Analysis of the Bombay High Court Judgment in A.R. Sulphonates Pvt. Ltd. v. Union of India & Ors.

Ambarish Pandey, Principal Associate, TLC Legal

The goods imported into India are eligible to Basic Customs Duty (“BCD”) under the Customs Act, 1962 (“1962 Act”). Until the introduction of GST with effect from 01.07.2017, separate duties in the nature of CVD and SAD were levied under Customs Tariff Act, 1975 (“1975 Act”), in addition to BCD. Pursuant to enactment of CGST Act, 2017 additional customs duties were subsumed into the IGST Act, 2017 and hence, IGST was made payable instead of additional customs duties under Section 3(7) of 1975 Act.

Section 3(12) of the 1975 Act, prior to its amendment vide Finance Act (No. 2), 2024 did not specifically refer to provisions pertaining to levy of interest and penalty from the 1962 Act. Thus, an issue arose as to whether there can be any demand of interest or imposition of penalty on the demand of additional duties made under 1975 Act.

The above issue was set to rest by the judgment of Bombay High Court in the case of Mahindra & Mahindra v. Union of India[1], wherein it was held that Section 3(12) of 1975 Act does not specifically refer to provisions pertaining to interest and penalties, which are substantive in nature and, therefore, imposing interest and penalty on duties levied under 1975 Act would be without the authority of law. The SLP filed by the Revenue against the judgment of Bombay High Court was dismissed by the Supreme Court, as also the Review Petition challenging dismissal of SLP. Thus, indisputably the issue concerning liability to pay interest on the demand of CVD and SAD had been laid to rest. Purportedly, pursuant to the judgment of Bombay High Court in the case of Mahindra & Mahindra (Supra), the Parliament amended Section 3(12) of 1975 Act vide Finance Act (No. 2), 2024.[2] The said amendment provides that provisions of 1962 Act shall be applicable for charging of interest and imposition of penalty, in respect of IGST demands.

However, the issue concerning levy of interest and penalty on demand of IGST had remained in limbo, for the reason that various benches of CESTAT had given different interpretations regarding applicability of the ratio laid down in Mahindra & Mahindra (Supra) concerning liability of interest on IGST demands. With pronouncement of judgment by Bombay High Court in the case of A.R. Sulphonates Pvt. Ltd. v. Union of India & Ors,[3] the issue appears to have been put to some finality with High Court holding that 1975 Act does not refer to provisions pertaining to interest and penalty from 1962 Act, until its amendment in 2024.

While quashing and setting aside the Order impugned, the Court also held that Circular No. 16/2023-Cus dated 07.06.2023, to the extent that it purports to levy interest on the IGST payment, is beyond the provisions of the 1975 Act and the amendment to the provisions of Section 3 (12) of the 1975 Act by Finance (No. 2) Act, 2024 is prospective in nature.

With respect to levy of interest, various benches of CESTAT have interpreted the judgment in the case of Mahindra & Mahindra (Supra) differently. One line of interpretation is that in the absence of statutory provisions providing for levy of interest or penalty on CVD or SAD demands under Section 3(12) of 1975 Act, no such levy can be held to be sustainable, particularly because the interest or penalty is substantive in nature.[4] However, contrary to the said interpretation, CESTAT, Kolkata, [5] held that interest and penalty can be levied/imposed, considering the language employed in Section 28AA of 1962 Act which indicates that interest will automatically arise where duty is payable.

Regarding levy of interest on IGST particularly, CESTAT Ahmedabad[6] followed the ratio laid down in the case of Mahindra & Mahindra (Supra) and held that in the absence of specific provisions relating to levy of interest or imposition of penalty, the same cannot be demanded by taking recourse to machinery provisions relating to recovery of duty. The above decision was rendered prior to amendment to Section 3(12) of 1975 Act, and hence had no occasion to consider its impact. After taking note of the amendment made vide Finance Act (No. 2), 2024, CESTAT, Mumbai,[7] has held that amended provisions would not have any application on the demand of differential duty for the imports made during any prior period.

Contrary to the above view, CESTAT, New Delhi[8] held that the ratio laid down in the case of Mahindra & Mahindra (Supra) would not be applicable to demand of IGST by observing that the judgment is not applicable to demand of differential IGST levied under Section 3(7) of 1975 Act as IGST is levied not as a duty of customs but is charged under Section 5 of the IGST Act and the charge is not on the act of importation but on supply of goods.

The contradictory views of benches of CESTAT were taken note of by CESTAT, Ahmedabad,[9] where the question was whether the interest, redemption fine and penalty can be demanded on IGST due to alleged violation of pre-import condition. To avoid uncertainty, CESTAT, Ahmedabad referred the issue to Larger Bench.[10] 

The judgment in the case of AR Sulphonates (Supra) provides relief to the assesses, given the ambiguity arising due to conflicting decisions by CESTAT. However, it remains to be seen what the fate and implication of the decision of the Larger Bench would be, particularly because the High Court did not have any occasion to examine whether IGST is a duty of customs leviable under Section 3 (7) of 1975 Act or is leviable under Section 5 of IGST Act, which may render the judgment sub-silentio on the above aspect and thus, affecting its binding ratio.  

As the Circular dated 07.06.2023 is quashed by the High Court in AR Sulphonates (Supra), the assesses may be entitled to seek refund of the amount paid towards interest in terms of the Circular. It can be argued that the time limit prescribed in 1962 Act would not be applicable as the levy itself has been declared to be ultra-vires­ the 1975 Act. However, the entitlement to refund of interest paid may not have been curtailed even if the Circular was not quashed, as it has been provided for in the Act and such a right cannot be governed by administrative actions.

[1] 2022 (10) TMI 212-Bombay High Court.

[2] Section 3(12) of CTA: The provisions of the Customs Act, 1962 (52 of 1962) and all rules and regulations made thereunder, including but not limited to those relating to the date for determination of rate of duty, assessment, non-levy, short-levy, refunds, exemptions, interest, recovery, appeals, offences and penalties shall, as 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 duties leviable under that Act or all rules or regulations made thereunder, as the case maybe.

[3] 2025-TIOL-592-HC-MUM-CUS.

[4] Acer India Ltd. vs. CC, 2023 (9) TMI 1553;

[5] Texmaco Rail Engineering Ltd. vs. CC, 2024 (1) TMI 902

[6] Chiripal Poly Films Ltd. v. CC-Ahmedabad [2024 (9) TMI 940- CESTAT AHMEDABAD]

[7] Philips India Ltd. vs. CC, Import, Final Order No. A/86879/2024 dated 18.11.2024

[8] Mayur Unicoaters Ltd. vs. CCE, 2024 (8) TMI 1060-CESTAT New Delhi

[9] Meghmani Organics Ltd. vs. CC, Interim Order Nos. 37-39/2024 dated 03.12.2024-CESTAT Ahmedabad.

[10] 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?