JULY 30, 2024

By Srinivas Mandalika IRS, Rtd. Principal Chief Commissioner

THERE have been divergent views with regard to liability towards 'Interest and penalty' on the amount of refund received, but returned in cash, on account of the restriction under the Rule 96(10) of the CGST Rules, 2017 (Rules), seeking recredit by way of an order in the form GST-PMT-03A, in terms of the Rule 86(4B) ibid.

2. As per the Rule 96(10), the persons claiming the refund of the Integrated Goods and Services Tax (IGST) paid on export of Goods or Services should not have received supplies on which the benefit under any of the notifications mentioned in the clause (a) and (b) therein (notifications specified), except so far it relates to the receipt of Capital Goods under EPCG Scheme.

2.1 Therefore, the exporters who had availed the benefit under any of the notifications specified in the Rule 96(10) should have exported goods/services under LUT/Bond (without payment of IGST), but not on payment of Tax to claim IGST refund, in view of the said restriction under the Rule 96(10). However, such exporters are eligible for claiming the refund of the ITC accumulated on account of the zero-rated supplies (physical exports and supplies to the SEZ), in terms of the Section 54(3) of the CGST Act, 2017(Act). It is pertinent to mention that there is no mechanism to identify the Shipping Bills under which such exports, attracting the Rule 96(10), were made; and hence the refund of IGST cannot be denied before the same is credited to the bank account of the exporter, by the Customs.

2.2 In case, an exporter who had availed the benefit under any of the notifications specified in the Rule 96(10), had received IGST paid on the Goods/Services exported, in terms of the Rule 96(3), such refund is treated as erroneous and the exporter is expected to pay the amount of such amount of refund, in cash, to claim an equal amount as re-credit in their Electronic Credit Ledger (ECL), in terms of the Rule 86(4B) ibid., since the said Input Tax Credit (ITC) initially utilised for zero rated supplies was otherwise admissible and it could be utilised for any other outward taxable supplies or could be claimed as refund under the Section 54(3).

3. The Rule 86(4B) of CGST Rules, 2017, extracted hereunder, provides for recredit of the ITC, where a registered person deposits the amount of erroneous refund sanctioned to him, along with Interest and Penalty, wherever applicable:

"Rule 86 (4B) Where a registered person deposits the amount of erroneous refund sanctioned to him, -

(a) under sub-section (3) of section 54 of the Act, or

(b) under sub-rule (3) of rule 96, in contravention of sub-rule (10) of rule 96,

along with interest and penalty, wherever applicable, through FORM GST DRC-03, by debiting the electronic cash ledger, on his own or on being pointed out, an amount equivalent to the amount of erroneous refund deposited by the registered person shall be re-credited to the electronic credit ledger by the proper officer by an order made in FORM GST PMT-03A."

4. Now the issue for consideration is whether the payment of 'interest and penalty', in addition to the amount equal to the refund, is mandatory in every such case where the re-credit of ITC is sought by an exporter in terms of the Rule 86(4B)?

4.1 It is pertinent to mention that the intention of the legislature is best understood based on the language employed in any provision/statute, as was held time and again by several Courts, including the Apex Court in the case of UOI Vs Dharmendra Textile Processors- 2008-TIOL-192-SC-CX-LB; GOI Vs Indian Tobacco Association-2005-TIOL-109-SC-CUS; State Vs Parmeshwaran Subramani - 2009-TIOL-105-SC-SERVICE etc.

4.2 It is pertinent to mention that, that part of the Rule 86(4B) which follows the clause (a) and (b) therein, is common for the erroneous refunds falling 'under sub-section (3) of Section 54 of the Act' as well as the erroneous refund of IGST sanctioned 'under sub-rule (3) of rule 96, in contravention of sub-rule (10) of Rule 96'.

4.3 As per the unambiguous provisions of the Rule 86(4B) of CGSTR, the liability towards 'Interest and Penalty' would arise only in cases "wherever applicable" as categorically mentioned therein; but not uniformly in every such case of repayment of erroneous refund. In case the 'interest and penalty' are applicable in every case falling under the clause (a) and (b) of the Rule 86(4B), there is no need to use the phrase 'wherever applicable', in the said rule, at all.

4.4 In other words, the very fact that the legislature used the phrase 'wherever applicable', after the expression "…along with the interest and penalty, (with a comma after the word penalty - emphasis supplied), categorically indicates that 'interest and penalty', in addition to the liability towards the amount of the IGST refund erroneously received by the exporter, are attracted only in certain circumstances but not for all such erroneous IGST refunds covered under the said (a) and (b) of the Rule 86(4B) .

4.5 It is important to note that the phrase 'wherever applicable' is after the expression "…along with the interest and penalty,…" with a comma after the word 'penalty' (emphasis supplied), which makes it abundantly clear that the additional liabilities towards 'interest and penalty' , 'wherever applicable' is related to both 'interest and penalty', but not certainly limited to the penalty, only. Thus it can be safely inferred that the liability towards both 'interest and penalty' are not inevitable legal consequences for all types of erroneous refunds falling within the ambit of the clause (a) and (b) in the Rule 86(4B).

4.6 It is seen that the Board in its Circular No: 174/06/2022-GST dtd: 06.07.2022 had gone beyond the scope of the Rule 86(4B). At para 4.3 of the said Circular, it was mentioned as "….payment of full amount of erroneous refund along with applicable interest, and penalty, wherever applicable,…." which is patently contrary to the expression in the Rule 86(4B). In the said rule, there is no comma after the word 'interest', unlike the one mentioned in the said circular; which has substantial relevance in it's interpretation and application.

4.7 The fact that the phrase 'interest and penalty" and "wherever applicable" are separated by a comma, categorically implies that both interest and penalty are payable (in addition to the amount of erroneous refund sanctioned), only in cases where such liabilities are attracted/applicable, as per the relevant provisions of the Act. The unambiguous construction of the Rule 86(4B) certainly does not indicate that the 'interest' is mandatorily payable in all cases falling under the Rule 86(4B) and the language employed in the said rule does not mean that the 'penalty' alone is payable, wherever applicable, as already mentioned above.

4.8 If the intention of the legislature was to make the interest as a mandatory and inevitable liability in case of all types of erroneous refunds, the expression in the Rule 86(4B) would have been different like: "…. along with interest; and penalty, wherever applicable,…." as was mentioned in the said Board's Circular dtd: 06.07.2022; but, again, subject to necessary provision in the statute to levy Interest on the erroneous refund.

5. In this context, it is important to examine the scope of the Section 50 of the Act, which is the (only) parent provision to levy 'interest' under GST law; and obviously it is a self-contained and exhaustive.

5.1 The Section 50 envisages levy of interest in cases of short-/non-payment of tax and in cases where ITC was wrongly availed and utilised, by any person who is liable to pay Tax. Surprisingly, the Section 50 does not provide for levy of interest in cases where the refund was erroneously sanctioned. This appears to be on the ground that the refund would normally be sanctioned by the proper officer on due verification of documents and recovery of the refunded amount alone would suffice. It may also be possible that interest provision on erroneous refund was just lost attention of law makers, while they covered the erroneous refund among the penal provisions under the Section 122, ibid. Whatever may be the reason, it cannot be disputed that there is no provision, in the GST Law, to levy interest with regard to erroneous refund.

5.2 The Rule 88B ibid (inserted vide Nfn. No: 14/2022-CT dtd: 05.07.2022, with retrospective effect from 01.07.2017), in tune with the Section 50, also does not provide for the manner in which interest is to be calculated for cases of erroneous refund. The Rule 88B covers only three situations in which interest liability is attracted i.e. Delayed filing of returns; Tax not paid by due date for any other reason; and ITC was wrongly availed and Utilised for taxable supplies. Obviously, interest on erroneous refund is not covered in this rule as this rule cannot go beyond the scope of the Section 50 of the Act.

6. Although the provisions of the Section 73 and Section 74 of the Act, inter alia, has an express mention as "…along with the Interest payable thereon under the Section 50…", with reference to the short/not-paid Tax, ITC wrongly availed/utilised and the erroneous refund amount, it cannot be applied to the erroneous refund, since the levy of interest cannot be beyond the scope of the Section 50. It is pertinent to mention that the word 'payable' in the above phrase implies that 'interest' has to be paid, wherever the Section 50 is applicable.

6.1 Thus, the mandatory liability towards interest in terms of the phrase "…along with the Interest payable thereon under the Section 50…" in the Section 73 & Section 74 would arise to the cases where there was a short/not-paid Tax or ITC wrongly availed and utilised; but not to the erroneous refund, since such levy is not provided in the Section 50, the amount refunded erroneously.

7. It is a settled issue that unless the parent provision (in this context-the Section 50 of the CGST be Act, 2017) or a statute has an express provision for levy of Interest on a particular liability (erroneously refunded amount), it cannot be charged; and assumptions and presumptions in the application / interpretation of law, are absolutely forbidden.

7.1 The fundamental principle under the Art. 265 of the Constitution that "no tax shall be levied or collected except by authority of law", is equally applicable for levy of Interest, as was categorically held by the Apex court in the case of M/s. Delta Paper Mills Ltd. vs Collector Of Central Excise, Guntur - 1995(1) ALT 288 / 1995 (77) ELT 544 (AP).

7.2 In this regard, I also draw strength from the judgement of the Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd - 2022-TIOL-1319-HC-MUM-CUS holding that the provisions relating to interest contained in Section 28AB of the Customs Act, 1962 are not borrowed in the legislation (The Customs Tariff Act, 1975) for imposing levy of surcharge or CVD or SAD. Therefore, the Settlement Commission cannot include interest in the settlement arrived at by it on the ground that petitioner had derived financial benefits by not paying the correct rate of duty when it was due. It was held that "deriving financial benefits itself cannot be a ground to order payment of interest in the absence of any statutory provisions for payment of interest".

7.3 Therefore, the Section 50 of CGST Act, 2017 referred to in the Section 73 and Section 74 of the Act (with the expression "…along with interest payable thereon under Section 50….), although would authorise levy and collection of interest in cases of Short/non-payment and cases where ITC was wrongly availed and utilised, as envisaged in the Section 50, it certainly does not empower the levy and collection of interest for cases of erroneous refund.

8. The liability towards the 'Interest', in addition to the amount equal to the erroneous refund amount, will be attracted in cases where the Goods/Services claimed to have been exported but were not exported at all; or the ITC availed and utilised ab initio was inadmissible etc., since, in such cases the facts and circumstances tantamount to short/non-payment of Tax; and hence the interest is payable thereon under Section 50.

8.1 But, in a case where the ITC was utilised to pay IGST on the Goods/Services exported contrary to the restriction in the Rule 96(10), the benefit of recredit to the ECL by PMT-03A, as provided under Rule 86(4B), is available on payment of the amount received as refund, in cash, without any additional liability towards 'interest'. It more so because the ITC is nothing but an amount equal to the Tax already paid to the Government in the past; and had it not been utilised for payment of IGST on the export of Goods/Services, it would have been utilised for any other taxable supplies made within India or could have been claimed as refund under the Section 54(3). Therefore, the whole process with regard to the erroneous refund on account of the restriction under the Rule 96(10), is revenue neutral.

9. Further, the 'Penalty' is not imposable if the erroneous refund is deposited, in cash, prior to issue of the SCN under Section 73 or within 30 days from the date of issue of such SCN. Even if such deposit of the amount in cash, equal to the erroneously refunded IGST paid on exports was made after being pointed out by the department, there cannot be any penal liability, in cases where the provisions of the Section 73 are attracted, but not the provisions of the Section 74 ibid.

10. In the normal course any exporter would have claimed the ITC accumulated on account of the exports made under LUT/Bond, in terms of the Section 54(3), had the ITC was not utilised for payment of IGST on the Goods/ Services exported, in compliance to the restriction under the Rule 96(10). Thus, utilisation of ITC for payment of IGST on the Goods/Services exported, although was contrary to the restriction under the Rule 96(10), it does not accrue any undue benefit to the exporter. Hence, in such cases there cannot be any additional liability towards the interest. Further, penal liability is also not imposable in such cases, in the normal course, unless the intention to gain undue financial benefit or fraud to claim the refund; or inadmissibility to avail the ITC itself etc, is established.

11. Therefore, mere return of the erroneous refund sanctioned under the sub-rule(3) of the Rule 96, on account of the contravention of the restriction under the sub-rule (10) of the Rule 96, is sufficient compliance to be entitled for the recredit of an equal amount in the ECL of the exporter, in terms of the Rule 86(4B), as long as the ITC availed and utilised, ab initio, was admissible; and the goods/services were actually exported; and there is no other reason to justify the levy of interest within the scope of the Section 50. Similarly, the penalty is imposable, wherever applicable, as per the relevant penal provisions.

12. To sum up:

(i) The Section 50 does not authorise levy and collection of interest for mere erroneous refund, unless it's ramification leads to a case of short/non-payment of Tax or involves wrongly availed and utilised ITC.

(ii) The liability towards the 'interest' as well as 'penalty' under Rule 86(4B) would be in cases 'wherever applicable', depending on the facts relevant to each case, as per the relevant provisions of the Act, but not are inevitable consequential liabilities of all erroneous refunds;

(iii) In cases where legally admissible ITC was utilised for payment of IGST on export of Goods/Services, but involved contravention of the Rule 96(10), not by reason of fraud/wilful misstatement/suppression of facts; and the amount of erroneously sanctioned amount under the Rule 96(3) is returned in cash, without issuing any SCN or within 30 days from the date of SCN, under the Section73, the recredit of an equal amount of ITC in the ECL of the exporter is admissible under the Rule 86(4B), without the requirement for payment of 'interest and penalty'.

(iv) If the intention of the Legislature is to levy interest on erroneous refund per se, insertion of a suitable provision in the Section 50 of the Act, is warranted; since the levy of interest also attracts the Art. 265 of the Constitution of India.

(v) If a suitable provision is inserted in Section 50 for levy of interest on erroneous refund, the Rule 88B would also require a corresponding provision to provide the method of calculation of interest in such cases.

[The views expressed are strictly personal.]