Supreme Court rules interest payable to deductor on refund of taxes withheld

This Tax Alert summarizes a recent ruling of the Supreme Court (SC) in the case of M/s Tata Chemicals Ltd. (Taxpayer). The SC was required to adjudicate on the issue of whether the Taxpayer, which is entitled to refund of excess taxes withheld by it under the provisions of the Indian Tax Laws (ITL), is also entitled to interest thereon.

In the facts of the case, the Taxpayer had withheld taxes as per the withholding orders issued by the Tax Authority and, on further appeal against such order, refund was granted to the Taxpayer. On claim of interest by the Taxpayer on such refund, the SC, while ruling in favor of the Taxpayer, held that interest is a kind of compensation for use and retention of money collected unauthorizedly by the Revenue. Obligation to refund money received and retained without right, implies and carries with it the right to interest. Furthermore, there was no reason to restrict interest on refund only to taxpayers which pay taxes on their own behalf, without extending similar benefit in respect of refund of withholding taxes.

This ruling provides relief to payers who claim refund of excess taxes withheld. The SC has endorsed the principle that the tax refund due and payable to the Taxpayer is debt-owed and payable by the Tax Authority and the Taxpayer is entitled to interest thereon as a matter of course. The SC has also held that interest is payable on refund of excess taxes withheld from the date of payment of such withheld taxes