Virchow Laboratories Ltd. Wins Appeal for Interest on Delayed Refund from Central Excise Department
In a significant ruling on March 26, 2026, the Telangana High Court directed the Commissioner of Customs & Central Excise to pay interest to Virchow Laboratories Ltd. for the delayed refund of Rs.31,52,256 that was wrongfully collected. The judgment, delivered by the division bench comprising Sri P. Sam Koshy and Sri Suddala Chalapathi Rao, emphasizes the principle of fairness and justice, stating that the Revenue cannot demand interest from taxpayers while refusing to pay interest on funds wrongfully withheld.
The court ordered the Revenue to pay interest at 7.5% per annum from the date of the refund claim (June 2, 1997) to the date of the actual refund payment (July 2, 2006). Additionally, further interest at 6% per annum was mandated on the unpaid interest amount from March 9, 2006, to November 29, 2011, when the appeal was filed.
This decision arises from a long-standing dispute where Virchow Laboratories Ltd., a manufacturer and exporter of bulk drugs, was coerced into paying the disputed amount under protest in 1997. The amount was initially collected as "interest" due to an alleged violation of Customs Notification No.203/92. Despite the Customs, Excise & Service Tax Appellate Tribunal ruling in favor of the company in 2006, the refund was delayed by nine years, with the department refusing to pay interest on the refunded amount.
The judgment leans heavily on the Supreme Court's precedent in Sandvik Asia Ltd. v. Commissioner of Income Tax, which underscores the necessity of compensating taxpayers for wrongful retention of funds, even in the absence of explicit statutory provisions.
Sri Muthuma Rajendran, representing the appellant, argued successfully that the department's actions were unjust and that compensation was due for the prolonged retention of funds. The court, aligning with these arguments, dismissed the Revenue's contention that interest on interest cannot be granted and ordered compensation for the delay.
The court, however, clarified that no further interest would be payable from November 29, 2011, onwards, as the matter was pending adjudication in court.
This judgment reinforces the obligation of revenue authorities to act justly and compensates taxpayers for undue delays and wrongful actions.
Bottom line:-
Revenue cannot refuse to pay interest on the amount that was wrongfully collected from the assessee, as it would contradict the principle of fairness and justice. Even in the absence of a specific provision, compensation for delay must be paid to the assessee for wrongful retention of funds.
Statutory provision(s): Central Excise Act, 1944 Section 11B, Section 11BB
