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Interest cannot be levied on tax which is paid by the way of adjustment from the balance ITC

MADRAS HIGH COURT
M/s Maansarovar Motors Pvt. Ltd. v. The Assistant Commissioner & Ors.
Writ Petition no. 4468 of 2020  Date: 29.09.2020
FACTS
The Madras High Court decided a batch of writ petitions under Article 226 of the Constitution of India. Each writ petition had some common factual background and therefore to avoid any unnecessary repetition only relevant facts common in all the writ petitions are discussed hereunder.
Section 50 of the Central Goods and Service Tax, 2017 (hereinafter “the Act”) states that every person who is liable to pay tax in terms of the Act shall remit the tax either in cash or by way of adjustment of credit available in the Input Tax Credit (hereinafter “ITC”) register.
The Petitioners in this case claimed that the levy of interest under Section 50 of the Act can only be in case of delay in remittance of tax which the Petitioners are liable to pay under the Act for delay caused in paying taxes by way of cash and that the interest cannot be levied on delay in remittance of tax by adjustment of available ITC.
The subject matter of challenge before the Madras High Court is that the Respondent has levied interest on remittances of tax by adjustment of the ITC available.
ISSUE BEFORE THE HIGH COURT
Whether interest can be levied on the delayed remittance of tax by way of an adjustment from the available ITC balance?
CONTENTIONS OF THE PARTIES 
The Petitioners contended that the Petitioners had ample ITC available in the electronic ledger and that interest could therefore be sought, if at all, only on the cash component of the tax that is remitted belated and not on the available ITC.
To substantiate the claims, the Petitioners argued that the credit of ITC was available with the Department prior to arising of the output tax liability and therefore the question of delay, if any, does not arise under Section 50 of the Act.
The Petitioners further contended that the Petitioners were not given a fair opportunity of hearing prior to raising of the impugned demands of interest and the consequential proceedings therefrom.
The Petitioners also contended that the interest under Section 50 of the Act is a measure of compensation and since the ITC was already available in the electronic ledger there was no case of any amount due to the Revenue.
Further, it was contended that the proviso to Section 50 of the Act, added vide Section 100 of Finance (No.2) Act of 2019, states that interest shall be levied only on the part of taxes that are paid by cash and has been inserted to set right a technical difficulty and is therefore retrospective in nature. Therefore, the interest can be levied only on belated remittance of tax by way of cash and not on remittance of tax by way of adjustment from the available ITC.
For the above submissions by the Petitioners, the principle laid down in Eicher Motors Ltd. v. Union of India [(1999) 106 ELT 3]; and Refix Industry v. Assistant Commissioner of CGST [W.P. No. 23360& 23361 of 2019] has been relied upon.   
The Respondents contended that Section 16(2) of the Act entitles a person to take credit of input tax and Section 41(1) of the Act provides for the credit entry in the electronic credit ledger which is just provisional in nature.
The Respondents further contended that Section 41 of the Act provides for credit entry, the entitlement to the same can only be availed of when a return is filed by the assessee on self-assessment basis. The entitlement of the credit cannot be availed of until the return is filed which is totally on self-assessment basis. 
The Respondents contended that after the return is filed and the credit is availed by the Department, the assessee can utilise the same against the output tax liability. Therefore, only when a credit entry is made by the assessee in the electronic ledger the entitlement to the same would be available to mitigate the output tax liability.
The Respondents also contented that since the return has to be filed by the assessee and the same is entirely on self-assessment basis, the credit would be utilised against the output tax liability. Therefore, the interest is liable to be levied on delayed remittance of tax by way of an adjustment from the available ITC balance.
DECISION AND FINDINGS
The Madras High Court observed that the proposal for amendment of the Section 50 of the Act was first taken into consideration in the 31st GST Council Meeting held on 22.12.2018 so as to provide for payment of interest on net cash liability only i.e. the interest shall be levied only on the portion of tax paid by cash.
Subsequently, the proviso to Section 50 of the Act was inserted vide Section 100 of the Finance Act, 2019 which reiterated the same position but the date from which it would be applicable was not specified. Further, the same position was confirmed in the 39th GST Council Meeting as held on 22.12.2018.
Thereafter, in the meeting dated 14.03.2020, it was decided vide a press release that the interest for delay in payment of GST would be charged only on net cash tax liability with effect from 01.07.2017 and the benefit of the proviso to Section 50 shall apply retrospectively from the inception of GST.
The Notification no. 63 of 2020- Central Tax dated 25.08.2020 stated that the proviso would operate with effect from 01.09.2020 and was issued only on account of and to get over some technical difficulties which was clarified by the Central Board of Indirect Taxes and Customs (hereinafter “CBIC”) and therefore the applicability of the proviso as held in the 39th GST Council meeting was upheld.
Thus, from the aforesaid it can be held that the proviso to Section 50 would operate from 01.07.2017 and accordingly no interest is liable to be levied on tax remitted by reversal of available ITC.
The Madras High Court while deciding this issue placed reliance on the judgment in case of Refix Industry v. Assistant Commissioner of CGST (supra) wherein the same issue was dealt with and the Court had observed that:
“Section 50 which is specifically intended to apply to a state of deprival cannot apply in a situation where the State is possessed of sufficient funds to the credit of the assessee. In my considered view, the proper application of Section 50 is one where interest is levied on a belated cash payment but not on ITC available all the while with the Department to the credit of the assessee. The latter being available with the Department is, in my view, neither belated nor delayed.”
Further, the Madras High Court taking into account the decision of Supreme Court in the case of Eicher Motors Ltd. Vs. Union of India (supra) that available credit is as good as tax paid and held that the Department cannot enrich itself doubly by demanding interest on the credit and at the same time holding the available credit in its own hands.
Further, the Madras High Court in view of the Supreme Court decision in Allied Motors (P)Ltd. Vs. Commissioner of Income Tax [1997 (3) SCC 472] & CIT vs. Alom Extrusions Ltd. (319 ITR 306), held that the nature and the object of the proviso is to eliminate unintended and prejudicial consequences and hence is remedial in nature and therefore should be applied retrospectively back to the date when the anomaly arose.
Further, the Madras High Court held that the interest is intended to compensate the revenue for loss of capital and in the present case, there is no loss in so far as the revenue is in possession of the credit which is as good as cash and therefore, cannot be said that the revenue was deprived of any income.
Therefore, on the basis of the above-mentioned prepositions the Madras High Court allowed the petition and held that interest shall not be levied on the portion of tax paid by way of adjustment from the ITC balance.
AMLEGALS REMARKS
The decision of the Madras High Court is a welcoming one and has put an end to the miseries of tax-payer and has clarified that the amendments introduced for clarification purposes are to be held to apply retrospectively.
The case brings out an important principle regarding the imposition of interest when there has been belated payment of tax and clearly demarcates the imposition of interest when there is a belated payment of tax by the way of cash and belated payment of tax when it is to be done through the available ITC balance with the department.
Further, the case highlights an another important aspect that the ITC balance available with the Department is as good as tax paid and therefore the department cannot take the aid of a notification which was issued just for clarificatory purpose and impose interest. Rather the Department has to take into account the intention of the legislature which clearly reflects as to when and on what the interest can be charged by the Department.
The case shows an important concept relating to the imposition of interest when the payment of tax has been delayed, and the same can be applied in cases which are not specifically protected by the proviso.
 
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