Interest Payable on Entire Amount Deposited During Investigation, ‘Interest On Interest’ also Admissible When Refund is Delayed: CESTAT [Read Order]

The Allahabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that when an assessee deposits money during investigation, interest is payable on the entire amount once it is found refundable, and if the refund is delayed, interest on that interest is also admissible.

Anand Engineering Ltd., formerly Bajaj Infrastructure Development Co. Ltd., had deposited sums of Rs. 32,77,968 and Rs. 35,02,129 as service tax along with interest during investigation in two separate cases. The Commissioner of Central Excise and Service Tax, Lucknow, confirmed the service tax demands in 2016.

Later, in 2019, the tribunal set aside the entire service tax liability. Following this, the appellant sought a refund of the deposited amounts. The Assistant Commissioner sanctioned the refund of the principal amounts and granted interest for the delay in refund, including additional interest on the delayed payment of interest.

The department appealed the decision, arguing that interest could only be paid on 7.5 percent of the disputed amount treated as pre-deposit and that there was no legal provision under Section 11BB of the Central Excise Act, 1944, for payment of interest on interest. The Commissioner (Appeals) accepted the department’s argument and restricted the refund, prompting the appellant to approach the CESTAT.

The appellant’s counsel argued that the money paid during investigation was not tax but only a deposit made under protest. Once the tax demand was set aside, the amount lost its character as tax and became an amount wrongfully retained by the department.

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The counsel relied on judicial precedents such as Pricol Ltd. v. CCE (Madras) and Coca Cola Beverages (P) Ltd. v. Union of India (Gujarat), arguing that such deposits must carry interest from the date of deposit until the date of refund, and when the refund is delayed, interest on interest is also payable.

The revenue counsel argued that interest should be limited to the amount equivalent to 7.5 percent of the duty demand, as this portion was treated as pre-deposit, and that there was no statutory authority to grant interest on interest.

The single-member bench of P.K. Choudhary (Judicial Member) observed that once the tax demand was set aside, the sums deposited during investigation no longer represented tax but money held without authority. The tribunal explained that such deposits cannot be governed by Section 11BB, which applies only to duty refunds, because the sums were never tax liabilities.

The tribunal referred to earlier tribunal rulings, including BSL Ltd. v. CCE & CGST, Udaipur (2019) and Kerala Chemicals & Proteins Ltd. v. CCE, Cochin (2007), where it was held that both interest and interest on interest were payable when the department delayed refund of deposits made under compulsion.

The tribunal further explained that restricting interest to only 7.5 percent of the disputed amount was incorrect because the entire deposit was made under pressure during investigation and not voluntarily as a pre-deposit. It also pointed out that in 3E Infotech v. CESTAT, Chennai (2018), the Madras High Court held that refusal to refund money collected without authority of law would be contrary to Article 265 of the Constitution.

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