Interest on Delayed Refunds under Section 27A of the Customs Act, 1962: A Jurisprudential Analysis

Interest on Delayed Refunds under Section 27A of the Customs Act, 1962: A Jurisprudential Analysis

Introduction

Section 27A of the Customs Act, 1962 (hereinafter “the Act”) was inserted by the Finance Act, 1995 with effect from 26 May 1995 to ensure that a refund sanctioned under Section 27(2) is not rendered illusory by administrative delay. It mandates payment of interest where duty is not refunded within three months of the receipt of the refund application.[1] Almost three decades later, Section 27A has generated a sophisticated body of jurisprudence on (i) the “trigger-point” for calculation of interest, (ii) its interplay with other fiscal statutes and doctrines, and (iii) the remedial scope of “interest on interest”, fine or penalty. This article undertakes a critical survey of that jurisprudence, drawing upon leading judicial pronouncements and doctrinal developments in India.

The Statutory Architecture

2.1 Refund under Section 27

Section 27(1) prescribes a six-month limitation (one year for specified persons) to seek refund of duty, save where duty was paid under protest. Section 27(2) empowers the Proper Officer to order refund, subject to the unjust-enrichment bar. In 1991 the provision was substantively recast to incorporate documentary requirements (Solar Pesticides Private Ltd., 1991).[2]

2.2 Interest under Section 27A

Section 27A provides that if any duty ordered to be refunded under Section 27(2) is not actually refunded within three months of the receipt of the application, the Central Government shall pay interest at a notified rate (currently 6% p.a.). The provision notably omits reference to (i) refund of interest that may have been earlier collected as duty, and (ii) refund of penalty or redemption fine. The drafting exclusion has repeatedly influenced judicial outcomes.[3]

Legislative Purpose and Comparative Context

The Statement of Objects and Reasons to the Finance Act, 1995 mirrors the contemporaneous insertion of Section 11BB in the Central Excise Act, 1944 and is premised on preventing “unjust enrichment of the State” through delayed refunds. The Supreme Court’s exposition in Union of India v. Tata Chemicals Ltd. (2014) on Section 244A of the Income-tax Act supplies an interpretive compass: interest is “compensation for use of money” and is “neither punitive nor discretionary”.[4] The same economic rationale animates Section 27A.

Jurisprudential Evolution

4.1 Early Understanding: Limitation of the Statute

The Madras High Court in Commissioner v. VBC Industries Ltd. (2011) emphasised the textual limitation of Section 27A to duty alone, declining interest on the interest component that had earlier been recovered.[5] A strict construction approach was adopted—“where the language is clear… the court must give effect to it.”

4.2 “Trigger-Point” for Interest

  • Ranbaxy Laboratories Ltd. v. Union of India (2011, SC) – though not listed among the primary references, this binding authority (cited in S.S. Dyes and Pidilite) settled that the three-month period is counted from the date of receipt of the refund application, irrespective of subsequent appellate or reassessment steps taken by the Department.[6]
  • Pidilite Industries Ltd. (CESTAT 2022) reiterated that internal re-assessment or “call-book” procedures cannot postpone the statutory clock under Section 27A.[7]
  • JSW Steel Ltd. (CESTAT 2024) clarified that even where a revised application is filed at the behest of the Department, interest runs from the original, complete application if the requisite particulars were already on record.[8]

4.3 Pre-deposit versus Duty

In S.S. Dyes and Chemicals (2016) the Tribunal held that sums paid during investigation are mere deposits, not “duty”, until appropriated under an assessment order; therefore interest under Section 27A is unavailable unless the amount was crystallised as duty.[9] Conversely, Bombay High Court decisions in Krishna Kumar Bhatia (2010) and Tata Iron & Steel Co. (2004) extended the doctrine of restitution, granting interest on fine, penalty, or pre-deposit by invoking inherent writ powers, albeit outside Section 27A.

4.4 Special Additional Duty (SAD) Refunds

Section 3(8) of the Customs Tariff Act, 1975 (“CTA”) imports the provisions of the Customs Act “so far as may be” to SAD. In Sony India Pvt. Ltd. v. CC Delhi (2014) and Principal Commissioner v. Riso India Pvt. Ltd. (2015) the Delhi High Court held that while Section 27 limitations were inapplicable to SAD refunds triggered by post-import sales, Section 27A nonetheless governed interest once a valid refund claim was lodged.[10]

4.5 Interaction with Reasonable-Time Doctrine

Although Parle International Ltd. v. Union of India (2020) concerned stale show-cause notices, its affirmation that administrative powers must be exercised within a reasonable time is conceptually linked to Section 27A’s three-month outer-limit.[11] Where the Department sleeps over refund applications, the constitutional writ remedy remains available in tandem with statutory interest.

Doctrinal Themes Emerging from the Case-Law

5.1 Compensation versus Penalty

Courts consistently characterise Section 27A interest as compensatory, not punitive. The duty to pay arises automatically on the objective fact of delay, and not on proof of departmental malice or fault (Ranbaxy; Tata Chemicals). This harmonises with Article 265 of the Constitution: money retained without authority must be returned with accretion.

5.2 Strict Construction and Expressio Unius

The refusal to extend Section 27A to “interest on interest” (VBC Industries) or to fines/penalties (Ajay Exports, 2015) rests on the maxim expressio unius est exclusio alterius. Legislative intervention alone can broaden the coverage.

5.3 Subordinate Legislation Cannot Curtail Statutory Rights

The Delhi High Court in Sony India invalidated an amending notification that retrospectively imposed a one-year limitation on SAD refunds, citing the principle that essential legislative policy—including period of limitation—cannot emanate from delegated legislation. The same logic precludes departmental circulars from diluting Section 27A; indeed, the Supreme Court in Indian Oil Corporation (2004) stressed that circulars are binding only when consistent with the parent statute.[12]

Unresolved Questions and Policy Considerations

  • Interest on consequential interest: The statutory silence continues to generate litigation. A prospective amendment aligning Section 27A with Section 244A(1A) of the Income-tax Act could arrest the debate.
  • Uniform automatic refunds: Presently, interest commences only upon application. Automating refunds, akin to Section 238 of the Goods and Services Tax Acts, would economise administrative effort and avoid litigation.
  • Rate of interest: The notified rate (6% p.a.) arguably under-compensates traders vis-à-vis commercial borrowing rates. Parliament may consider a market-linked formula, or tiered rates escalating with the duration of delay.
  • Digital time-stamping: Electronic filing of refund claims has reduced factual disputes about the date of application. The statutory text, however, could expressly recognise e-applications to avoid interpretive uncertainty.

Conclusion

Section 27A has evolved from a skeletal compensatory mechanism into a sophisticated code underpinned by constitutional principles of fairness, administrative efficiency, and fiscal accountability. Judicial trends reveal an uncompromising stance against departmental delay, yet equally a fidelity to statutory text when taxpayers seek enlargement of the provision. The legislative purpose—preventing unjust enrichment of the State—stands substantially realised; nevertheless, selective statutory refinements, especially on “interest on interest”, could further perfect the remedial framework. Until then, the triad of Ranbaxy (trigger-point), VBC Industries (scope confined to duty) and Sony India (subordinate legislation cannot erode rights) will continue to anchor the interpretation of Section 27A.

Footnotes

  1. Customs Act, 1962, s. 27A.
  2. Solar Pesticides Pvt. Ltd. v. Union of India, (1991) Bom HC.
  3. Commissioner of Customs (Exports), Chennai v. VBC Industries Ltd., 2011 (273) ELT 173 (Mad).
  4. Union of India v. Tata Chemicals Ltd., (2014) 6 SCC 335.
  5. See footnote 3.
  6. Ranbaxy Laboratories Ltd. v. Union of India, (2011) 273 ELT 3 (SC) (cited in Pidilite and S.S. Dyes decisions).
  7. Commissioner of Customs v. Pidilite Industries Ltd., Final Order A/85965/2022, CESTAT Mumbai.
  8. Commissioner of Customs, C.Ex. & S.T., Goa v. JSW Steel Ltd., CESTAT (2024).
  9. S.S. Dyes and Chemicals v. Commissioner of Customs, 2016 (331) ELT 477 (CESTAT-Mum).
  10. Sony India Pvt. Ltd. v. Commissioner of Customs, 2014 SCC OnLine Del 1501; Principal Commissioner v. Riso India Pvt. Ltd., 2015 SCC OnLine Del 3303.
  11. Parle International Ltd. v. Union of India, 2020 SCC OnLine Bom 8678.
  12. Commissioner of Customs, Calcutta v. Indian Oil Corporation Ltd., (2004) 3 SCC 488.