CESTAT Grants Interest on Delayed Refund but Denies 'Interest on Interest' Citing Lack of Statutory Provision [Read Order]

In a ruling partly favouring M/s Lohia Starlinger Ltd., the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Allahabad, allowed interest on a delayed refund of excise duty but rejected the claim for "interest on interest." The Tribunal held that while statutory interest is mandatory for delayed refunds, there is no provision in the Central Excise Act to compensate for the delay in paying that interest.

The Tribunal ruled partly in favour of the Appellant, granting interest under Section 11BB for the period the refund was withheld, but denying the claim for interest on the delayed payment of that interest.

M/s Lohia Starlinger Ltd. (Appellant) had filed a refund claim for Central Excise Duty paid on exported goods. The Department appropriated a significant portion of this refund (Rs. 49.22 Lakhs) against a confirmed Service Tax demand. Later, the Commissioner (Appeals) set aside the appropriation, and the Adjudicating Authority released the funds. However, no interest was paid for the period the amount was wrongfully withheld. The Appellant contested this before CESTAT, arguing they were entitled to interest from the date of the original application, and further claimed "interest on interest."

The Revenue argued that the refund was processed within the stipulated time following the appellate order, relying on the deeming fiction explanation in Section 11BB to deny interest.

The Coram of Sanjiv Srivastava (Member Technical) relied on the Supreme Court’s decision in Ranbaxy Laboratories Ltd. regarding the computation of interest. The Bench observed that the deeming fiction in the Explanation to Section 11BB only treats an appellate order as a refund order but does not postpone the date from which interest becomes payable. Consequently, since the refund was paid more than three months after the original application date, the Appellant was entitled to interest for the delay.

However, regarding the claim for "interest on interest," the Tribunal referred to the Larger Bench decision in Sun Pharmaceuticals and the Supreme Court’s clarification in Gujarat Fluoro Chemicals Ltd. The Court noted that the decision in Sandvik Asia Ltd which awarded interest on interest was based on inordinate delays ranging from 12 to 17 years and was awarded as equitable compensation, not as a statutory right.

Citing Willowood Chemicals, the Tribunal held that where a statute prescribes a specific rate and mechanism for interest, there is no scope to award interest on interest in the absence of a specific statutory provision, especially where the delay was not inordinate.

The Tribunal observed:

“Whenever a specific provision has been made under the statute such provision has to govern the field... In absence of any provision for grant of interest on the delayed payment of interest in the Central Excise Act, 1944, I do not find any merits in the claim made by the appellant to that effect.”

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