GST: Natural justice violation in trial administrative body cannot be cured by observing natural justice at appellate stage

Chandni Crafts Vs Union of India (Rajasthan High Court)

GST: Natural justice violation in trial administrative body cannot be cured by observing natural justice at appellate stage

The authority conclusively found that the natural justice had not been followed by the adjudicating authority, however, on the  basis that natural justice was duly followed during appeal proceedings, did not interfere with the order on account of the said aspect of violation of principle of natural justice.

It is well settled that a failure of natural justice in the authority of first instance cannot be cured by sufficiency of natural justice in the appellate body, else the same would encourage the tendency of the authorities to give a short shrift to the proceedings before them.

In the case of World Home Textiles (supra), the Madras High Court came to the following conclusion :-

“7. When Rule 92(3) of the CGST Rules, 2017, makes it clear that hearing is mandatory before rejecting any application for refund, the second respondent as well as the first respondent in their respective impugned orders have arbitrarily and by total non application of mind to the said Rule has rejected the  petitioner’s application for refund. Therefore, the refund application submitted by the petitioner will have to be considered afresh on merits and in accordance with law after giving sufficient opportunity of hearing to the petitioner by the second respondent.”

The Hon’ble Supreme Court in 63 Moon Technologies Ltd. v. Union of India : (2019) 18 SCC 401, pointed out that breach or defect in observing Rules of natural justice in the trial administrative body cannot generally be cured by observing natural justice at the appellate stage, particularly when a clear statutory right has given at the trial stage of an assessment of compensation first by the prescribed authority and then a right of appeal to the appellate Tribunal.

In view of the above fact situation, wherein admittedly the principles of natural justice have been violated by the adjudicating authority and the appellate authority only on account of the fact that it had provided opportunity of hearing, did not interfere with the order of the adjudicating authority, both the orders cannot be sustained.

Refund of ITC cannot be rejected without providing an opportunity of being heard to the assessee

Rajasthan High Court has quashed and set aside the order rejecting the refund claim of accumulated Input Tax Credit (“ITC”) on the grounds that the assessee was not given the opportunity of hearing by the Revenue Department. Further viewed that it is a well settled law that a failure of natural justice in the authority of the first instance cannot be cured by the sufficiency of natural justice in the appellate body. While allowing the writ petition, the Court quashed the impugned order. The matter was remanded back to the adjudicating authority to follow the provisions of Rule 92(3) of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”).

Facts:

M/s. Chandni Crafts (“the Petitioner”) had claimed a refund of accumulated ITC for the months of July 2017 and August 2017 amounting to INR 6,07,553/- and INR 8,78,605/-, as per Section 54(3) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) on account of export of goods under the letter of undertaking. The Revenue Department (“the Respondent”) partially sanctioned the refund claim vide order dated September 26, 2018, but rejected the refund claim for Integrated Goods and Service Tax (“IGST”) and Central Goods and Services Tax (“CGST”) vide Order-in- Original dated October 29, 2018 (“the OIO”).

Thereafter, the Petitioner preferred an appeal before the Appellate Authority, however, it was rejected vide the Order-in-Appeal (“the OIA”) on January 15, 2020.

Being aggrieved, this petition has been filed.

The Petitioner contended, that the refund was rejected without providing the opportunity for a hearing and that the Respondent has violated the provisions of Section 54(3) of the CGST Act and Rule 92 (3) of the CGST Rules. Further contended that, Rule 92(3) envisages issuance of notice in Form GST RFD-08 requiring the applicant to furnish a reply in Form GST RFD-09 and after considering the reply, the order can be made in Form GST RFD-06 and that no application for refund shall be rejected without giving the applicant an opportunity of being heard. The Petitioner stated that, the Appellate Authority had followed the principles of natural justice while passing the OIA.

The Respondent contended, that the Appellate Authority had considered all the issues raised by the Petitioner and that the mere fact that the respondent did not provide an opportunity of hearing to the Petitioner cannot be the sole reason for questioning the validity of the OIO and the OIA.

Issue:

Whether the rejection of the Petitioner’s refund claim for accumulated ITC without providing an opportunity of hearing, violated the provisions of Section 54(3) of the CGST Act and Rule 92(3) of the CGST Rules?

Held:

The Hon’ble Rajasthan High Court in [D. B. Civil Writ Petition No. 5460/2020] held as under:

• Analysed Rule 92(3) of the CGST Rules, and noted that, the refund cannot be rejected without giving the applicant an opportunity to be heard.
• Observed that, the Respondent has failed to comply with Rule 92(3) of the CGST Rules.
• Noted that, principles of natural justice were not followed by the Respondent, but the Appellate Authority had adhered to it, however, it did not interfere with the OIO based on the violation of principles of natural justice.
• Relied on the judgment of the Hon’ble Supreme Court in 63 Moon Technologies Ltd. v. Union of India [(2019) 18 SCC 401], wherein, it was noted that the breach or defect in observing rules of natural justice in the trial, the administrative body cannot generally be cured by observing natural justice at the appellate stage, particularly when a clear statutory right has given at the trial stage of an assessment of compensation first by the prescribed authority and then a right of appeal to the Appellate Tribunal.
• Held that, a failure of natural justice in the authority of first instance cannot be cured by the sufficiency of natural justice in the appellate body, else the same would encourage the tendency of the authorities to give a short shrift to the proceedings before them.
• Remanded the matter back to the Respondent for fresh consideration as per Rule 92(3) of the CGST Rules and passed an order in accordance with the law.
• Quashed and set aside the OIO and the OIA.

Relevant Provisions:

Section 54(3) of the CGST Act:

“Refund of Tax

Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than––

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies. “

Rule 92(3) of the CGST Rules:

“Order sanctioning refund.-

Where the proper officer is satisfied, for reasons to be recorded in writing, that the whole or any part of the amount claimed as refund is not admissible or is not payable to the applicant, he shall issue a notice in FORM GST RFD-08 to the applicant, requiring him to furnish a reply in FORM GST RFD-09 within a period of fifteen days of the receipt of such notice and after considering the reply, make an order in FORM GST RFD-06 sanctioning the amount of refund in whole or part, or rejecting the said refund claim and the said order shall be made available to the applicant electronically and the provisions of sub-rule (1) shall, mutatis mutandis, apply to the extent refund is allowed:

Provided that no application for refund shall be rejected without giving the applicant an opportunity of being heard.”

FULL TEXT OF THE JUDGMENT/ORDER OF RAJASTHAN HIGH COURT

This writ petition has been filed by the petitioner aggrieved against the orders dated 29.10.2018 (Annex.2) passed by the Assistant Commissioner, Central Goods & Service Tax, Division-A, Jodhpur and order dated 15.01.2020 (Annex.3) passed by the Commissioner of Central Excise (Appeals) rejecting the appeal filed by the petitioner.

It is, inter-alia, indicated in the petition that the petitioner claimed refund of accumulated input tax credit on account of export of goods under letter of undertaking in terms of the provisions of Section 54(3) of the Central Goods & Service Tax

Act, 2017 (‘CGST Act’) amounting to Rs.6,07,553/- and Rs.8,78,605/- for the months of July, 2017 and August, 2017. The Assistant Commissioner issued provisional refund order dated 26.09.2018, partially sanctioning refund claims to the petitioner and rejecting the refund claim for the Integrated Goods & Service Tax (‘IGST’) and Central Goods & Service Tax (‘CGST’). Whereafter, the refund sanction / rejection orders dated 29.10.2018 (Annex.2) were passed, inter-alia, rejecting the claims of the petitioner.

Feeling aggrieved, the petitioner filed appeal before the Commissioner (Appeals), who by order dated 15.01.2020 (Annex.3), rejected the appeal filed by the petitioner.

It is submitted by learned counsel for the petitioner with reference to provisions of Section 54(3) of the CGST Act and Rule 92 of the CGST Rules that the refund could not have been rejected by the authority without providing opportunity of hearing, inasmuch as, the provisions of Rule 92(3) envisage issuance of notice in Form GST RFD-08 requiring the applicant to furnish a reply in Form GST RFD-09 and after considering the reply, order can be made in Form GST RFD-06 and that no application for refund shall be rejected without giving the applicant an opportunity of being heard. However, the said provision was violated by the authority.

The appellate authority by its impugned order on the issue of violation of the principles of natural justice though held in favour of the petitioner, by observing that the natural justice has been duly followed during the appeal proceedings and the case is heard on the basis of merits, rejected the appeal.

It is submitted that the action is contrary to the provisions of the Rules and the orders having been passed in violation of principle of natural justice deserves to be set-aside.

Reliance has been placed on World Home Textiles Inc v. Additional Commissioner (Appeals) & Anr. : 2020 SCC Online Mad 25916.

Learned counsel for the respondents vehemently opposed the submissions. It was submitted that the plea raised by the petitioner seeking refund had no substance and therefore, both the authorities were justified in rejecting the claim of the petitioner for grant of refund and therefore, the order impugned does not call for any interference.

It was submitted that as the appellate authority has considered all the issues sought to be raised by the petitioner, merely because the original authority did not provide opportunity of hearing to the petitioner, cannot be a reason for questioning the validity of the orders on the said count alone and therefore, the petition deserves dismissal.

We have considered the submissions made by learned counsel for the parties and have perused the material available on record.

The provisions of Rule 92(3) of the CGST Rules, which deals with order sanctioning refund, inter-alia, provides as under:-

“Rule 92. Order sanctioning refund.-

(3)- Where the proper officer is satisfied, for reasons to be recorded in writing, that the whole or any part of the amount claimed as refund is not admissible or is not payable to the applicant, he shall issue a notice in FORM GST RFD-08 to the applicant, requiring him to furnish a reply in FORM GST RFD-09 within a period of fifteen days of the receipt of such notice and after considering the reply, make an order in FORM GST RFD-06 sanctioning the amount of refund in whole or part, or rejecting the said refund claim and the said order shall be made available to the applicant electronically and the provisions of sub-rule (1) shall, mutatis mutandis, apply to the extent refund is allowed :

Provided that no application for refund shall be rejected without giving the applicant an opportunity of being heard.”

The provisions are clear and specific requiring issuance of notice in Form GST RFD-08, seeking reply and making an order thereafter.

The proviso further emphasizes that the refund shall not be rejected without giving the applicant an opportunity of being heard. The provisions by there very language are mandatory and apparently, the adjudicating authority has failed to comply with the said statutory provision.

The appellate authority, when the plea was raised by the petitioner in appeal, came to the following conclusion :-

“5.2 On the  issue of Principle of Natural justice, the appellant has contended that the department has decided the case without  issuing any show cause  notice or providing opportunity of personal hearing. I find that the correspondence made with the adjudicating authority regarding the issuance of Show Cause Notice / Deficiency Memo and providing any opportunity for personal hearing to the appellant did not result in any reply from him. Moreover, both the impugned orders are not bearing the serial numbers of the relevant Show Cause Notices in the columns so provided for this purpose. Ass such I am of the view that natural justice has not been followed by the adjudicating authority. Nevertheless, the course of natural justice has been duly followed during appeal proceedings. Ample opportunities have been given to hear the case of the appellant and put forward all the facts and figures. All the submissions of the appellant have been keenly gone through and discussed and the case is heard on the basis of merits of the case. In view of above discussion and finding, I upheld the impugned order and reject the appeal filed by the appellant.”

The authority conclusively found that the natural justice had not been followed by the adjudicating authority, however, on the  basis that natural justice was duly followed during appeal proceedings, did not interfere with the order on account of the said aspect of violation of principle of natural justice.

It is well settled that a failure of natural justice in the authority of first instance cannot be cured by sufficiency of natural justice in the appellate body, else the same would encourage the tendency of the authorities to give a short shrift to the proceedings before them.

In the case of World Home Textiles (supra), the Madras High Court came to the following conclusion :-

“7. When Rule 92(3) of the CGST Rules, 2017, makes it clear that hearing is mandatory before rejecting any application for refund, the second respondent as well as the first respondent in their respective impugned orders have arbitrarily and by total non application of mind to the said Rule has rejected the  petitioner’s application for refund. Therefore, the refund application submitted by the petitioner will have to be considered afresh on merits and in accordance with law after giving sufficient opportunity of hearing to the petitioner by the second respondent.”

The Hon’ble Supreme Court in 63 Moon Technologies Ltd. v. Union of India : (2019) 18 SCC 401, pointed out that breach or defect in observing Rules of natural justice in the trial administrative body cannot generally be cured by observing natural justice at the appellate stage, particularly when a clear statutory right has given at the trial stage of an assessment of compensation first by the prescribed authority and then a right of appeal to the appellate Tribunal.

In view of the above fact situation, wherein admittedly the principles of natural justice have been violated by the adjudicating authority and the appellate authority only on account of the fact that it had provided opportunity of hearing, did not interfere with the order of the adjudicating authority, both the orders cannot be sustained.

Consequently, the writ petition filed by the petitioner is allowed. The orders dated 29.10.2018 (Annex.2) to the extent of rejecting the refund of CGST & IGST and the appellate order dated 15.01.2020 (Annex.3) are quashed and set-aside.

The matter is remanded back to the adjudicating authority to follow the provisions of Rule 92(3) of the CGST Rules and thereafter pass an appropriate order in accordance with law.

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(Author can be reached at info@a2ztaxcorp.com)