Facts of the Case:
In this case, the petitioner, an importer, had paid Integrated Goods and Services Tax (IGST) on ocean freight under reverse charge mechanism pursuant to Notifications dated 28.06.2017 issued under the IGST Act. The payment was made under protest and subject to the outcome of pending writ proceedings challenging the constitutional validity of the levy.
Subsequently, in Mohit Minerals Pvt. Ltd. v. Union of India, the levy of IGST on ocean freight was declared ultra vires and unconstitutional, a decision later affirmed by the Supreme Court. Pursuant to the said judgment, the petitioner applied for refund of the IGST paid, which was granted by the department. However, the authorities rejected the claim for interest, holding that interest under Section 56 of the CGST Act is payable only for delayed statutory refunds, and since the refund was processed within the prescribed period, no interest was payable.
Aggrieved by denial of interest, the petitioner approached the High Court.
Issue:
Whether a taxpayer is entitled to interest on refund of IGST paid under an unconstitutional levy, from the date of payment till the date of refund, even when the refund has been processed within the time limits prescribed under Section 56 of the CGST Act.
Held That:
The High Court held that the authorities were not justified in denying interest on the refunded amount of IGST paid on ocean freight. It observed that the levy of IGST under Notification No. 8/2017–Integrated Tax (Rate) and Notification No. 10/2017–Integrated Tax (Rate) dated 28.06.2017 had been declared unconstitutional and without authority of law by the Supreme Court in Union of India v. Mohit Minerals Pvt. Ltd. Consequently, the collection of tax pursuant to such notifications was void ab initio and hit by Article 265 of the Constitution of India, which mandates that no tax shall be levied or collected except by authority of law. Once the very foundation of the levy stood invalidated, the State had no legal right to retain the amount so collected, and the obligation to refund the same arose automatically and not merely under the statutory scheme of the CGST Act.
The Court further held that the refund in the present case was not a refund contemplated under Sections 54 and 56 of the CGST Act arising out of assessment proceedings or adjudication under the statute, but a case of restitution flowing from a declaration of unconstitutionality by the constitutional courts. Therefore, the reliance placed by the departmental authorities on Section 56 of the CGST Act to deny interest on the ground that the refund was processed within the statutory time limit was misconceived and legally untenable. Statutory provisions governing interest on delayed refunds cannot override the constitutional obligation of the State to make full restitution when money has been collected without authority of law.
The Court emphasized that interest is not in the nature of a penalty or largesse but is a normal accretion on capital and a measure of compensation for deprivation of the use of money. When a taxpayer is compelled to part with money pursuant to an illegal levy and is deprived of its use for a considerable period, equity and justice demand that the State must compensate such deprivation by payment of interest.
Accordingly, the Court held that the petitioner was entitled to interest on the refunded IGST amount from the date of deposit till the date of actual refund, by applying the principles of restitution and compensation. The Court directed payment of interest at the rate of 6% per annum. The impugned appellate order and the original order rejecting the claim for interest were set aside, and the respondents were directed to compute and pay the interest within the stipulated time.
Case Name: M/s PARADEEP PHOSPHATES LIMITED v. ADDITIONAL COMMISSIONER & ORS. dated 22.01.2026
