The Delhi High Court has held that an assessee whose service tax demand was ultimately set aside cannot claim interest at a rate higher than the statutory 6% per annum on the refund of the amount deposited during investigation, in the absence of any challenge to the statutory provisions governing such interest. 

The bench of Justice Anil Kshetrapal and Justice Shail Jain ruled that once the legislature has prescribed both the entitlement and the rate of interest under the law, courts exercising appellate jurisdiction cannot enhance the rate merely on equitable considerations. 

The appellant/assessee, a registered service tax assessee, had deposited ₹30,54,449 under protest on March 28, 2012 during the course of a departmental investigation into its service tax liability. Subsequently, the department issued three show cause notices demanding an aggregate service tax of ₹1.19 crore, along with interest and penalties. The adjudicating authority confirmed the demand through an Order-in-Original dated May 31, 2016. 

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The assessee challenged the adjudication before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). On June 13, 2022, the Tribunal allowed the appeal and set aside the entire service tax demand along with the consequential interest and penalties. 

Following the favourable Tribunal order, the assessee sought refund of the amount deposited during investigation. The refund was sanctioned, and the department also granted interest at the rate of 6% per annum through an Order-in-Original dated May 24, 2024. 

However, dissatisfied with the quantum of interest, the assessee contended that it was entitled to 12% per annum, arguing that the department had retained its money for nearly twelve years without authority after the demand was eventually quashed. The Commissioner (Appeals) rejected the claim, and the Tribunal affirmed that decision, leading to the present appeal before the Delhi High Court. 

The appellant argued that the amount deposited during investigation was merely a revenue deposit and not payment of tax. Once the service tax demand had been set aside, the department had no authority to retain the money, thereby entitling the assessee to adequate compensatory interest for the prolonged deprivation of its funds.

It further submitted that the authorities had mechanically applied Section 35FF of the Central Excise Act without considering equitable principles of restitution. Relying on several judicial precedents, including Sandvik Asia Ltd. v. Commissioner of Income Tax, the appellant argued that constitutional courts have, in appropriate cases, awarded compensatory interest exceeding the statutory rate where revenue authorities unjustifiably retained taxpayers’ money for prolonged periods. 

The Revenue argued that the amount deposited during investigation was correctly treated as a pre-deposit for the purposes of Section 35FF of the Central Excise Act. Consequently, interest was strictly governed by that provision and Notification No. 24/2014-C.E. (N.T.) dated August 12, 2014, which prescribes interest at 6% per annum.

The department contended that once Parliament had laid down a complete statutory mechanism governing payment of interest, no court could award a higher rate unless the validity of the statutory provision or the notification itself was challenged. 

The High Court agreed with the Revenue and upheld the Tribunal’s reasoning.

The Court observed that there was no dispute regarding the refund of the principal amount or the grant of interest under Section 35FF. The only controversy was whether the statutory rate of 6% could be increased to 12%.

According to the Court, once Parliament has enacted a comprehensive statutory framework governing payment of interest and has authorised the Central Government to notify the applicable rate, the entitlement of an assessee must necessarily be determined strictly in accordance with that statutory scheme. Since the appellant had neither challenged Section 35FFnor the notification prescribing 6% interest, there was no legal basis for seeking a higher rate. 

The Bench reiterated the settled principle that where a statute itself creates the right to interest and prescribes the applicable rate, such entitlement ordinarily cannot extend beyond the statute.

It further clarified that an appeal under Section 35G of the Central Excise Act is confined to examining substantial questions of law. Once it was found that the Tribunal had correctly applied Section 35FF and the relevant notification, no substantial question of law survived for consideration. 

The Court also rejected the appellant’s reliance on the Supreme Court’s decision in Sandvik Asia Ltd., observing that the judgment had subsequently been explained by the Supreme Court in Commissioner of Income Tax v. Gujarat Fluoro Chemicals Ltd. The Supreme Court had clarified that Sandvik Asia does not lay down any general principle entitling taxpayers to interest beyond the statutory provisions and that an assessee is entitled only to such interest as is specifically provided under the governing statute. 

The High Court also held that the other judgments cited by the appellant turned on their own facts and statutory frameworks and therefore could not justify enhancement of the statutory interest rate in the present proceedings. 

The Delhi High Court held that no substantial question of law arose for consideration and affirmed that the assessee was entitled only to 6% interest under Section 35FF of the Central Excise Act read with Notification No. 24/2014-C.E. (N.T.). The Court observed that any independent claim based on a different legal remedy was outside the scope of the present statutory appeal. 

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