The Punjab and Haryana High Court has held that the GST department cannot retain interest paid on delayed realisation of export proceeds when the corresponding tax has subsequently been refunded. 

The Bench of Chief Justice Ashwani Kumar Mishra and Justice Rajesh Gaur quashed the restriction in paragraph 4.6 of Circular No. 197/09/2023-GST to the extent that it denied refund of interest in these circumstances.

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The dispute concerned professional services exported by the firm to overseas clients without payment of Integrated Goods and Services Tax (IGST), under a Letter of Undertaking (LUT).

Under Rule 96A(1)(b) of the Central Goods and Services Tax Rules, 2017, as applicable to the case, payment for the exported services was required to be realised in convertible foreign exchange within one year from the invoice date. Failure to realise the payment within that period required the exporter to deposit tax along with interest under Section 50 of the CGST Act.

The firm did not receive the export consideration within the stipulated period and accordingly deposited both tax and interest. When the foreign remittances were subsequently received, it sought a refund of both amounts.

While the tax refund was granted, the interest refund was rejected. The appellate authority upheld the rejection, prompting the firm to approach the High Court.

The central question was whether the department could retain interest solely on the strength of paragraph 4.6 of the CBIC circular dated July 17, 2023, after refunding the underlying tax.

The Court examined Section 54(1) of the CGST Act, which expressly permits claims for refund of tax, interest paid on that tax, and any other amount paid, subject to the statutory requirements.

It observed that Rule 96A requires payment of tax and interest when export proceeds are not realised within the prescribed period. However, the Rule does not stipulate that interest must be retained when the proceeds are subsequently received and the tax is refunded.

The prohibition against refund of interest appeared in the circular alone.

The Bench held that such a restriction must have support in the Act or the Rules. Relying on the Supreme Court’s Constitution Bench decision in Commissioner of Central Excise, Bolpur v. Ratan Melting & Wire Industries, it reiterated that departmental circulars cannot override or alter statutory provisions.

The department argued that the interest liability had crystallised when the exporter failed to realise the proceeds within the prescribed period. It maintained that subsequent receipt of payment could not erase the earlier default.

The Court rejected that argument in the absolute form advanced by the department. It reasoned that once the tax had been refunded, retention of the associated interest required an independent statutory basis. No such provision had been identified beyond the circular.

The Bench also recognised the compensatory character of interest and observed that it ordinarily follows the principal amount on which it is levied.

The department’s reliance on Rule 96B, which concerns recovery of refunds relating to exports of goods where sale proceeds remain unrealised, was also rejected. The Court held that the provision operated in a different field. Its silence on interest refunds could not be imported into Rule 96A to create a restriction absent from that Rule or narrow the scope of Section 54(1).

The Court declared paragraph 4.6 of the circular bad in law and quashed it to the extent that it prohibited refund of interest under Rule 96A(1) where the corresponding tax had subsequently been refunded upon realisation of export proceeds.

It also set aside the appellate order insofar as it rejected the firm’s interest refund claim.

The authorities were directed to refund the interest corresponding to the tax already refunded under two orders issued in April 2022, within eight weeks of receiving a certified copy of the judgment.

If the refund is not made within that period, the amount payable will carry interest under Section 56 of the CGST Act from the expiry of the eight-week period until actual payment. The petition was allowed without an order as to costs. 

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