Introduction:
In a decisive reaffirmation of the principles of restitution and constitutional legality, the Bombay High Court in West India Continental Oils Fats Pvt. Ltd. v. The Union of India, Writ Petition No. 3000 of 2023, delivered a landmark judgment directing the Union of India and its concerned department to pay interest amounting to ₹71.31 lakh on the refund of illegally collected Integrated Goods and Services Tax (IGST) under the Reverse Charge Mechanism (RCM) on ocean freight. The division bench comprising Justice M.S. Sonak and Justice Advait M. Sethna held that once the IGST collected from the assessee had been declared unconstitutional, the department had no lawful authority to retain or utilize those funds. Hence, depriving the petitioner of interest would be contrary to the equitable doctrine of restitution, which finds statutory recognition under Section 144 of the Civil Procedure Code (CPC). The petitioner, engaged in the business of importing crude and refined palm oil for trading across India, had been compelled to pay IGST on ocean freight pursuant to government notifications issued in 2017. However, subsequent judicial developments invalidated these levies, leading to the petitioner’s claim for a refund and corresponding interest. The High Court’s ruling not only provided relief to the aggrieved assessee but also reasserted the judiciary’s commitment to ensuring that the State does not unjustly enrich itself by retaining amounts collected without authority of law.
Arguments of both sides:
The petitioner, represented by Advocate Jas Sanghavi along with Advocates Linzy Sharan and Vikas Poojary, argued that the collection of IGST on ocean freight through Notification No. 8/2017–Integrated Tax (Rate) and Notification No. 10/2017–Integrated Tax (Rate), along with the corrigendum dated 30 June 2017, was unconstitutional and beyond the legislative competence of the Union. They pointed out that under Section 5(3) of the IGST Act, tax liability could be imposed under reverse charge only for specific services notified by the government, but ocean freight for imports did not fall within this permissible framework. Consequently, the collection was ultra vires, illegal, and violative of Articles 265 and 300A of the Constitution, which mandate that no tax shall be levied or collected except by authority of law and no person shall be deprived of their property save by lawful means.
The petitioner further submitted that they had paid ₹2.62 crore between July 2017 and April 2019 on ocean freight under protest, and following the High Court’s earlier judgment declaring the levy unconstitutional, they applied for a refund of the principal amount along with interest of ₹71.31 lakh. However, the department sanctioned only the principal amount through Order in FORM GST RFD-06, rejecting the interest claim by invoking Sections 54 and 56 of the Central Goods and Services Tax (CGST) Act, 2017. The petitioner contended that this reliance was entirely misplaced, as these provisions govern refunds of tax paid under the Act, whereas the IGST in question was collected without authority of law and therefore stood outside the ambit of those sections.
Emphasizing the principle of restitution, the petitioner relied on Section 144 of the CPC, which obligates the State to restore benefits unjustly retained once a decree or order is set aside. They argued that since the department had utilized their funds for several years, the retention of such amounts without compensatory interest amounted to an unjust enrichment by the State at the expense of the taxpayer. They also cited precedents from the Supreme Court affirming that when tax is collected without authority of law, the taxpayer must be compensated with interest from the date of payment to the date of refund. The petitioner asserted that denying such interest would violate the doctrine of equity and fairness embedded in constitutional governance.
Conversely, the respondent department, represented by Advocate Y.R. Mishra along with Advocate Saket R. Ketkar, opposed the petition, maintaining that the claim for interest was untenable under the statutory framework. They argued that Sections 54 and 56 of the CGST Act provide the only mechanism for claiming interest on refunds, and since these sections do not authorize interest in cases of non-statutory payments, the petitioner’s claim had no legal foundation. The department contended that the refund process was duly completed, and any further liability to pay interest would amount to a burden on public exchequer without statutory sanction.
The department also argued that since the refund claim was processed under the CGST regime, it necessarily attracted the procedural limitations of Section 54, which provides for interest only when refund claims are delayed beyond the stipulated period of sixty days from the date of receipt of application. They further contended that the petitioner had not established that there was an inordinate delay in processing the refund. Hence, the denial of interest was justified. Moreover, the department maintained that as the collection of IGST was made pursuant to a validly issued notification at the time, it could not be characterized as “illegal retention” until the notification was struck down by the court. Thus, interest could not accrue for the period during which the law remained in force.
Court’s Judgment:
After hearing both sides and meticulously examining the record, the division bench of Justice M.S. Sonak and Justice Advait M. Sethna delivered a detailed judgment in favour of the petitioner. The Court categorically held that the retention and utilization of IGST collected under the impugned notifications were unconstitutional, and once the levy itself was declared void, the State was under a legal and moral obligation to refund not only the principal amount but also interest for the period of unlawful retention.
The Court rejected the department’s reliance on Sections 54 and 56 of the CGST Act, holding that those provisions apply only to refunds of tax legitimately collected under the Act. In the present case, the IGST was collected without authority of law and was later declared unconstitutional by judicial pronouncement. Therefore, the legal foundation of such collection was non-existent from inception. The bench observed that “Section 54 of the Act can be invoked only when a tax is paid under the framework of the Act, not when the collection itself lacks authority.”
The Court then turned to the doctrine of restitution under Section 144 of the Civil Procedure Code, emphasizing that when a party is deprived of money due to an unlawful act of the State, full restitution must be made, including the payment of interest to compensate for loss of use of the funds. The judges noted, “Admittedly, the Petitioner had paid the amount of IGST which the respondents utilized up to the date of grant of refund. Having utilized such amounts of the Petitioner, there is no justification, legal or otherwise, to deny interest.” The bench underscored that interest is not merely a form of compensation but an integral part of restitution to ensure that the party wronged is restored to the position it would have occupied had the illegality not occurred.
The Court found that the petitioner had been consistently pursuing its claim in a bona fide manner and that there was no undue delay or negligence on its part. On the contrary, the department’s refusal to grant interest demonstrated a disregard for settled legal principles. The judges cited established precedents from the Supreme Court, including Sandvik Asia Ltd. v. CIT and Union of India v. Tata Chemicals Ltd., where the apex court had held that when the State wrongfully retains money, it must compensate the taxpayer through interest.
The Court further clarified that the principle of restitution is a constitutional obligation derived from Article 265, which bars the collection of tax without authority of law. The bench observed that “to deprive the Petitioner of interest, in the given facts, would run contrary to the well-recognised legal principle of restitution.” The State cannot retain or benefit from an amount that it was never entitled to collect in the first place. Hence, denying interest would be equivalent to sanctioning unjust enrichment by the government.
Rejecting the argument that the levy was valid until struck down, the bench held that once a notification is declared unconstitutional, it is void ab initio—meaning it is deemed never to have existed in law. Consequently, the State’s collection under such notification cannot be legitimized for any period. The bench also reiterated that equity and good conscience demand that when public authorities wrongfully retain funds, they must make the taxpayer whole.
Accordingly, the Court directed the department to pay interest of ₹71,31,225 to the petitioner, representing the interest accrued on the principal refund amount of ₹2.62 crore from the date of payment till the date of refund. The judgment also served as a broader reaffirmation of taxpayers’ rights against arbitrary tax collection and the State’s duty to uphold the rule of law. The bench concluded by allowing the petition and granting the relief sought, with directions for compliance within a reasonable period.
The judgment thus not only reinforced the doctrine of restitution but also set a precedent emphasizing accountability of tax authorities in cases of unconstitutional levies. It sends a clear message that the government cannot, under any pretext, retain taxpayer funds unlawfully and escape its obligation to make full restituton with interest.