Applicability of Rate of Interest where interest rates have changed before tax/duty payment

Applicability of Rate of Interest where interest rates changed before tax/duty payment - Gray Area for which Clarification required

1. In taxation, taxpayers have to pay tax/duty on or before prescribed due date and if tax/duty is being paid after due date, taxpayers have to pay interest at the rates prescribed under erstwhile notification issued under subject Act.

2. Here, the question is at what rate of interest should be calculated where interest rates are changed between due date and date of payment? The Law and instructions are silent for this aspect and ambiguity is created.

3. In case of litigation in taxation, SCNs are decided by Departmental Adjudicating Authorities and if ambiguity still remains, than the issue is decided by the Tribunal, High Courts or the Supreme Court. Higher Judicial Forums always study the issue deeply in light of relevant Act/Rule/Notification/Circular/Trade Notice/Public Notice/Standing orders etc. by applying popular meaning, common sense, logic, tradition and interpreting the provisions by using various internal/external elements of basic interpretation of Law. The judgment of Higher Forum has binding impact on its lower formations falling under its jurisdictions.

4. While working in service tax and audit, I remember that interest on tax/duties were being calculated at rates prescribed for the period during which tax/duty was not paid. For example, for service tax default from 10.09.2004 to 31.03.2011, interest was being calculated upto 31.03.2011 at 13%, from 01.04.2011 to 30.09.2014 18%(15% if Turnover below 60 lakh) i.e. not considering interest prescribed on date of default but at different rates prescribed during different period during which tax/duty was not paid. However, Higher Appellate Forums/Court have taken different stand and created confusion.

5. It was noticed that for the default in duty payment in month June and July, 2002 (Where interest @ 15%, Notification No. 12/2003-C.E.) but payment made in December, 2003, January, 2004, February, 2004 and March, 2004 (Where interest was enhanced to 24% by Notification NO. 12/2003-C.E. since 01.03.2003), in judgment of COMMISSIONER OF CUS. & C. EX., HYDERABAD Vs. PRIYADARSHINI CEMENTS LTD [2013 (292) E.L.T. 30(A.P.)] the High Court of Andhra Pradesh, without analyzing or discussing the reason/grounds in own order, upheld the order of Commissioner (Appeals) and the CESTAT that “the rate of interest prevailing as on the date of default will be taken and that the new rate introduced by the amendment to Rule issued vide the Notification No. 12/2003 dated 1-3-2003 and with effect from 1-4-2003 will be applicable to the defaults which occurred after 1-4-2003. We concur with the concurrent findings on this aspect”.

5.1 In relevant judgment by Tribunal (Bang.) [2008 (224) E.L.T. 429(Trib.- Bang.)] it was held that “Even when the money is borrowed, at the time of borrowing the money, there is a particular interest rate the same is normally followed and the interest rate is not arbitrarily changed even in respect of the post office, bank fixed deposits etc. At the time of making the deposit, a particular rate of interest is followed and the same rate is continued till the deposit matures. The general prevailing interest rate may varying, but the new interest rate will not be applicable to the deposits made earlier. The same principle should applied here.

5.2 Relevant Portion of the said tribunal judgments are reproduced below.

2.

......

- The rate of Interest payable will be the rate prevailing during the relevant period, i.e. during the period of default in payment of duty, and not the rate prevailing at the time of payment of Interest.

- Subsequent amendment in respect of change in rate of interest chargeable to defaulted amount will not alter this position and will only be effective prospectively.

- ....

- Without prejudice to anything mentioned above, this is a plain case of applicability of rate of interest during the period i.e. between date on which duty was due and date on which duty was actually paid.

3. .....

Even when the money is borrowed, at the time of borrowing the money, there is a particular interest rate the same is normally followed and the interest rate is not arbitrarily changed even in respect of the post office, bank fixed deposits etc. At the time of making the deposit, a particular rate of interest is followed and the same rate is continued till the deposit matures. The general prevailing interest rate may varying, but the new interest rate will not be applicable to the deposits made earlier. The same principle should applied here. ....

5.3 It appears that the Hon'ble High Court simply concurred with finding of the CESTAT, without own independent analysis of the case, and the said finding became the judgment of High Court and binding on all lower formations under its jurisdiction.

6. Whether above referred decision is correct or otherwise, following aspects are required to be considered.

(i) What is the interest?

Where money due to someone is not repaid to him on due date, interest is being calculated at determined rate prevailed during the period of non-payment and considering the period of non-payment of the capital amount. In some method, not paid interest is also added to the said original capital amount.

Borrower use lender's money in various commercial activities to solve own financial liquidity problem, earn profit like invest in business, capital assets, to clear own Debts taken on high interest, to lend at high rate and many more. Simultaneously, lender is taking risk in lending own saved money, abstained to use own money for investment, profit or other facilitation. Thus interest is in nature of compensation/reward to lender or person to whom money is due but not repaid.

(ii) Whether Non/Delayed payment of tax/duty is at par with fixed deposit made with or loan taken from Financial Institution?

When money is being deposit in Bank there are two methods as described below.

(a) Saving Account: Wherein there will be no any contract for the quantum of money and the period of deposition. Money can be deposited and withdrawn on any day without any restriction by the depositor who may get interest at rate determined by financial institution on amount kept deposited for the relevant period. If rate is changed, interest will be calculated according to changed rate considering rate prevailing on period of deposition, irrespective of date of initial deposition.

(b) Fixed Deposit: Contract for quantum of money, period of deposition and rate of interest are predetermined by the financial institution. Generally for quantum of money, longer period of deposition higher interest is given. Rates and period can't be changed during whole predetermined period of deposition. In case of early withdrawal, lesser interest rate, applicable for the period of actual deposition upto withdrawal, is considered and further some penal amount also be deducted.

(iii) Whether interest rate has relevancy with (a) date of taking and/or depositing money or (b) period during which money was not paid?

Where taxpayer doesn't pay tax/duty to the Government on due date, it is default in payment. There is no terms and condition that taxpayer will not pay tax/duty for some fix period and will pay interest considering the quantum of tax/duty and fixed period of non-payment. Instead, taxpayer is free to pay the tax/duty at any time after due date. So, has nothing similar like any fixed deposit but very is similar to saving deposit.

In above referred Tribunal judgment it is held that “the rate of Interest payable will be the rate prevailing during the relevant period, i.e. during the period of default in payment of duty, and not the rate prevailing at the time of payment of Interest”. The underlined phrase is very important. In case of non-payment, default is not occurred on one specific day but it has recurring effect and such default occurs daily until the amount is paid. Means, each day of non-payment, it is new default for that particular day and rate of interest applicable on that day should be applied. Hence, “period during which amount not paid” has crucial significance than the date of initial default or date of payment.

6.1 From the discussion above, it is not understood how duty default is compared with fixed deposit where taxpayer not keeping tax/duty for specific predetermined period and at specific rate under any contract, but he is required to pay tax/duty immediately and if not paid on due date, he is free to pay tax/duty at any time with Government Exchequer.

7. In other contrary judgment in case of Jeevan Diesels & Electricals Ltd. Vs. Commissioner of Central Excise, Pondichery [2016 (68) taxmann.com 325 Chennai - CESTAT], it is held that Adjudicating Authority had rightly computed the interest amount from the due date till the date of payment in respect of demand for the month of January, 2011, by working out interest at 13% up to March 31, 2011 and thereafter, at increased rate of interest of 18%;

8. It is dilemma as to which judgment should be followed out of two contrary judgment?. i.e. (i) High Court of Andhra Pradesh in year 2013 or (2) Tribunal(Chennai) in 2016? For Andhra Pradesh, judgment of High Court High Court of Andhra Pradesh is binding and for jurisdiction falling under CESTAT (Chennai) judgment of CESTAT is binding. But for rest of India which judgment should be followed?

A judgment of non-jurisdictional Appellate Forum/Court is not binding but where it contains good analysis, such analysis is followed by other formations also.

9. This dilemma over applicable rate of interest, where interest rates changed before tax/duty payment, may cause corruption. Where rate of interest is changed during the period of initial default and date of payment, either corrupt officer or tax professional may show interest calculation at higher rate of interest and after settlement, finally taxpayer may be asked to pay at lesser rate. Hence, it is deadly required that this aspect may be clarified at an early date to put an end to dilemma and to curb corruption.

NOTE: This is my personal views/understanding which is shared for bonafide purpose and in no way against any department or Appellate Forum/Court.