Inequity in the provisions relating to interest

In taxing statutes, in case of delayed payment of taxes/ duties, provisions have been made for recovery of interest in addition to the tax due as also in addition to the penalty wherever imposable.  In the case of Pratibha Processors v. Union of India reported in 1996 (88) E.L.T. 12 (S.C.), the Hon’ble Supreme Court has differentiated between “tax”, “interest” and “penalty”. Tax is the amount payable as a result of the charging provision & is compulsory exaction of money by a public authority for public purposes, & its payment is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable.  In the case of Mahalakshmi Sugar Mills Co. vs. CIT – [1980] 123 ITR 429 (SC), it has been held that where payment of interest is automatic for failure to make statutory payment by the due date, it is not penalty for infringement of law but is compensation to Government for delayed payment, and is allowable as deduction from the total income for the purpose of calculation of income tax.

2. Due to lack of interest provisions in the Central Excise Act, 1944, a huge amount of central excise revenue was locked up in litigation as the assessees continued to enjoy the duty not deposited by them till the matter was decided by the Courts/ Tribunal. In those days, theassesseescould recover the amount of tax by saving interest in as much as in those days money doubled every five years. Therefore, by litigating the matter for more than 5 years without making any deposit, the amount of tax was saved in the form of interest.In order to curb this menace, interest provisions were first introduced in 1995 in the Central Excise Act, 1944 by insertion of Section 11AA w.e.f. 29.05.1995, whereby simple interest @ 20% per annum was recoverable in addition to the delayed payment of central excise duty.  However, this provision of interest was made applicable to amount of duty that was adjudicated by the Central Excise Officers under Section 11A and it was payable after three months of the date of adjudication. Identical provisions were also made in the Customs Act, 1962.

3. Again it was felt that the measures introduced were not sufficient in as much as interest was payable on the amount of duty determined after three months of the adjudication. In most of the cases, revenue belonged to longer periods and due to delay in adjudication proceedings, interest for the period prior to adjudication was lost and the very purpose of introduction of provisions of interest could not be achieved.   Therefore, in order to plug this loophole, Section 11AB was introduced, whereby w.e.f. 09.10.1996, interest @ 20% was made applicable on the delayed payment of duty and it was payable from the date from which theduty was otherwise payable.   However, there are certain taxes/ duties where interest provisions have not been borrowed, meaning thereby that interest is not payable on the demand as also in the case of refund, e.g.Additional duty of excise on tea (Pabhojan Tea Estate vs. U.O.I- 2014 (307) ELT 448 (Gau.). The case of J.K.Synthetics Ltd. vs. CTO – 1994 (4) SCC 276 can also be referred to in this regard.

4. With regard to refund of the Central Excise duty, provisions were made to pay interest on delayed payment of refunds. To start with, provisions were introduced with effect from 29.05.1995 to grant 15% per annum interest on delayed refunds of Central Excise duty.  However, such interest is payable only after three months of making the application for the refund and not from the date when duty was actually deposited.  In other words, if duty was deposited in March 2002, and refund claim was filed in March 2014, interest on the refund amount is payable for the period after three months from June 2014 and not from March 2002.  Thus interest on refund amount for the period from April 2002 to March 2014 is not payable. 

5. From time to time, rates of interest have been revised. Here is the table of rates of interest relating to Central Excise duty and refunds thereto:

6. From the above table, one can clearly notice the disparity between the rates of interest on duty demand vis-à-vis rate of interest on refund of duty. While the difference in rate of interest in case of recovery of duty as well as that of refund with effect from 29.05.1995 is understandable, the increase in rate of interest with effect from 01.03.2000 to 24% on duty demand has not seen proportionate increase in the interest rate on refund. It continued to be at 15%.   To make things worst, it was drastically reduced to 9% w.e.f. 11.05.2001 while the rate of interest on duty demand continued @ 24%. 

7. Presently, while the market/ bank rate of interest is pegged at around 13% approx., Department is recovering @ 18%. On the other hand, in the case of refunds, it is at a discriminatory meager rate of 6%.   Although there is no equity in taxation, the disparity is unfair and unjust. Government is thus irrationally enriching itself due tothis bias.  It would be incorrect to argue that interest is penal in nature while demanding the duty and compensatory in nature while granting refunds.  Penalty provisions are separately contained in the statues and are invariably invoked.  

8. Further injustice can be viewed from another angle also. While interest on duty demand is payable from the very date from which the duty was otherwise payable, interest on refund of duty is not payable from the date of actual payment of duty, but only after three months of filing the refund claim.  In the example cited earlier, while Department is able to recover the interest from April 2002 itself in case of delay in the duty deposited in 2014,  in the case of refund, interest is payable after three months of filing the refund claim i.e. from June 2014 even of the duty was deposited in 2002. 

9. Amendment has been made in the Budget 2004 with regard to interest on refund on pre-deposit made under Section 35F, in the event an order is passed infavor of the litigant assesse. As per the amendment, Section 35FF has been inserted whereby interest @ 6% per annum is payable vide Notification No. 24/2014-C.E. (N.T.), dated 12-8-2014 from the date of payment of such pre-deposit and not from the date after three months of filing the refund claim.  However, no such amendment has been made with regard to refund in the cases other than those of pre-deposit.  

10. Provisions relating to interest are based on simple interest and not on compound interest. In other words, there is no interest on interest.  Since the rates of interest on demand of duty are exorbitant vis-à-vis bank/ market rate, assessees wherever they feel on the basis of legal opinion that their case is weak, it is better to deposit the disputed amount of tax/ duty in order to stop the running of interest meter.   In the event, assessee loses a case, if the amount of disputed tax/ duty is deposited at the initial stage, interest cost is minimal.   On the contrary, in the event of winning the case, interest is lost on the amount deposited in as much as 6% interest is payable on the amount of refund which runs only after three months of filing the refund application.  Instances of delayed refunds are not uncommon and a number of times, the matters relating to refund faced prolonged litigation.  In most of the cases, the amount of tax/ duty is refunded, interest payable on the refund is withheld.  Practice of waiver obtained from the assessees of not claiming interest on the refund amount have also been noticed, which is without the sanctity of law.  Payment of interest is mandatory by statutory provisions both ways i.e. in the case of demand even if the provisions of interest are not invoked in the show cause notice, order-in-original (CTT vs. KANHAI RAM THEKEDAR- 2005 (185) E.L.T. 3 (S.C.) as also in the case of refund not dependent on claim by the party, authority is statutorily obliged to pay the interest (Siddhant Chemicals vs. U.O.I.- 2014 (307) ELT 44 (All.); Aroma Chemicals vs. U.O.I- 2014 (298) ELT 41 (All.); Hero Motors Ltd. vs. CCE — 2014 (307) ELT 138 (Tri.-Del.).   Although there is no provision of interest on interest, at times, Courts have come to the rescue of litigant assessees.  In the cases of Sandvik Asia Ltd. vs. CIT- 2006 (196) E.L.T. 257 (S.C.); Sirpur Paper Mills Ltd. vs. JCIT – [2014] 368 ITR 598 (AP), issues relating to delayed payment of refunds as also of interest have been examined and interest has also been awarded on delayed payment of interest as compensation. 

11. It is high time for the business forums to take up the issue of disparity in interest provisions in case of delayed refunds.