The Punjab & Haryana High Court has struck down paragraph 4.6 of Circular No. 197/09/2023-GST, holding that interest paid under Rule 96A of the CGST Rules must be refunded where the underlying tax has already been refunded upon subsequent realisation of export proceeds. The Court asserted that a departmental circular cannot retain interest on a tax that the Revenue itself has refunded upon subsequent realisation of export proceeds, since Section 54(1) of the CGST Act expressly contemplates refund of tax and interest paid thereon.
The High Court explained that Section 54(1) of the CGST Act contemplates refund of ‘tax and interest, if any, paid on such tax’ as well as ‘any other amount’ paid, and is wide enough to cover a claim for refund of interest paid along with tax under Rule 96A. The Court also explained that Rule 96A(1)(b) of the CGST Rules does not contain any stipulation that interest paid along with tax must continue to be retained after the tax itself has been refunded upon subsequent realisation of export proceeds.
The Court went on to clarify that Paragraph 4.6 of Circular No. 197/09/2023-GST dated July 17, 2023, which denies refund of interest paid under Rule 96A(1) even where the underlying tax has been refunded, travels beyond the Act and the Rules and cannot be sustained. Thus, a Board circular may clarify the manner of administering a statutory provision but cannot override or alter the statute. Accordingly, the respondents were directed to refund the interest corresponding to the tax already refunded under the two Orders in Original, within eight weeks, failing which the amount shall carry interest under Section 56 of the CGST Act.
Briefly, the petitioner, Ernst and Young LLP, is engaged in the export of professional services to clients located outside India. The petitioner did not pay Integrated Goods and Services Tax (IGST) at the time of supply, having furnished a Letter of Undertaking (LUT) under Rule 96A of the Central Goods and Services Tax Rules, 2017. Rule 96A(1)(b) required the payment for export of services to be realised in convertible foreign exchange within a period of one year from the date of the invoice. In the event of failure to realise such payment within the stipulated period, the exporter was required to pay the tax along with interest under Section 50 of the Central Goods and Services Tax Act, 2017 for the period of delay.
The petitioner could not realise the export consideration within the stipulated period of one year and accordingly deposited the tax along with interest in terms of Rule 96A. The export consideration was subsequently realised by the petitioner, though after expiry of the prescribed period. Upon receipt of the foreign remittance, the petitioner sought refund of both the tax as well as the interest deposited by it.
The refund of the tax component was allowed; however, the claim for refund of interest was declined. The petitioner carried the rejection in appeal, but without success. The rejection of refund of interest came to be affirmed by the Appellate Authority vide the impugned order dated Feb 28, 2023, inter alia, by placing reliance upon paragraph 4.6 of Circular No. 197/09/2023-GST dated July 17, 2023.
The Division Bench comprising the Chief Justice Ashwani Kumar Mishra and Justice Rajesh Gaur observed that Section 54(1) of the CGST Act expressly contemplates refund not only of tax but also of interest, if any, paid on such tax, besides “any other amount” paid by a person. The provision is wide enough to encompass a claim for refund of interest paid along with the tax, subject to the other requirements of the Act and the Rules. Rule 96A(1)(b) requires an exporter of services, who has exported without payment of tax under an LUT, to realise the export proceeds within the prescribed period.
On failure, the tax becomes payable along with interest under Section 50. The Rule, however, does not provide for the consequence where the export proceeds are subsequently realised and the tax so deposited is refunded. More particularly, it does not provide that the interest paid along with such tax shall nevertheless be retained. The restriction against refund of interest is found only in paragraph 4.6 of the Circular, added the Court.
The High Court noted that the Circular itself recognises the consequence of subsequent realisation and permits refund of the tax paid under Rule 96A. Once the tax is refunded, retention of the interest paid thereon must have an independent statutory basis. The Court further observed that interest is compensatory in character and ordinarily follows the principal amount on which it is levied.
The reliance by the respondents on Rule 96B was held to be misplaced, as Rule 96B operates in a different field dealing with export of goods, and its silence regarding refund of interest cannot be imported into Rule 96A. The Court also held that a circular issued by the Board may clarify the manner in which a statutory provision is to be administered, but cannot override or alter the statute.
