The IT Act allows taxpayers to claim refunds for any excess tax paid to the Government.^[1] However, such refund claim is often subject to the limitations prescribed under the statute.^[2] Under the IT Act, Section 119 confers power on the Central Board of Direct Taxes (‘CBDT’) to relax such limitation upon showing reasonable cause by issuing circulars. Back in 2007, CBDT had issued Circular No. 7/2007^[3] which prescribed a time period of two years for filing refund claims for excess payment of tax. It was stated that any refund claimed beyond two years would face rejection on the grounds of being time barred.

A dispute arose in the case of Sun Pharmaceutical Industries Ltd.^[4] (‘Petitioner’), where the Assessing Officer (‘AO’) rejected refunds claimed by the Petitioner for excess tax deducted at source, deducted under Section 195 of the IT Act. The payments in question pertained to premium and interest paid to various bondholders and international banks related to foreign currency convertible bonds (‘FCCB’) and external commercial borrowings (‘ECB’) raised for expansion of its global business, despite the fact that such payments fall within the exclusion provided under Section 9(1)(v)(b) of the IT Act. The rejection was primarily based on paragraph 9 of CBDT Circular No. 7/2007, which prescribes a two-year limitation period for refund claims.

The Petitioner challenged the order passed by the AO before the Delhi High Court (‘Delhi HC’), wherein the Delhi HC has rendered a significant ruling, holding that while Section 119 of the IT Act empowers the CBDT to relax procedural requirements, it does not authorise the CBDT to curtail or extinguish a statutory right, such as claiming a refund. In addition to that, it has also been clarified that the limitation introduced by way of an administrative circular cannot override statutory rights provided under the IT Act. The Delhi HC took notice of the fact that the IT Act does not currently prescribe any limitation for filing a refund claim. Introducing such limitation through a circular would result in curtailing the statutory right of refund itself. Accordingly, the Delhi HC held that the conditions imposed in the circular are ultra vires the IT Act.

The Delhi HC further examined the applicability of Section 9(1)(v)(b) of the IT Act and held that interest/premium remitted by the Petitioner on borrowed capital for business operations outside India does not attract tax liability in India, as such payments would fall within the statutory exclusion. Moreover, relying on the principle of commercial expediency, the Delhi HC affirmed that this test is equally relevant in determining the business purpose for which borrowed capital is utilised, particularly in cases where a holding company invests overseas.

This ruling sets a strong precedent in safeguarding taxpayers’ right to seek refund of excess tax paid, which is otherwise sought to be curtailed by way of prescribing a limitation period through circulars. Further, the Delhi HC’s interpretation of Section 9(1)(v)(b) of the IT Act clarifies that interest/premium payments on borrowed capital, when used for business operations outside India, fall within the statutory exclusion and do not attract tax liability. This decision is noteworthy for future tax disputes, ensuring that CBDT circulars cannot override or supersede statutory rights granted under the IT Act.

[1]               Section 237 of the ITA.

[2]               Section 239(2) of the ITA, as omitted by the Finance Act, 2019, w.e.f. 01.09.2019.

[3]               CBDT Circular No. 7/2007 dated 23.10.2007.

[4]               Sun Pharmaceutical Industries Ltd. v. ITO, W.P.(C) 8444/2018 (Order Dated 31.01.2025) (Delhi
HC).