An interest rate of 15% is permitted on delayed refunds related to deemed export duty drawback.

In the case of Union of India and Ors. v. M/s. B.T. Patil and Sons Belgaum (Construction) Pvt. Ltd. [Civil Appeal No. 7238 of 2009 dated February 05, 2024], the Supreme Court affirmed the ruling of the Division Bench of the High Court of Karnataka. The respondent was granted a 15% interest rate on the delayed refund of deemed export duty drawback related to the construction of civil work. Consequently, the interest calculation was to commence from the date of the refund application.

Facts:

M/s. B.T. Patil and Sons Belgaum (Construction) Pvt. Ltd. (“the Respondent”) operated as a class-I contractor specializing in civil contract works, particularly for water projects and hydroelectric power ventures. The Central Government approved funding for the Koyna Hydro Electric Power Project from the International Bank for Reconstruction and Development. The Respondent secured a sub-contract to execute civil works from Lake Intake to the Emergency Valve Tunnel.

The Respondent completed the construction work in March 1996 and applied for a refund of duty drawback under the deemed export scheme outlined in the Exim Policy, 1992-1997 by the Ministry of Commerce, Government of India, and the Director General of Foreign Trade (“the DGFT”).

The DGFT initially denied the refund, asserting that civil construction works did not qualify for the deemed export benefit specified in the Exim Policy, 1992-1997. Subsequently, the DGFT issued a circular on August 20, 1998, under the successor Exim Policy, 1997-2002, clarifying that the supply of goods under paragraph 10(2)(d) of the Exim Policy, 1997-2002, would be eligible for ‘deemed export’ benefit. On December 5, 2000, another circular was issued, stating that drawback was applicable concerning excise duty on the supply of goods to projects funded by multilateral agencies. A Policy Interpretation Committee was formed for the Respondent, deciding to grant the duty drawback benefit. Accordingly, the DGFT issued an order allowing duty drawback for INR 2,25,79,470 Crores. It was clarified that this order was not considered a precedent. Following this, the Respondent sought interest on the delayed refund through a writ petition before the Single Bench of the High Court. The Single Judge Bench determined that interest at 15% was payable, as per the Customs Act, 1962, for the delay from December 5, 2000, until the refund was paid on November 25, 2002. The Customs Act provides for interest in the range of 5% to 30% in such cases. The Respondent appealed before the Division bench, arguing that a notification in 1998 was available to the Department. Subsequently, a clarificatory notification was issued on December 12, 2000. Therefore, the interest should be calculated from August 20, 1998. After referencing Sections 27A and 75A of the Customs Act, the Division Bench, in the Order dated August 22, 2008 (“the Impugned Order”), concluded that the Respondent is entitled to interest on the delayed refund of duty drawback from the date of the expiry of three months after submitting the application for refund in 1996 at 15%.

Dissatisfied with the Impugned Order, the present appeal was filed by the Appellant.

Issue:

Should a 15% interest be granted on the delayed refund of deemed-export duty drawback?

Held:

The Hon’ble Supreme Court in Civil Appeal No. 7238 of 2009 ruled as follows:

1. The Supreme Court noted that, upon a combined examination of the provisions of the Exim Policy, 1992-1997, along with the Central Excise Act, 1944, and the Customs Act, it is evident that the supply of goods by the Respondent to the project in question falls under the category of ‘deemed export.’ Consequently, the Respondent rightfully qualified for the benefits under the Duty Drawback Scheme.

2. The court observed that the applications for refund were submitted in 1996, and the decision to grant a refund of duty drawback was made belatedly on October 7, 2002, followed by subsequent payments through cheques. Hence, there was a significant delay in reimbursing the duty drawback.

3. It was noted that Rule 3 of the Customs, Central Excise Duties and the Service Tax Drawback Rules, 1995, explicitly allows the Central Government to determine the amount or rates for the drawback on the export of goods. Additionally, Rule 14 of the Drawback Rules addresses the payment of drawback and interest.

4. The court considered the Explanation to sub-section (1) of Section 27 of the Customs Act, which clarifies that, in the case of a person other than an importer, the expression ‘the date of payment of duty or interest’ is construed as ‘the date of purchase of goods’ by such person.

5. In reference to Section 75A (1) of the Customs Act, the court emphasized that if duty drawback is not disbursed within three months from the date of filing the claim, the claimant is entitled to interest. The prescribed interest rate, according to Section 27A of the Customs Act, ranges between 10% and 30%. The court disagreed with the High Court’s reference to Notification No. 32/1995 (N.T.)-Customs dated May 26, 1995, fixing the interest rate at 15%.

6. The court acknowledged that a Circular dated August 20, 1998, had clarified the eligibility of civil construction work for the benefit of duty drawback as deemed export. Thus, by 1998, the DGFT had already clarified that civil construction work was entitled to duty drawback benefits.

7. The court drew on precedents such as Zile Singh v. State of Haryana, S. Grewal v. State of Punjab, and Rajagopal Reddy (dead) by Lrs. Vs. Padmini Chandrasekharan (dead) by Lrs., supporting the notion that the benefits of duty drawback were available to the Respondents as soon as the Exim Policy came into effect.

8.Concluding that the Respondent was eligible for the refund of duty drawback, the court directed the Appellant to provide interest at the rate of 15%, resulting in the dismissal of the appeal.

Our Remark:

Section 27A of the Customs Act pertains to “Interest on delayed refunds.” It stipulates that if any duty, mandated to be refunded under Section 27(2) of the Customs Act, is not reimbursed to an applicant within three months from the date of receiving the application under Section 27(1) of the Customs Act, the applicant is entitled to receive interest. This interest is calculated at a rate not below five percent and not exceeding thirty percent per annum. The interest accrues from the date immediately after the lapse of three months from the date of receiving the application until the actual refund of the duty takes place.