Bombay High Court Upholds 18% Interest on Delayed VAT Payments for Extra Neutral Alcohol Sales, Rejects Ambiguity Defense

Introduction

In a significant ruling for the taxation of industrial spirits post-GST implementation, the Bombay High Court at Goa has dismissed a writ petition filed by United Spirits Ltd., upholding the levy of 18% interest on delayed Value Added Tax (VAT) payments for sales of Extra Neutral Alcohol (ENA), Rectified Spirit (RS), and High Bouquet Spirit (HBS) during the financial year 2019-20. The Division Bench, comprising Justices Bharati Dangre and Ashish S. Chavan, emphasized that interest under Section 25(4) of the Goa Value Added Tax Act, 2005 (GVAT Act), is automatically triggered upon delayed payment of tax due, regardless of perceived ambiguities in the GST regime. The court rejected the company's arguments centered on uncertainty following the 2017 GST rollout, which excluded alcoholic liquors for human consumption from its ambit. This decision reinforces the statutory obligation of registered dealers to remit collected taxes timely, even amid transitional uncertainties, and has implications for businesses dealing in non-potable alcohol variants used in beverage manufacturing.

The case, titled United Spirits Ltd. v. Additional Commissioner of State Tax-II & Ors. (Writ Petition No. 229 of 2025), was pronounced on December 23, 2025, after being reserved on September 22, 2025. It underscores the court's stance that filing returns declaring zero liability does not absolve dealers from interest if taxes are later found due upon assessment. As India's GST framework continues to evolve, particularly for alcohol-related goods, this judgment serves as a cautionary note for manufacturers navigating dual VAT-GST overlaps.

Case Background

United Spirits Ltd., a major player in the manufacture, import, and export of alcoholic liquors and beverages, is headquartered in Bengaluru and operates extensively in Goa. The company produces high-concentration spirits like ENA, RS, and HBS (94-96% alcohol content), which are raw materials for alcoholic beverages for human consumption. These products straddle a complex tax landscape: excluded from GST under Article 366(12A) of the Constitution but potentially taxable under state VAT regimes or Central Sales Tax (CST) for interstate sales.

The dispute arose in the context of the GST regime introduced on July 1, 2017, via the 101st Constitutional Amendment. Prior to GST, under the GVAT Act, "Rectified Spirit and High Bouquet Spirit" were listed under Entry No. 11 of Schedule 'C', attracting 20% VAT. A June 30, 2017, notification amended the schedules, omitting this entry, but Section 5(1)(e) of the GVAT Act imposed a residual 12.5% VAT on unspecified goods not covered by GST. Alcoholic liquors for human consumption were explicitly included in the definition of "goods" under Section 2(p) of the GVAT Act post-amendment.

For FY 2019-20 (April 1, 2019, to March 31, 2020), United Spirits filed quarterly returns under the GVAT Act, declaring zero VAT liability on HBS/ENA sales, claiming they fell outside VAT post-GST due to ambiguity over whether these spirits qualified as "alcoholic liquor for human consumption." The company paid VAT only on Indian Made Foreign Liquor (IMFL) sales at 22%. However, it collected VAT from buyers like M/s Mandovi Distilleries and Breweries, who availed Input Tax Credit (ITC), but did not remit it to the government treasury.

The Commercial Tax Officer, Ponda Ward, issued an assessment notice under Section 29 of the GVAT Act on December 12, 2022, after the company failed to attend initial hearings. Following a hearing on March 8, 2023, an assessment order dated March 15, 2023, finalized gross turnover at Rs. 1,10,95,39,183, with local sales of HBS/ENA at Rs. 13,08,02,188 taxable at 12.5%, yielding Rs. 1,63,50,274 in VAT. IMFL sales attracted Rs. 23,92,603 at 22%. The company had paid Rs. 1,87,42,877 via challans, but interest of Rs. 53,58,986 at 18% under Section 25(4) was levied for delayed payment from April 2019 to March 2020. A demand notice followed, threatening recovery as land revenue arrears.

Aggrieved, United Spirits appealed under Section 35 to the Additional Commissioner of State Tax-II, South Goa, depositing 10% (Rs. 5,35,898) as pre-deposit. The appeal, filed disputing the interest on grounds of no willful withholding due to GST-VAT uncertainty, was dismissed on January 29, 2025. The appellate authority upheld the assessment, noting the company's duty to remit collected taxes timely under Section 25 and Rule 24 of the GVAT Rules. This led to the writ petition before the Bombay High Court at Goa, challenging the interest levy as ultra vires the GVAT Act and violative of Articles 14, 265, and 300A of the Constitution.

The timeline highlights a pattern: For prior years (2017-18 and 2018-19), the company similarly declared zero liability but paid VAT after assessments without appeal. Revised returns filed on April 17, 2022, for 2019-20 were invalid as they exceeded the one-year limit under Section 24(3).

Arguments Presented

Petitioner's Contentions:
Senior Advocate Rohan Shah, assisted by Mohammad Anajwalla, Eesha Dukle, and Neha Shirodkar, argued that the interest levy was arbitrary and unconstitutional. They highlighted post-GST ambiguity on ENA/RS/HBS taxability, citing GST Council minutes from the 20th meeting (August 5, 2017) maintaining status quo pending Attorney General's opinion, and debates on whether these non-potable spirits fell under state VAT or central GST. Reliance was placed on the Allahabad High Court's ruling in Jain Distillery Pvt. Ltd. v. State of U.P. , striking down a VAT notification on ENA as lacking legislative competence post-GST (challenge pending in Supreme Court). Shah asserted that clarity emerged only via the Finance Act, 2024 (effective November 1, 2024), amending Section 9(1) of the CGST Act to exclude undenatured ENA/RS from GST.

The company contended interest under Section 25(4) is compensatory for willful withholding, not applicable here as no tax was "due" amid uncertainty. VAT was paid on September 30, 2021 (Rs. 1,63,50,273), borne from its pocket without buyer collection, and revised returns reflected abundant caution. Precedents like M/s Abhay Solvents Pvt. Ltd. v. Assistant Commissioner of Commercial Taxes (Karnataka HC) and M/s Birla Cement Works & J.K. Synthetics Ltd. v. Commercial Taxes Officer were cited to argue against interest on ambiguous liabilities. The impugned orders were challenged as violating equality (Article 14), no-tax-without-law (Article 265), and property rights (Article 300A).

Respondents' Contentions:
Advocate General Devidas J. Pangam, with Additional Government Advocate Shubham Priolkar, defended the levy, emphasizing the company's registration under GVAT imposed a duty to collect and remit taxes timely per Section 25 and Rule 24. They argued no ambiguity existed: Post-July 1, 2017, omitted Entry 11 shifted HBS/ENA to 12.5% VAT under Section 5(1)(e), as confirmed by a prior 2021 assessment order (unappealed) taxing similar sales at 12.5%. The company collected 20% VAT pre-GST and continued post-GST but declared zero liability in returns, retaining funds. Revised returns were time-barred under Section 24(3).

Pangam distinguished potable vs. non-potable alcohol per the Supreme Court's Constitution Bench in State of U.P. v. M/s Lalta Prasad Vaish & Sons (2024 SCC OnLine SC 3029), affirming states' competence over intoxicating liquors under Entry 8, List II, including ENA/RS as raw materials. The GST exclusion applied only to human-consumable liquor, leaving VAT intact. Interest was mandatory for delayed remittances, as returns without payment are invalid under Section 24(4). Ayush Mittal (for Respondent 3) supported via video conference, aligning with statutory compliance.

Legal Analysis

The court's reasoning centered on the GVAT Act's framework, rejecting ambiguity as a shield against interest. Section 3 imposes VAT on dealers exceeding thresholds, with Section 5 levying rates per schedules or 12.5% residually. Chapter V mandates returns (Section 24) and payments (Section 25), with sub-section (4)(a) imposing 18% interest if taxes due per books, assessments, or returns (including revised) remain unpaid or partially paid from the due date. Rule 24(4) deems unpaid returns invalid, triggering notices and interest.

Justices Dangre and Chavan clarified that post-2017 omission of Entry 11, HBS/ENA remained taxable at 12.5% under Section 5(1)(e), as GST exclusion preserved state VAT jurisdiction over non-GST goods. The 2017 notification and GST Council's status quo (per OM dated April 21, 2021) confirmed VAT applicability, pending central clarification. The company's prior unappealed 2021 assessment (taxing at 12.5%) and collection of VAT evidenced awareness of liability.

Precedents were pivotal. State of U.P. v. M/s Lalta Prasad Vaish distinguished industrial alcohol variants, holding Entry 8, List II, covers ENA/RS as noxious substances prone to misuse, within state purview. Parliament's Entry 52, List I power is limited, not ousting states entirely. This overrode petitioner's reliance on Jain Distillery , noting its pendency and non-binding nature. The court distinguished Abhay Solvents and Birla Cement , as they involved different factual ambiguities without collected-but-unremitted taxes.

A prior related writ (WP 2290/2021) was referenced: The same bench struck down an OM requiring undertakings for C/F forms under CST Act, affirming ENA's VAT/CST treatment per state executive decision. This underscored the company's knowledge that goods were under VAT, not GST. The court held returns declaring zero liability invalid without payment (Section 24(4)), making interest automatic. Ambiguity delayed but did not negate "due" taxes, especially since VAT was collected and ITC allowed to buyers, causing revenue loss.

The ruling aligns with GVAT's objective: Timely remittances prevent treasury shortfalls. It distinguishes ambiguity from non-liability, applying liberal interpretation to beneficial provisions but strictly to penal ones like interest.

Key Observations

The judgment extracts pivotal reasoning through direct quotes, emphasizing procedural rigor and state revenue protection:

• On statutory duty: “Once registered under the Goa VAT Act, the Appellant is duty-bound to levy and collect tax on the sale of taxable goods or commodities from buyers and remit such tax to the Government treasury within the prescribed time limit, as per the provisions of Section 25, read with Rule 24 of the Goa VAT Act, 2005, and the rules made thereunder.”

• On interest's automatic nature: “Sub-section (4) of Section 25 contemplate a contingency of imposition of interest @ 18% p.a, if there is a failure to file return and taxes due, or even if the tax is due as per the returns or revised returns, but not paid.”

• Rejecting ambiguity defense: “True it is, then there was some conundrum about whether the goods in which the Petitioner is dealing, cannot be subjected to GST or VAT, but in the wake of the notification issued on 30/6/2017... made it evidently clear that if it is subjected to VAT/CST, then it must fall within the domain of State.”

• On returns' validity: “As soon as the return is filed, as per Rule 24, the tax became payable within 20 days from the expiry of each month... Whenever the return is submitted without a copy of e-challan for having paid due or lesser payment of what is due, the Assessing Authority shall issue a notice... and within receipt of 30 days, the tax shall be paid along with interest.”

• Broader implication: “The Petitioner admittedly filed Return/Revised Return, but did not pay the tax and thus, according to us, there is no return in the eyes of law and though the tax has come to the Government belatedly, the interest is leviable.”

These observations highlight the court's focus on substantive compliance over technical excuses, integrating GVAT provisions with constitutional tax competence.

Court's Decision

The Division Bench dismissed the writ petition, upholding the appellate order dated January 29, 2025, and the assessment order of March 15, 2023. No merit was found in challenging the interest of Rs. 53,58,986, as taxes were due under GVAT, collected but delayed in remittance, triggering Section 25(4) automatically. The company was directed to comply with recovery proceedings, with pre-deposit adjustments.

Practically, this mandates immediate payment, recoverable as land revenue arrears under Section 25(5). Implications are far-reaching: Businesses in alcohol supply chains must remit collected VAT promptly, even amid GST uncertainties, facing 18% interest (or notified rates) for delays. It deters "zero liability" declarations in returns if collections occur, potentially increasing compliance costs but stabilizing state revenues (Goa relies heavily on excise/VAT from spirits).

For future cases, the ruling sets precedent that GST transitional ambiguities do not waive interest if state laws clearly impose liability post-notification. It may influence pending SLPs on ENA taxability, urging GST Council finality. Tax practitioners should advise cautious filings and timely payments, avoiding invalid revised returns. In Goa's context, with spirits integral to the economy, this bolsters enforcement against revenue leakage, estimated at crores from delayed remittances. Overall, it promotes fiscal discipline, aligning with the Supreme Court's emphasis on states' Entry 8 powers, potentially reducing litigation in VAT-GST hybrid sectors.