Delhi High Court clarifies mandatory nature of interest on GST refunds under Section 56

Background and context

The Delhi High Court, in King Impex Vs Commissioner of Delhi Goods and Services Tax & Anr. (Delhi High Court), examined whether the GST authorities have any discretion to withhold interest that is otherwise payable on sanctioned refunds under Section 56 of the Central Goods and Services Tax Act, 2017. The decision reinforces that once the statutory conditions for interest under Section 56 are satisfied, the Department cannot decline payment of such interest in the absence of any express discretion vested in the authorities.

The writ petition arose from a refund of pre-deposit amounting to Rs. 19,76,518/-, which had been sanctioned to King Impex following partial success in appeal, and the assessee’s claim for interest on this refund under Section 56 of the CGST Act.

Chronology of events leading to the dispute

Search and adjudication proceedings

  • On 24th December, 2020, the business premises of King Impex were subjected to a search under Section 67 of the CGST Act.
  • Following the search, a demand-cum-Show Cause Notice was issued in July 2021 under Section 74 of the CGST Act, proposing a demand of tax, interest and penalty.
  • King Impex submitted its reply to the Show Cause Notice.
  • Thereafter, an Order-in-Original dated 05th December, 2022 was passed, confirming the demand raised against the assessee.

Appeal and pre-deposit

  • King Impex, aggrieved by the Order-in-Original, filed an appeal before the Appellate Authority in accordance with the CGST Act.
  • In order to maintain this appeal, the assessee deposited a mandatory pre-deposit of Rs. 31,44,190/- (Rupees Thirty-One Lakhs Forty-Four Thousand One Hundred and Ninety only).
  • The Appeal was partly allowed on 04th December, 2023 by the Appellate Authority, resulting in a reduction of the demand originally confirmed.

Application for refund of pre-deposit

  • Consequent to the partial relief granted in appeal, King Impex filed an application dated 14th February, 2024, seeking refund of the pre-deposit amount that was no longer required to be retained by the Department.
  • While processing the refund, the authorities adjusted a penalty amount of Rs. 11,67,672/- (Rupees Eleven Lakhs Sixty-Seven Thousand Six Hundred and Seventy-Two only).
  • After this adjustment, a refund of Rs. 19,76,518/- (Rupees Nineteen Lakhs Seventy-Six Thousand Five Hundred and Eighteen only) was sanctioned in favour of King Impex vide Order dated 13th January, 2025.

Claim for interest under Section 56 of CGST Act

Once the refund was sanctioned, King Impex asserted that it was legally entitled to interest on the refunded sum under Section 56 of the CGST Act. The provision, broadly, is designed to compensate an assessee when there is a delay in disbursement of refund beyond the time-limit prescribed in the statute.

The assessee, therefore, approached the Delhi High Court through a writ petition, praying for:

  • Direction to the Department to pay interest on the sanctioned refund of **Rs.