Restitution Over Red Tape: Bombay High Court Mandates Interest on Illegally Collected IGST

In a significant blow to revenue authorities, the Bombay High Court has ruled that the Union of India must pay interest on Integrated Goods and Services Tax (IGST) refunds where the underlying tax levy was found to be unconstitutional. The judgment, delivered by a bench comprising Justice M.S. Sonak and Justice Advait M. Sethna , reinforces the principle that the government cannot profit from funds collected without the authorization of law.

The Conflict: A Tax That Should Never Have Been

The petitioner, West India Continental Oils Fats Pvt. Ltd. , had paid over ₹2.62 crore in IGST on ocean freight for imported goods between 2017 and 2019 under the reverse charge mechanism. Following the Supreme Court’s landmark decision in * Union of India Vs. Mohit Minerals Pvt. Ltd. *, these specific notifications—which attempted to levy IGST on ocean freight—were struck down as unconstitutional.

While the tax department eventually refunded the principal amount, they refused to pay interest, arguing that the refund was processed within the 60-day statutory limit prescribed by Section 54 and Section 56 of the CGST Act. The petitioner, feeling the sting of having their capital locked in government coffers for years without compensation, moved the High Court.

The Arguments: Statutory Limits vs. Constitutional Mandates

Counsel for the petitioner argued that the CGST Act’s 60-day refund window only governs taxes collected within the framework of the Act. Since the tax itself was collected without any legal authority and in violation of Article 265 of the Constitution, the rigid timelines of the CGST Act were inapplicable. They invoked the doctrine of restitution, citing * Mafatlal Industries Vs. Union of India *, asserting that the government cannot benefit from "unjust enrichment."

The Revenue, conversely, maintained a rigid stance, arguing that once the refund was processed within the statutory 60-day window from the date of the online application, no interest liability could arise. They claimed the petitioner failed to apply promptly, thereby forfeiting any claim to interest.

Legal Analysis: Unconstitutional Levy Invalidates Statutory Defenses

The Court dismantled the Revenue’s reliance on the CGST Act, clarifying that a tax collected without legislative competence is not a "tax" at all, but rather money held without the authority of law.

"The IGST collected from the Petitioner by the respondents, which is now refunded, is not payable at all in law," the court observed. The bench emphasized that the right to claim interest arises from the moment the money was deposited, not just from the date of the refund application. By retaining the petitioner's funds while the notifications were under challenge, the state had effectively utilized the petitioner's capital illegally.

The judgment further settled the debate over the applicability of previous High Court rulings, noting that decisions declaring such notifications unconstitutional are judgments in rem and cannot be limited to the original litigants.

Key Observations

• "The respondents cannot shirk the statutory obligation to pay interest within the time line of 60 days as stipulated under Section 54 read with Section 56 of the CGST Act."
• "It is trite law that a judgment is an authority for what it decides. Such decisions are judgments in rem and the ratio cannot be restricted and/or limited to the Petitioner exclusively."
• "To deprive the Petitioner of interest, in the given facts, would run contrary to the well recognized legal principle of restitution."
• "The Petitioner is legally entitled to claim interest on such refunded amount of tax paid without authority of law and contrary to Article 265 of the Constitution."

Future Implications

The ruling serves as a vital precedent for businesses grappling with tax refunds stemming from struck-down legislation. By prioritizing the constitutional mandate against the unjustified retention of funds over bureaucratic timelines, the Bombay High Court has ensured that taxpayers are made whole when the state errs in its levy. The court has directed the payment of ₹71,31,225 in interest to the petitioner, to be settled within four weeks.

This decision is likely to open the door for similar claims, forcing tax authorities to handle refunds with greater care and fiscal accountability.