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Interest Is Payable On Refund Of IGST Collected Under An Unconstitutional Levy – Orissa High Court In Paradeep Phosphates Limited

(M/s Paradeep Phosphates Limited v. Additional Commissioner, GST (Appeals) & Others / W.P.(C) No.11618 of 2024 / Orissa High Court, Cuttack / 22 January 2026)

Introduction

The Orissa High Court, in a significant judgment delivered in January 2026, has settled an important issue relating to interest on refund of IGST paid on ocean freight under CIF contracts. While the illegality of levying IGST on ocean freight already stood concluded by the Supreme Court in Union of India v. Mohit Minerals Pvt. Ltd., the present case addresses a critical but often litigated consequence—

From which date is interest payable when tax itself was collected without authority of law?

The ruling in Paradeep Phosphates Limited draws a clear distinction between statutory delayed refunds under Section 56 of the CGST Act and refunds arising from unconstitutional or unauthorized tax collection, holding that interest is payable from the date of deposit till the date of refund.

Facts of the Case

M/s Paradeep Phosphates Limited, a manufacturer of fertilizers, imported raw materials such as phosphoric acid, ammonia, sulphur, etc., during April–May 2018 on a CIF (Cost, Insurance and Freight) basis.

Key factual aspects include:

• IGST was paid on imported goods including the ocean freight component
• Additional IGST @ 5% was paid on ocean freight under reverse charge mechanism (RCM) in terms of:
• Notification No. 8/2017–IGST (Rate)
• Notification No. 10/2017–IGST (Rate)
• The tax was paid under protest
• The assessee challenged the levy before the Orissa High Court in 2019

Meanwhile, similar notifications were struck down by the Gujarat High Court in Mohit Minerals Pvt. Ltd., which was later affirmed by the Supreme Court in May 2022.

Background: Mohit Minerals and Its Impact

In Union of India v. Mohit Minerals Pvt. Ltd. (2022), the Supreme Court held that:

• CIF imports constitute a composite supply
• Ocean freight cannot be artificially vivisected and taxed separately
• Levy of IGST on ocean freight amounts to double taxation
• Such levy violates Sections 2(30) and 8 of the CGST Act

Following this, the Orissa High Court disposed of Paradeep Phosphates’ writ petition and allowed refund of IGST paid on ocean freight.

Refund Granted but Interest Denied

Pursuant to the judgment:

• Refund of ₹8.37 crore IGST was sanctioned in September 2022
• No interest was granted on the refunded amount

The assessee applied separately for interest, which was rejected on the ground that:

• Refund was sanctioned within 60 days of filing RFD-01
• Section 56 of CGST Act allows interest only for delayed refunds

The rejection was upheld by the Appellate Authority, leading to the present writ petition.

Core Legal Issue

Whether interest is payable on refund of IGST collected under an unconstitutional levy, and if yes, from which date?

Specifically:

• Is interest governed strictly by Section 56 of CGST Act, or
• Does Article 265 of the Constitution mandate interest from the date of unlawful collection?

Arguments by the Petitioner

The petitioner contended that:

• IGST on ocean freight was collected without authority of law
• Payment was made under protest
• Once levy is declared unconstitutional, the State cannot retain the money even temporarily
• Interest is compensatory in nature and must run from the date of deposit, not from the date of refund application

It was argued that Section 56 applies only to statutory refunds, not to refunds arising from unconstitutional taxation.

Stand of the Department

The Department relied strictly on Sections 54 and 56 of the CGST Act, arguing that:

• Refund was granted within 60 days
• Therefore, no interest is payable
• No specific statutory provision allows interest prior to filing of refund application

Findings of the Orissa High Court

The High Court decisively rejected the Department’s approach and made the following crucial observations:

1. Distinction Between Statutory Refund and Unauthorised Collection

The Court held that:

• This is not a case of delayed refund
• It is a case of unauthorised levy and collection of tax

Section 56 deals with delay in processing valid refunds—not with compensation for illegal exaction.

2. Article 265 Overrides Statutory Limitations

The Court emphasized Article 265 of the Constitution:

“No tax shall be levied or collected except by authority of law.”

Once the levy is declared unconstitutional:

• Retention of tax becomes illegal
• The taxpayer is entitled not only to refund but also interest for deprivation of money

3. Payment Under Protest is a Key Factor

The Court noted that:

• IGST was paid under protest
• The challenge to levy was pending
• Therefore, the State was aware of the disputed nature of collection

This strengthens the taxpayer’s claim for interest from the date of deposit.

4. Section 56 Not a Bar in Such Cases

The Court categorically held that:

• Section 56 cannot be used to deny interest where tax itself was illegally collected
• Interest in such cases is a constitutional consequence, not merely statutory

Final Decision

The Orissa High Court held that:

• The orders rejecting interest were illegal and unsustainable
• The petitioner is entitled to interest @ 6%
• Interest shall be calculated from the date of deposit of IGST till the date of actual refund

The writ petition was allowed accordingly

Conclusion

The decision in Paradeep Phosphates Limited reinforces a fundamental constitutional principle:

The State cannot profit from an illegal levy.

By granting interest from the date of deposit, the Orissa High Court ensures that taxpayers are fully compensated for unlawful deprivation of funds. This judgment will serve as a powerful precedent in GST refund litigation, particularly where tax demands collapse due to constitutional invalidity rather than mere procedural lapses.

 Disclaimer: All the Information is based on the notification, circular advisory and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.

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