Interest on IGST: Decision of Mahindra & Mahindra and subsequent legal developments

Goods imported into India suffer Basic Customs Duty (‘BCD’) levied under Section 12 of the Customs Act, 1962 along with other duties payable under the Customs Tariff Act, 1975 (‘CTA’).

Article 265 of the Constitution of India, 1950 (‘Constitution’) restricts the collection and levy of taxes without authority of law. This means that the power of levy and collection of tax shall be rooted through the legislation itself. Article 265 of the Constitution ensures that taxes, interest and penalty shall be levied in fair and transparent manner.  

In the case of Mahindra & Mahindra v. Union of India - 2022 (10) TMI 212 (‘Mahindra and Mahindra’), the question before the Bombay High Court was whether interest and penalty can be levied/imposed with regard to the payment of Additional Duty of Customs levied under Section 3(1) (‘CVD’) and Special Additional Duty (‘SAD’) levied under Section 3(3) of the CTA, by borrowing the provisions of levy of interest / penalty from the Customs Act, 1962. The assessee contended that the same cannot be levied/imposed as there was no substantive provision for the same under Section 3(12) of the CTA.

The Hon’ble Bombay High Court ruled that as there is no substantive provision in Section 3 of the CTA that provides for payment of penalty or interest on duty other than BCD, penalty/interest payable on CVD/SAD is not recoverable from the assessee. The court held that in absence of such a specific provision for levy of interest or penalty, under Section 3(12) of the CTA, the same cannot be charged. The relevant provisions dealt in the said case is reproduced below for ease of reference:

Section 3(1) of CTA : Any article which is imported into India shall, in addition, be liable to a duty (hereafter in this section referred to as the additional duty) equal to the excise duty for the time being leviable on a like article if produced or manufactured in India and if such excise duty on a like article is leviable at any percentage of its value, the additional duty to which the imported article shall be so liable shall be calculated at that percentage of the value of the imported article

Section 3(3) of CTA: If the Central Government is satisfied that it is necessary in the public interest to levy on any imported article whether on such article duty is leviable under sub-section (1) or not such additional duty as would counter-balance the excise duty leviable on any raw materials, components and ingredients of the same nature as, or similar to those, used in the production or manufacture of such article, it may, by notification in the Official Gazette, direct that such imported article shall, in addition, be liable to an additional duty representing such portion of the excise duty leviable on such raw materials, components and ingredients as, in either case, may be determined by rules made by the Central Government in this behalf.

Section 3(12) of CTA: The provisions of the Customs Act, 1962 (52 of 1962) and the rules and regulations made thereunder, including those relating to drawbacks, refunds and exemption from duties shall, so far as may be, apply to the duty or tax or cess, as the case may be, chargeable under this section as they apply in relation to the duties leviable under that Act.

Against the order passed by Hon’ble High Court in the case of Mahindra and Mahindra department had filed a Special Leave Petition (‘SLP’) before the Supreme Court. The same was dismissed by the Hon’ble Supreme Court on the ground that there were no merits in the SLP[1].  Against such dismissal, the Department had filed a Review Petition which was also dismissed by the Supreme Court holding that “… there is no error apparent on the face of record or any merit in the Review Petition warranting reconsideration of the order impugned”[2]. Thus, the decision of the Hon’ble Bombay High court has become final.

Amendment in Section 3(12) of CTA vide Finance (No. 2) Act, 2024:

The decision of Mahindra and Mahindra was rendered on 15 September 2022. The review petition of the Customs Department was dismissed on 9 January 2024. Though the court was dealing with dispute which arose in the pre-GST era, even after onset of GST, similar provision with regard to levy of GST (in place of CVD/SAD) continued to exist under the CTA. Thus, imminent need was felt by the Government of India to amend the CTA.

Accordingly, the lacunae pointed out by the Hon’ble Bombay High Court in Mahindra and Mahindra has been rectified by the Finance (No. 2) Act, 2024 by amending Section 3(12) of the CTA, with effect from 16 August 2024. The provisions of the CTA, immediately prior to the amendment in 2024, and post the amendment in 2024 are captured below:

The amendment vide Finance (No. 2) Act of 2024 is with effect from 16 August 2024, as that is the day the Finance (No. 2) Act, 2024 has come into effect, and there was no mention in the said Act regarding the amendment being applicable retrospectively.

Legal controversy on the leviability of interest and penalty on CVD, SAD and IGST in term Section 3(12) of the CTA, pre and post amendment

The decision of Hon’ble Bombay High Court in the case of Mahindra and Mahindra has been subject to various interpretations.

In the case of Acer India Pvt. Ltd. v. CC [2023 (9) TMI 1553], the issue before the Chennai CESTAT was that whether interest can be levied on CVD and SAD. In the said case the Tribunal relied upon the decision of Mahindra and Mahindra and held that in the absence of specific provisions for levy of interest or penalty under Section 3(12) of CTA, the same cannot be levied / charged unless the statute makes a substantive provision in this behalf.

The CESTAT Bench at Kolkata in the matter of Texmaco Rail Engineering Limited v. CC [2024 (1) TMI 902] was dealing with the question of leviability of interest under Section 28AA of the Customs Act, 1962 on the confirmed demand for CVD under Section 3 (1) of the CTA. The Tribunal held that interest was leviable on the following grounds:

a) The usage of the words ‘shall’ and ‘in addition to such duty’ under Section 28AA(1) emphatically indicates the applicability of interest to a scenario where duty becomes payable. Thus, what has been borrowed for the realisation of interest payable and applicability as an automatic route are the structural elements of Section 28 of the Customs Act.

b) The legislature has consciously incorporated interest provision which is rendered applicable to the CTA.

c) Section 28AA of the Customs Act starts with a non-obstante clause, thereby giving importance to the said provision to hold them as a determinant and a predominant provision in the law.

d) That interest is not penal but compensatory in nature.

The Kolkata Tribunal did refer to the Hon'ble Bombay High Court decision in the Mahindra and Mahindra, but distinguished this decision holding as under:

1. The Bombay High Court decision is in respect of the ‘Settlement of a case’ (which is a shift from the usual process of adjudication, appeal, etc.).
2. The Bombay High Court decision is to be considered to be applicable to scenarios which were in existence in the said order (of Settlement Commission) which was under challenge. However, the applicability of the said order cannot be extended to normal scenarios. When a higher court reviews a decision made by the Settlement Commission, its ruling applies specifically to the case being reviewed. It should not be applied to regular cases.

It is also worth noting that above decision of the CESTAT Kolkata was challenged before the Calcutta High Court in the case of Texmaco Rail and Engineering Limited v. Commissioner of Customs [Order No. CUSTA/64/2024 dated 5 July 2024] wherein, an interim stay has been granted.  

The decision of the Kolkata Tribunal in Texmaco was delivered on 12 January 2024 and pertained to levy of interest on CVD. However, the levy of interest on IGST was not considered in the above case. The same came up for considerations in subsequent decisions of the Tribunal.

Prior to the amendment in Section 3(12) of CTA, the Ahmedabad Tribunal in April 2024 dealt with the question pertaining to levy of interest, redemption fine on short-paid IGST in terms of Section 3(7) of the IGST in the case of Chiripal Poly Films Ltd. v. CC-Ahmedabad [2024 (9) TMI 940- CESTAT AHMEDABAD]. In the said case, the Tribunal decided to apply the ratio laid down by the High Court in Mahindra and Mahindra even in the context of IGST. The CESTAT held that in the absence of specific provisions under the CTA, interest on IGST is not payable. As the amendment to Section 3(12) of CTA was not yet made, the same was not considered by the Tribunal.

Post the amendment made in Section 3(12) of CTA, similar issue pertaining to leviability of interest and penalty on demand of IGST on ground of violation of pre-import condition came before the Ahmedabad Tribunal in October 2024 in the case of Sakar Industries Pvt. Ltd. v. C.C. [2024 (10) TMI 1141- CESTAT AHMEDABAD]. In the said case, the Tribunal followed the precedent set by the decision in Chiripal. The Tribunal did not refer/consider the amendment made in Section 3(12) of the CTA by the Finance (No. 2) Act of 2024.  

Recently, the amendment made to the CTA was considered by the Mumbai Tribunal in the case of Phillips India Limited v. CC Import [Final Order No. A/86879/ 2024 dated 18 November 2024]. The issue in this case was with respect to classification of imported goods and demand of differential IGST along with interest. In the said case, the Tribunal relied upon the decision of the Bombay High Court in the case of Mahindra and Mahindra and held that interest is not payable as there is no substantive provision in Section 3 of the CTA requiring payment of penalty or interest. In the said case, the Tribunal considered the amendment made in Section 3(12) of the CTA by the Finance Act No. 2 of 2024 and held that as the dispute before the Tribunal pertained to  import undertaken during the period 29 July 2017 to 26 February 2022, and such amended provision was not in existence back then, the amendment will not have any impact on the present case.  Accordingly, the levy of interest on differential IGST was set aside.

Meanwhile, the Delhi Tribunal in its decision dated 12 August 2024 in the case of Mayur Uniquoters Ltd. and JLC Electromet Pvt Ltd. v. CCE [2024 (8) TMI 1060 - CESTAT NEW DELHI] has taken a stand that the ratio set out in the decision of Mahindra and Mahindra is not applicable to demand of differential IGST under Section 3(7) of CTA.  In the said case, the assessee had undertaken the imports during the period when pre-import condition was in existence (13 October 2017 – 9 January 2019). Accordingly, the assessee availed the benefit of Notification No. 18/2015-Cus dated 1 April 2015, as amended by Notification No. 79/2017-Cus dated 13 October 2017. Later, upon realising that assessee had failed to comply with pre-import condition decided to pay the IGST along with interest.  The question before the Delhi Tribunal in the said case was that whether the assessee would be entitled for refund of interest paid on IGST. The court differentiated IGST from CVD and held that while BCD, CVD, SAD and cesses are part of the Customs duties, IGST is part of the GST and not part of the Customs duties. The court reasoned that when interest is payable on delayed payment of IGST on inter-state supplies within India, interest will also be payable on delayed payment of IGST on imports. It further held that while the taxable event for levy of Customs duties levied either under the Customs Act or under the CTA is the act of importation or exportation, the taxable event for levy of IGST is the inter-state supply of goods and services, including supply in the course of importation. Thus, the court held that interest is payable on delayed payment of IGST payable at the time import, even though Section 3(12) of the CTA does not provide for it.

Relying upon Mayur Uniquoters Ltd., similar, adverse ruling dated 14 October 2024 has been given by Delhi Tribunal in the case of Poddar Pigments Ltd. v. CCE [2024 (10) TMI 732 – CESTAT New Delhi], wherein the identical issue pertaining to levy of interest on demand of differential IGST on account of alleged violation of pre-import condition was addressed.

The identical issue again came up before the Tribunal in Ahmedabad in the case of Meghmani Organics Ltd. v. CC [Order No. 37-39 /2024 dated 3 December 2024] wherein the issue was whether the interest, redemption fine and penalty is recoverable on IGST on account of violation of pre-import condition in view of the decision of Chiripal Poly Films. The Hon’ble Tribunal took into consideration the contradictory decisions rendered by the Tribunals already on the issue. In order to avoid uncertainty, the Tribunal referred the only issue pertaining to leviability of interest, fine and penalty for non / delayed payment of IGST on account of non-compliance of pre-import condition as per the Notification No. 18/2015-Cus. as amended with reference to Section 3(7) read with Section 3(12) of CTA to the Larger Bench. The relevant portion of the reference Order is extracted below:

Whether the importer is liable to pay interest, fine and penalties for non/delayed payment of IGST in case of non-compliance of pre-import condition under Notification No.18/2015-Cus with reference to Section 3(7) read with Section 3(12) of the Customs Tariff Act or otherwise?

Despite the reference of issue pertaining to leviability of interest on IGST to the Larger Bench in the case of Meghmani, the CESTAT Kolkata passed adverse order in the case of Shree Renuka Sugar Ltd. v. CC and JM. Baxi v. CC [2025 (1) TMI 437], wherein the issue was pertaining to imposition of penalty and interest on demand of SAD leviable under Section 3(5) of  CTA. The Kolkata Tribunal in the said case held that Section 3(12) of CTA is an inclusive provision. It makes the provisions of the Customs Act applicable in relation to levy of SAD under the CTA. The section specifically includes provisions such as drawback, refund and exemptions applicable in Customs Act, and has been made applicable to SAD levied under CTA also. It does not mean that the provisions relating to levy of demand of interest under Customs Act are not made applicable for the delay in payment of SAD. When there is a delay in payment of SAD, interest is automatically liable to be paid as per Section 28AB of Customs Act, 1962. Accordingly, the interest liability was confirmed. It is pertinent to note here that though the decision of the Hon’ble Tribunal was rendered on 7 January 2025 the same has not considered the reference to Larger Bench made on the question pertaining to leviability of interest, fine and penalty for non / delayed payment of IGST in the case of Meghmani on 3 December 2024.

The Larger Bench is yet to be constituted and accordingly, the decision is awaited.  It remains to be seen that whether the Larger Bench while deciding the issue will follow the principle laid down in Mahindra and Mahindra or not.

In case the Larger Bench decides in the favour of assessee, then subject to complying with the procedural requirements of claiming refund, the assessee will be entitled to seek the refund of interest paid on IGST in terms of Section 27 of the Customs Act, 1962. However, to make such a claim for refund, the assessee will have to satisfy multiply challenges set under the customs law for claiming such refund: i) challenge/modify the assessment confirming interest [as laid down by the Supreme Court in the case of ITC Ltd. v. CCE Kolkata [2019 (368) ELT 216 (SC)]], and ii) overcome the hurdles of time bar and unjust enrichment.

In conclusion, it seems that the final word on this issue has not yet been spoken. The matter remains unresolved, and the legal debate continues.  

[The authors are Partner, Principal Associate and Senior Associate, respectively, in Customs practice at Lakshmikumaran & Sridharan Attorneys, Mumbai]

[1] 2023 (386) E.L.T. 11 (S.C.)

[2] Union of India and Ors. Vs. Mahindra and Mahindra Ltd. [R.P.(C) Diary No. 41195/2023] dated 9 January 2024