The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata, has affirmed that interest at 12% per annum is payable on refunds of amounts deposited by importers during customs investigations when such payments were made under a mistaken notion of liability. This ruling reinforces the principle that such deposits are not voluntary duty payments and must be returned with interest, regardless of whether a separate claim for interest was filed.
Background & Facts
The Dispute
The appellant, M/s. Kamala Metachem, deposited Rs. 7,50,000 during a customs investigation into imports of "Zinc Skimming" between July 2003 and December 2003. The Department insisted on this payment as a pre-deposit during the course of proceedings. The appellant consistently disputed its liability for the duty. After a prolonged investigation and adjudication process, the CESTAT vide Final Order No. 76162 of 2023 dated 13.07.2023 dropped all proceedings against the appellant, holding that no duty was payable.
Key Facts
- The appellant deposited Rs. 7,50,000 during the investigation period (July 2003 - December 2003)
- The payment was made at the insistence of the Customs Department
- The appellant maintained throughout that the payment was not due and disputed liability
- Final Order No. 76162 of 2023 dated 13.07.2023 by CESTAT dismissed all proceedings against the appellant
- The appellant filed a refund application on 24.08.2023 (Sevottam Receipt No. 010368)
- The Assistant Commissioner of Customs, Appraising Refund Section, Kolkata, passed Order-in-Original No. KOL/CUS/AC/ARS (Port)/391/2024 dated 07.06.2024, sanctioning refund of Rs. 7,50,000 under Section 27 of the Customs Act, 1962
- The order did not mention interest on the refund
- The appellant appealed before the Commissioner of Customs (Appeals)
- The Commissioner, by Order-in-Appeal No. KOL/CUS/Port/KS/657/2024 dated 19.11.2024, rejected the claim for interest, holding the deposit was voluntary
Procedural History
- July 2003 - December 2003: Deposit of Rs. 7,50,000 made during customs investigation
- 13.07.2023: CESTAT Final Order No. 76162 of 2023 dismissing proceedings against appellant
- 24.08.2023: Refund application filed by appellant (Sevottam Receipt No. 010368)
- 07.06.2024: Assistant Commissioner sanctions refund of Rs. 7,50,000 under Section 27, but does not address interest
- 19.11.2024: Commissioner of Customs (Appeals) rejects interest claim, upholding non-sanction
- 24.03.2026: CESTAT Kolkata hears appeal and delivers final order
The Parties' Positions
For the Appellant
- The deposit was made under duress and mistaken belief of liability, not as a voluntary payment of duty
- The Department had no legal authority to demand the amount, as confirmed by the CESTAT order
- The refund is not governed by Section 27 alone, but by the broader principle that money collected without lawful authority must be returned with interest
- Relied on multiple precedents including M/s. Harrisons Industries v. Commissioner of C.G.S.T. and Central Excise, Falcon Exports v. Commissioner of Customs, and Rajendra Kumar Jain v. Commissioner of Customs
- Cited Sandvik Asia Ltd. v. Commissioner of Income Tax to support 12% interest rate
For the Respondent
- The deposit was voluntary and made without coercion
- No separate application for interest was filed, making the claim non-maintainable
- The refund was granted under Section 27, which does not mandate interest
- Relied on the absence of a specific statutory provision for interest in customs refund cases
Relief Sought
The appellant sought:
- Setting aside of the Commissioner’s order dated 19.11.2024
- Grant of interest at 12% per annum on Rs. 7,50,000 from the date of deposit (July 2003) to the date of refund (07.06.2024)
- Direction to the Department to pay the interest amount within a stipulated time
The Legal Issue
Whether interest at 12% per annum is payable on a refund of customs deposits made under a mistaken notion of liability, even in the absence of a specific application for interest, and whether such interest is governed by judicial precedent rather than statutory provision.
Arguments Presented
For the Appellant
The appellant’s counsel argued that the deposit was not a payment of duty but a security deposit made under compulsion. Citing Harrisons Industries and Falcon Exports, the appellant emphasized that when a tribunal holds that no duty is payable, the deposit becomes a payment made without lawful authority. The Supreme Court in Sandvik Asia held that unjustified withholding of funds attracts 12% interest as compensation. The appellant further relied on Rajendra Kumar Jain v. Commissioner of Customs, where the Calcutta High Court held that 12% interest applies to customs pre-deposits refunded after adjudication in the assessee’s favor. The appellant contended that interest is automatic upon refund and does not require a separate claim.
For the Respondent
The Revenue argued that the deposit was voluntary and that Section 27 of the Customs Act, 1962, which governs refunds, contains no express provision for interest. It relied on the absence of a formal application for interest and the Commissioner’s finding that the payment was not made under duress. The Revenue also cited Notification No. 70/2014/Customs (N.T.) dated 12.08.2014, which prescribes 6% interest for delayed refunds, but failed to establish its applicability to pre-deposit refunds arising from judicial determination of non-liability.
The Court's Analysis
The Tribunal undertook a comprehensive review of judicial precedents and statutory interpretation. It held that the deposit made by the appellant was not a payment of duty but a pre-deposit made under a mistaken belief of liability, at the insistence of the Department. The Tribunal emphasized that once the CESTAT order dated 13.07.2023 conclusively established that no duty was payable, the deposit ceased to have any legal character as duty and became an amount collected without authority.
"The amount deposited by the appellant during the investigation cannot be construed as a voluntary payment towards duty but rather as a deposit made under a mistaken notion as to their liability, at the insistence of the Revenue."
The Tribunal relied on Harrisons Industries, where it was held that Section 11B of the Central Excise Act, applicable to service tax, does not govern refunds of amounts paid under mistaken notion. The same logic extends to customs under Section 27. The Tribunal noted that the Calcutta High Court in Rajendra Kumar Jain had explicitly rejected the applicability of the 6% notification for pre-deposit refunds occurring before its issuance, holding that 12% interest applies as per Sandvik Asia.
"When once there is lack of authority to demand [duty], the department lacks authority to retain the amount paid... mere payment made by the respondent will neither validate the nature of payment nor the nature of transaction."
The Tribunal further held that the Assistant Commissioner’s order dated 07.06.2024 was not a speaking order on interest, and the first rejection of interest came only in a letter dated 16.02.2023, which was not a formal order. Therefore, the appeal was maintainable. The Tribunal concluded that interest is not a claim to be made but an automatic entitlement upon refund of unlawfully held funds.
The Tribunal also noted that the Revenue had not appealed against the Harrisons Industries and Falcon Exports decisions, which had attained finality, thereby binding the Department to the same principle.
The Verdict
The appellant succeeded. The Tribunal set aside the Commissioner’s order dated 19.11.2024 and held that the appellant is entitled to interest at 12% per annum on the refund amount of Rs. 7,50,000 from the date of deposit (July 2003) until the date of refund (07.06.2024). The Department was directed to pay the interest amount within 30 days from the date of receipt of a certified copy of this order.
What This Means For Similar Cases
Interest Is Automatic on Refunds of Pre-Deposits
- Practitioners need not file a separate claim for interest when a customs refund is granted after a tribunal holds no duty was payable
- The refunding authority must calculate and pay interest automatically, even if not raised in the refund application
- Failure to do so renders the order non-speaking and liable to be set aside
12% Is the Prescribed Rate for Pre-Deposit Refunds
- The 6% rate under Notification No. 70/2014 applies only to delayed refunds under Section 27 where the liability was acknowledged and later reduced
- For refunds arising from judicial determination of non-liability, 12% applies as per Sandvik Asia and Rajendra Kumar Jain
- This rate is compensatory, not statutory, and reflects the cost of unjust enrichment by the Department
Precedents Bind the Revenue Even Without Formal Appeals
- Final orders by CESTAT on interest entitlements become binding on the Department if not appealed
- Revenue cannot challenge the same issue repeatedly across cases if a precedent has been affirmed by a coordinate bench and not overturned
- Practitioners should cite unchallenged CESTAT orders as binding authority in similar matters
