GST refund cannot be denied for proposed appeal against refund sanction order

REFUND SANCTIONED VIDE ORDER-IN-APPEAL CANNOT BE IGNORED BY THE REVENUE SOLELY BECAUSE THEY INTEND TO APPEAL IN TRIBUNAL. DELHI HIGH COURT ORDER TO PROCESS REFUND WITH INTEREST.

In the absence of GSTAT, taxpayers face difficulties not only in challenging tax liabilities & demands, but also to receive legitimate refunds. Here is one such case G S Industries Vs. Commissioner Central GST (W.P.(C) No. 14234/2022 dated 23.02.2023) wherein relief is given by Hon’ble Delhi High Court. 

A. BRIEF NOTE ON THE CASE PROCEEDINGS: 

• G S Industries, the petitioner has filed this motion to issue directions to the respondent to refund the tax claimed by the petitioner for the period from September 2017 to March 2018.

• The petitioner carries on business as GS Industries and manufactures hand pump parts under HSN 8413/9140, which is liable to GST @ 5%.

• The applicant claimed to have accrued input tax credit as a result of an inverted duty structure and filed an application on 04.07.2019 claiming a refund of ₹ 23,10,333 accumulated Input Tax Credit for the period September 2017 to March 2018. The Applicant made another claim on 09.07.2019, claiming an amount of ₹ 14,46,417/- as an input tax credit accrued for the period April 2018 to March 2019.

• The petitioner’s requests were acknowledged and two separate memos, both dated 29.11.2019, were issued. The respondent noted some deficiencies and asked for some clarification with respect to those requests. The respondent also asked the petitioner to provide a certificate of chartered accountant confirming that the tax and interest impact was not passed on to anyone else.

• The petitioner responded to these briefing notes by way of communication on 27.01.2020. However, the respondent has not accepted the Applicant’s explanation and has issued Show Cause Notices on 23.11.2020 stating –
  • That the petitioner claims to be manufacturing India Mark 11 hand pumps and their parts that fall into the 5% GST classification. In addition, it was also observed This is the largest part of the refund claim is for brass scrap (18%). Therefore, the petitioner was requested to submit the complete details of the purchase and sale registers for the relevant period.

• • It was also observed that the product that is claimed to be manufactured by the petitioner requires very little or no brass. So, the petitioner was asked to provide the details of the stock register/item summary for verification of the claim.

• • The Petitioner was also requested to submit the details of the registered place of business (both principal and additional) to this office as a PV was Conducted by the AE branch on 16.09.2020 at the regd. principal place of business is pursuant to subsection 67(1) of the CGST Act 2017 and it has been observed that another corporation has been active since January 2019.

• The petitioner responded to the foregoing show cause notices that were not accepted and, by separate order dated December 14 2020, the applications for the refund were rejected.

• On an appeal lodged by the applicant, the Appellate Authority granted the refund. Furthermore, the contracting authority had not provided any evidence to suggest that the product manufactured by the applicant required less or no brass at all.

• The Coram commented that as the petitioner was successful in appealing the petitioner is entitled to the refund as claimed and ordered the respondents to immediately process the applicant’s application for a refund, including interest. 

B. CORE MATTERS TO OBSERVE FROM THE CASE: 

Well, the refund claim under inverted duty structure was rejected after serving deficiency memo and SCN. On an appeal lodged by the applicant, the Appellate Authority granted the refund, observing that Adjudicating Authority had not provided any basis for observing that the product manufactured by the petitioner required very less or no brass at all. However, the authority failed to disburse the sanctioned refund despite the petitioner (taxpayer) being successful in the appeal, with the intention of filing appeal in the tribunal which is yet to be set up.

The principal question is whether the benefit of Order-in-appeal can be denied to the petitioner and the refund amount be withheld solely on the ground that the respondent has decided to file an appeal against the said order. Concededly, the respondent has not filed any appeal against the order-in-appeal, and there is no order of any Court or Tribunal staying the said order. Hence, Indisputably, the order-in-appeal cannot be ignored by the respondents solely because according to the revenue, the said order is erroneous and is required to be set aside. Court directed the respondents to forthwith process the petitioner’s claim for refund including interest.

It is noteworthy that a similar relief was given by the same court in the case of Mr. Brij Mohan Mangla Vs. Union of India & Ors.: W.P.(C) 14234/2022 dated 23.02.2023.

C. AUTHOR’S NOTE ON TWO CRITICAL POINTS EMERGING OUT OF THIS ORDER:

1. Getting into the facts of the case, the petitioner G.S. Industries is engaged in manufacturing Handpump parts falling under HSN 8413/9140 chargeable @ 5% output tax and the major part of the refund claim is of Brass Scrap (18%). The adjudicating authority cited in the SCN that “From various sources, it was also observed that the product which are claimed to be manufactured by you requires very little to no Brass”. The question here is, can the department reject refund claim citing that the input used in deriving the output is very less in quantity, when such condition is prescribed neither in the relevant proviso to Section 54(3) nor under the rule 89(5). 

Clause (ii) of Proviso to Section 54(3) reads as “(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.” 

It may be noted that there is neither a reference to the term “manufacturing” nor the quantum of input to output has been prescribed as a criteria. Hence such views by the department would be leading to multiple litigations unless CBIC steps in to clarify on such matters, especially with the widened scope for refund claims under inverted duty structure ever after the recent formula changes.

2. The Court also cites that this order this not preclude the revenue from availing any remedy against the Order-in-appeal once tribunal is formed and in the event, the respondents prevail in their challenge to order-in-appeal, the respondents would also be entitled to take consequential action for recovery of any amount that has been disbursed, albeit in accordance with the law.

Taxpayers should be cautious to note that though refund is now received with 6% nominal interest, in the event of any contrary decision in the higher forum, this needs to be repaid with interest @ 18%. This holds good not only for such hard-earned refund but for every refund received all these years and taxpayers shall be prepared to face any litigation by the department, since the time limit is still open from 2017-18.