High Court Directs Payment of Interest on Refund of IGST Collected on Ocean Freight

The petitioner, which is a company involved in the import and trading of palm oil, had paid Integrated GST on ocean freight under reverse charge from July 2017 to April 2019 in the sum of Rs. 2,62,37,558/-. The levy arose under Notification No. 8/2017 and Notification No. 10/2017, both dated 20 June 2017. Challenging these notifications as ultra vires Section 5(3) of the IGST Act, the petitioner had approached the High Court earlier, which by order dated 10 August 2022 declared them unconstitutional to the extent they sought to levy IGST on ocean freight, relying on the Supreme Court’s decision in Union of India v. Mohit Minerals Pvt.Ltd.. The Court had further directed that a refund be granted with applicable interest.

Aggrieved, the petitioner filed refund applications on the GST portal seeking a return of Rs. 2,62,37,558/- along with interest of the refund of tax was allowed for Rs. 71,31,225/-, but the interest claim was disallowed on the basis that the refund had been processed within sixty days as per the provisions of Sections 54 and 56 of the CGST Act. The petitioner argued that the provisions in question pertain only to lawful tax collections, and since the amount collected in this case was already declared unconstitutional, it should attract interest right from the date of deposit. He cited Article 265 and the rulings in the cases of Ranbaxy Laboratories Ltd. and Mafatlal Industries Ltd. to support his claim, invoking the doctrine of restitution.

Main Issue: Whether interest on refund of IGST paid under an unconstitutional levy on ocean freight could be denied by invoking Sections 54 and 56 of the CGST Act, or was payable as restitution for amounts retained without authority of law.

Court’s Decision: The High Court held that the notifications levying IGST on ocean freight stood declared unconstitutional and that amounts collected thereunder were without authority of law. Sections 54 and 56 of the CGST Act apply only to refunds of lawfully collected tax and cannot govern a refund arising from an invalid levy. Retention of the petitioner’s money after the levy was struck down violated Article 265 and the principles of restitution and unjust enrichment as recognized in Mafatlal Industries Ltd. and Ranbaxy Laboratories Ltd.

The Bench rejected the Department’s plea that interest was not payable since the refund was processed within sixty days, observing that the amount was never a valid tax to begin with. Therefore, the rule was made absolute, and the respondents were directed to sanction and pay interest of Rs. 71,31,225/- to the petitioner forthwith and in any event within four weeks from the date of uploading of the judgment. 

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