The issue pertaining to levy of interest and penalty on Integrated Goods and Services Tax (“IGST”) payable on imported goods has been in dispute since a long time. This is so because demands for interest and penalty on such IGST is made in terms of Section 28AA and 112/114A/114AA of the Customs Act. However, there is an ambiguity as to whether IGST is a levy of Goods and Services Tax (“GST”) under the Integrated Goods and Services Tax Act, 2017 (“IGST Act”) or whether it would fall under the Customs Tariff Act, 1975 (“Tariff Act”).
The ambiguity also persisted due to Circular No. 16/2023-Cus. dated June 7, 2023 providing the procedure for payment of IGST and compensation cess, along with interest.
The Hon’ble Bombay in Mahindra and Mahindra v. Union of India & Ors., 2022 (10) TMI 2012, in the context of additional duties of customs levied under the pre-GST regime, i.e., Countervailing Duty (“CVD”) and Special Additional Duty (“SAD”), held that no interest and penalties would be imposed and levied for delayed payment of such duties since Section 3(4) and Section 3(6) of the Tariff Act did not specifically borrow provisions from the Customs Act, 1962 (“Customs Act”) pertaining to interest and penalties. It was held that mere mention of the term “including” is not sufficient as interest and penalties ought to be specifically mentioned considering the same are substantial levy. This decision has also been affirmed by Hon’ble Supreme Court and has attained finality.
The Mahindra & Mahindra decision has been followed by a plethora of decisions including CESTAT, Ahmedabad in the case of Chiripal Poly Films Ltd., which even pertained to post-GST regime, and was concerned with the levy of interest and imposition of penalty on IGST. The CESTAT (in Chiripal Poly Films) applied the same interpretation to hold that Section 3(12) of the Tariff Act does not borrow provisions from Customs Act pertaining to interest and penalties.
The decisions passed in the case of Mahindra & Mahindra and Chiripal Poly Films Ltd. pertained to a period prior to the amendment brought in Section 3(12) of the Tariff Act vide Finance (No. 2) Act, 2024 dated August 16, 2024. Section 3(12) of the Tariff Act as it stood prior to, and post amendment is extracted below for ease of reference-
“Section 3(12) of CTA: The provisions of the Customs Act, 1962 (52 of 1962) and the rules and regulations made thereunder, including those relating to drawbacks, refunds and exemption from duties shall, so far as may be, apply to the duty or tax or cess, as the case may be, chargeable under this section as they apply in relation to the duties leviable under that Act.”
“Section 3(12) of CTA: The provisions of the Customs Act, 1962 (52 of 1962) and all rules and regulations made thereunder, including but not limited to those relating to the date for determination of rate of duty, assessment, non-levy, short-levy, refunds, exemptions, interest, recovery, appeals, offences and penalties shall, as far as may be, apply to the duty or tax or cess, as the case may be, chargeable under this section as they apply in relation to duties leviable under that Act or all rules or regulations made thereunder, as the case may be.”
Therefore, the amendment specifically introduced provisions pertaining to interest, offences and penalties. The CESTAT, Ahmedabad in Sakar Industries, post-amendment also, followed the case of Chiripal Poly Films to hold that interest and penalties would not apply in the case of IGST.
On the other hand, there are contrary decisions which held that interest on IGST ought to be levied, including the decision passed by the Principal bench of CESTAT, Delhi in Mayur Uniquoters Ltd. and JLC Electromet Pvt. Ltd. The period of dispute therein pertained to post-GST regime. It was held that Section 20 of the IGST Act borrows several provisions of the CGST Act, including Section 50, applicable to IGST. Section 50 of the CGST Act provides for interest on delayed payment of tax. The CESTAT found no legal basis to exempt delayed IGST payments on imports from interest and thereby distinguished the decision of Mahindra & Mahindra.
Pursuant to the contrary decisions, CESTAT, Ahmedabad in the case of Meghmani Organics, referred the issue to Larger Bench pertaining to whether interest, fine and penalty can be levied for non / delayed payment of IGST. The Larger Bench is yet to be constituted and accordingly, the decision is awaited.
The decision of Mayur Uniquoters and JLC Electromet Pvt. Ltd. has been challenged by way of appeal by the assessee therein. The said appeal, has been admitted by Hon’ble Rajasthan High Court and is pending for final disposal.
The identical issue has come up before Hon’ble Bombay High Court in AR Sulphonates, who has held that interest on IGST and consequential penalty cannot be levied in absence of statutory provisions in the Tariff Act relying upon the decision of Mahindra & Mahindra.
The Hon’ble High Court also held that the amendment to Section 3(12) of the Tariff Act is prospective in nature and would apply only with effect from August 16, 2024 and that Circular No. 16/2023-Cus. dated June 7, 2023, to the extent it seeks to recover interest along with IGST, being inconsistent, is bad in law.
It is, however, important to note that Hon’ble High Court did not go into the question as to whether IGST is duty of customs or leviable under GST law.
While there are matters pending before Rajasthan High Court and Larger Bench of CESTAT, the decision passed in AR Sulphonates is a High Court decision on the issue pertaining to interest on IGST. Unless it is reversed by Hon’ble Supreme Court, it holds the field and is binding on the department. Further since the Bombay High Court did not get a chance to delve into the issue pertaining to whether IGST is levy of customs or GST, the rulings of the Rajasthan High Court and the Larger Bench of CESTAT are awaited on this aspect.
The assessee can rely upon the decision to contend that the matters are pending before various forums including CESTAT, and to say that no interest and penalty is imposable on IGST leviable on imported goods for the period prior to amendment.
The assessee can explore the possibility of seeking refund of the interest already paid on such IGST. However, it is to be examined as to whether a refund can be directly applied for, or a modification of assessment will be required as held in the case of ITC Ltd.
Whether Section 27 of the Customs Act would be applicable for such refund claim is a grey area especially when interest was collected by department without the authority of law.
About the authors: Ratan Jain is an Executive Partner, Anjali Hirawat is a Partner and Shruti Khanna is a Senior Associate at Lakshmikumaran and Sridharan attorneys.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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