mere fact that the company followed the prescribed refund procedure could not convert the investigation-stage deposit into payment of excise duty. Nor could the refund form be used as a ground to deny interest.
The Tribunal consequently held that the Commissioner (Appeals) had wrongly applied Section 11BB to the case.
The Bench acknowledged that no statutory provision specifically governing interest on investigation-stage deposits existed when the company made the payments in 1996-97.
However, it held that the absence of such a provision could not permit the Revenue to retain an assessee’s money without compensation, particularly after the department’s demand had been set aside.
The Tribunal relied on judicial precedents recognising that interest represents compensation for the period during which a person is deprived of the use of money that was wrongfully retained by the government.
It referred, among other decisions, to the Supreme Court rulings in Sandvik Asia Ltd. v. Commissioner of Income Tax and Ranbaxy Laboratories Ltd. v. Union of India, along with decisions granting interest on amounts deposited during investigation or adjudication.
The Bench also followed the Calcutta High Court’s decision in Rajendra Kumar Jain v. Commissioner of Customs, under which interest at 12% was held payable on delayed refunds of investigation-stage deposits for periods not governed by a statutory interest provision.
It further relied on its recent ruling in Berger Paints India Ltd. v. Commissioner of Customs, which applied the Calcutta High Court’s decision and granted interest at 12% on an amount deposited during an investigation.
The CESTAT held that amounts deposited during an investigation lose the character of excise duty once the duty demand is held to be unsustainable, particularly when the Revenue does not challenge that decision.
The department had no lawful claim over the ₹50 lakh and was required to refund it together with interest. It could not use the absence of a statutory provision as a justification for denying interest.
The company was accordingly held entitled to interest at 12% per annum from the respective dates of the five deposits until June 17, 2020, when the principal amount was refunded.
As the money had remained blocked for decades and the dispute concerning interest had continued for almost 30 years from the earliest deposit, the Tribunal directed the department to calculate and pay the interest within eight weeks.
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