Adjustment of interest is permissible on tax liability against the claim for IGST refund

The Hon'ble Supreme Court in the case of M/s Grapes Digital Private Limited v. Principal Commissioner, CGST, Delhi & Ors. [Special Leave Petition (Civil) Diary No (s.) 35601/2024 dated September 06, 2024] granted leave and admitted SLP against Delhi High Court Judgment wherein it was held that the department can adjust interest on the tax amount paid by the Assessee which had had already been sanctioned for refund.

Facts:

M/s Grapes Digital Private Limited ("the Petitioner") was engaged in the business of providing services of digital media management, online advertisement, management of advertisement project, sale and procurement of space and slots for advertisement on social media, planning and management of advertisement campaign and other business support services.

During the period the period of July, 2017 till March, 2018, the Petitioner exported its services under the Letter of Undertaking ("LUT") without payment of the Integrated Goods and Service Tax. In order to avoid the blocking of its funds by payment of IGST on Reverse Charge Mechanism ("RCM"), the Petitioner refrained from depositing such tax, which it was liable to be paid under the Integrated Goods and Services Tax Act, 2017 ("the IGST Act").

The Petitioner claimed that in the month of August, 2018 it deposited IGST for its input supplies on RCM basis and export of services by utilizing the Input Tax Credit ("ITC") that was accumulated on account of payment of IGST on input supplies. Subsequently, it filed for IGST refund.

The refund claim was accepted however, it was held that the interest due on delayed payment of IGST on RCM, on inputs as well as on the interest liability on delayed payment of IGST, was required to be adjusted under Section 73 of the Central Goods and Services Tax Act, 2017 ("the CGST Act") read with Rule 50 of the Central Goods and Service Tax Rules, 2017 ("the CGST Rules").

The Petitioner filed a refund application to obtain a refund of the IGST paid on exports, which was accepted by the Adjudicating Authority. However, the Adjudicating Authority adjusted the interest due on the delayed payment of IGST on imports and exports against the refund claim. Hence, aggrieved by the said order, the Petitioner filed the writ petition before, the Hon'ble Delhi High Court.

The Hon'ble Delhi High Court inW.P. (C) No. 2918/2021 ("the Impugned Order") held as under:

• Noted that, the interest on delayed payment of tax being a statutory levy cannot be avoided on the ground that the Petitioner at a subsequent stage is entitled to a refund of the ITC. The assumption that since the transaction of imports and exports is revenue neutral, the same would absolve the Petitioner from payment of GST or any interest thereon is contrary to law.
• Opined that, it was not open for the Petitioner to plead that since the supply imported was required to be exported, the Petitioner was absolved from the statutory levy under the IGST Act. Refund of unutilized ITC or GST is available only in terms of the relevant statutory provisions. A claim for refund of tax collected in accordance with law is a statutory right and is circumscribed by the statutory provisions.
• Relied on, the case of Commissioner Income Tax,Madras &Anr v. V. MR P. Firm Mua & Ors (1965) 1 SCR 815 and held that equity is out of place in tax law Cape Brandy Syndicate v. Inland Revenue Commissioner 1921 (1) KB 64 held that in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.
• Noted that, the Petitioner had exported supplies without payment of IGST at the material time, it was entitled to claim refund of unutilized ITC in respect of input supplies. However, the Petitioner could not claim such refund at the material time because it had not deposited IGST on RCM on inputs. Therefore, unutilized ITC in respect of the outwards supplies was not available to the Petitioner for discharging its liability to pay IGST on exports on due dates when the said lability fell due. Hence, interest liability on delayed payment of IGST is the statutory consequence of the Petitioner's claim that the exports made by it were on payment of IGST.
• Held that, if the refund of IGST on exports was rejected on the ground that assessee could not amend the invoices, it would follow that its claim would be required to be considered for the ITC utilised to pay such IGST. Further, the GST and interest are 'statutory exactions' and cannot be averted merely because the merely because the same would be available as a consequent refund.

High Court directed payment of refund with applicable interest and rejected the challenge to adjustment of interest.

Hence, aggrieved by the Impugned Order, the Petitioner filed Special Leave Application before the Hon'ble Supreme Court.

Issue:

Whether adjustment of interest permissible against the claim for an IGST refund?

Held:

The Hon'ble Supreme Court in Special Leave Petition (Civil) Diary No (s.) 35601/2024 granted leave and admitted SLP against the Impugned Order.

Our Comments:

Relevant Provisions:

Section 75 of the CGST Act discusses the "General provisions relating to determination of tax". Section 75(12) of the CGST Act states that anything contained in Section 73 of the CGST Act or Section 74 of the CGST Act , where any amount of self-assessed tax in accordance with a return furnished under Section 39 of the CGST Act remains unpaid, either wholly or partly, or any amount of interest payable on such tax remains unpaid, the same shall be recovered under the provisions of Section 79 of the CGST Act.

Section 79 discusses 'Recovery of Tax'. Section 71(1)(a) states that where any amount is payable by a person to the Government under any of the provisions of the CGST Act or the CGST Rules made thereunder is not paid, the proper officer shall proceed to recover the amount by deducting or may require any other specified officer to deduct the amount so payable from any money owing to such person which may be under the control of the proper officer or such other specified officer.

The key takeaways from the Supra judgment are as follows:

1. Interest amount can be adjusted against GST Refund: The Delhi High Court permitted the adjustment of interest payable by the Petitioner on account of the delay in payment of tax liability against its refund claim.
2. Adjustment of interest against admissible refund claim does not warrant issuance of a demand notice: The Delhi High Court stated that the Petitioner who is liable to pay interest should be given an opportunity to contest such levy in consonance with the principles of natural justice. However, it was explicitly clarified that no specific demand notice is required for recovery of such interest, which is an 'automatic accrual' as a consequence of delayed payment.
3. Interest payment cannot be avoided merely on account of tax neutrality: The Delhi High Court asserted that GST and interest are 'statutory exactions' and cannot be averted merely because the same would be available as a consequent refund.

Further, it has been established through various judgments by the Hon'ble Supreme Court that in cases where the outcome is revenue-neutral, neither tax nor interest is payable:

One was in the CESTAT Mumbai in the case Jet Airways (I) Ltd Vs Commissioner of Service Tax [2016 (44) S.T.R. 465 (Tri. - Mumbai)] affirmed by the Supreme Court in 2017 (7) G.S.T.L. J35 (S.C.): The case was with respect to demand of service tax under RCM on online information and database access or retrieval services. It was observed that service tax payable under RCM, being available as credit for discharging tax on its output service, the entire issue is revenue neutral and the demand, interest and penalty is not sustainable.