Whether amount paid UNDER PROTEST during the course of investigation is refundable?

Whether amount paid UNDER PROTEST during the course of investigation is refundable?

During the course of investigation proceedings, the Taxable Person voluntarily (GST -DRC-03) deposits some amount, primarily to buy peace with the Investigation authorities. More often than not, this amount gets blocked until the final conclusion of the Investigation is met. However, if the amount paid is substantial, the Capital of the Taxable person gets blocked. Under the circumstances, can he resort to filing a refund claim of the amount so deposited voluntarily?  The investigation team always treated that payment made by the person as voluntary payment on his own volition, though it is always an extension of Goodwill gesture with explicit indications that the amount was paid during times when there was no legal obligation to make such payment.

Recently, a dispute of similar nature came up for judgment before the Hon’ble Madras High Court in the case of M/S. ADITYA ENERGY HOLDINGS [W.P. NO. 9654 OF 2021]  wherein the petitioner claimed refund of the amount paid under persuasion during the course of investigation proceedings.

The petitioner filed a Writ Petition under Article 226 of the Constitution of India (Power of High Courts to issue certain writs) seeking relief of refund of the amount paid by them during the course of the investigation process, before the conclusion of Investigation. Having regard to this right treasured under the Constitution, no doubt, the power of investigation cannot be interfered with nor can the court direct investigation be made in a particular manner.  However, during all such investigations, it cannot be held that the Fundamental Rights including the right of a bona fide taxpayer to be treated with appropriate dignity as enshrined under Article 21 of the Constitution of India would be kept in abeyance.

The Department’s contention was defended on the pretext that the petitioner had wrongly availed Input Tax Credit which he is not eligible for. Therefore, an investigation that was carried on by the department was justifiable and the amount paid should not be refunded to the petitioner, as it is due to the Government.

After considering the facts and submissions made, the Hon’ble Madras High Court held that the amount paid by the petitioner can be at best treated only as a deposit under Section 73 and/or 74 of CGST Act, 2017 as the amount was collected on the date when summon was issued, Mahazar was drawn and search memo was issued to petitioner and not after the conclusion of the Investigation / Adjudication process led by Principles of Natural justice.  The court opined that the amount paid by the petitioner is “Under Protest”. It must be noted here that though there is a payment of tax and even if it is accepted that payment of tax is also followed by a requisite process of Challan GST-DRC-03, the mere payment of tax cannot be construed to be a payment towards self-ascertainment as contemplated under Section 73 / 74 of CGST Act 2017 as the case may be. However, in the instant case, the Court directed the revenue authorities to return the seized documents and issue a Show Cause Notice to the petitioner within a period of six months from the date of receipt of a copy of this order and to complete the adjudication proceedings within a period of 12 months from the date of this judgment.

Notably, the Hon’ble Madras High Court refrained from granting a refund of the amount paid during the investigation to the petitioner.

In another case M/s. Shri Nandhi Dhall Mills India Private Limited, the Hon’ble High Court of Madras allowed to refund the amount paid during the course of the investigation. To repeat verbatim, in its own words, the Hon’ble High Court ruled with regard to self-ascertainment under 74(5) of the CGST Act 2017 as under:

Merely because an assessee has, under the stress of the investigation, signed a statement admitting tax liability and has also made a few payments as per the statement, cannot lead to self-assessment or self-ascertainment. The ascertainment contemplated under Section 74(5) is of the nature of self-assessment and amounts to a determination which is unconditional, and not one that is retracted as in the present case. Had such ascertainment/self-assessment had been made, there would be no further proceedings contemplated, as Section 74(6) states that with ascertainment of demand in Section 74(5), no proceedings for show cause under Section 74(1) shall be issued. In this case, inquiry and investigation are ongoing, personal hearings have been afforded and both the parties are fully geared towards issuing/receiving a show-cause notice and taking matters forward. Thus, the understanding and application of Section 74(5) in this case, is, in my view, wholly misconceived.

Well! the above decision is in complete contradiction with another recent order pronounced by the Hon’ble Karnataka High Court in the case of M/s BUNDL TECHNOLOGIES PRIVATE LIMITED [WRIT PETITION NO. 4467/2021] wherein refund was ordered to be sanctioned of the amount deposited “Under Protest” during investigation for non-issuance of show cause notice for 10 months after investigation proceedings conducted at the factory premises. The said decision was in fact an eye-opener to ensure that the proceedings are concluded within a reasonable period of time post-investigation.

The present decision Hon’ble Madras High Court in the case of M/S. ADITYA ENERGY HOLDINGS [W.P. NO. 9654 OF 2021] takes a divergent view from the one pronounced in the case of M/s. Shri Nandhi Dhall Mills India Private Limited, by prescribing the time limit for completion of adjudication by the investigating authorities rather than refunding the amount back to the petitioner. It is worth mentioning here that there is no time limit for claiming a refund of the amount paid “Under Protest” and this has been concluded in various judicial pronouncements in the erstwhile indirect tax regime.

However, if one goes through the entire GST legislation, it is worth noting that there is no concept of the amount paid “Under Protest” under the GST regime, as there is no express provision for the same now, unlike the earlier indirect tax legislations. Looking back, when Central Excise law, as was in force at the material time, there was separate Rule 233B of Central Excise Rules, 1944, which listed down some conditions that need to be fulfilled to satisfy “Duty paid under protest”. There were some established procedures to be followed for lodging the payments “Under Protest” by the Assessee and also for vacating the same by the Proper Officer of the Department.  Are these rules applicable to GST also if we want to pay Tax “Under Protest”?  Just because GST has not listed down any such conditions can we take the answer as a firm NO ?

On the other side of the coin, it may well be argued that Central Excise Rules 1944 as amended from time to time, were saved by Section 38 A of the Central Excise Act, 1944. If we peruse the language of Section 174 (1) (2) & (3) of CGST Act 2017, read with Section 6 of General Clauses Act, 1897, Section 38 A of CEA, 1944 appear to stand saved now also. This Saving Section apparently is applicable both for the Department as well as the assessees. So can we take that, the provision of “Under Protest” provided under erstwhile Rule 233 B of Central Excise Rules 1944 is in force because Section 174 of CGST Act 2017 gives the much-needed fill-up?  To dwell on the subject further, as per general understanding, one has to believe that section 174 of CGST Act 2017 is applicable only when the right of the assessee in the previous law is affected by the introduction of GST law and not for all and sundry. But, here, paying duty under protest is not a right given to the Taxpayer under the GST legislations as every payment of Tax is on Self-Assessment or Self-ascertainment.  Obviously, one cannot protest his own decisions.  Going a bit extra-terrestrial, it may be argued that for a taxpayer, ‘to protest’ is one’s fundamental right, so paying duty/tax under protest is tantamount to privilege of fundamental right and we don’t need any specific provisions for that. Under protest’ is an integral part of ‘principles of natural justice. Payment of tax under protest means challenging the issue on merits through due process of law. Not accepting the decision or order or notification or circular for seeking natural justice and that too not at the cost of revenue is to contest for your fundamental right or constitutional privilege. Nobody can snatch this entitlement.

Nonetheless, be it as it may, such amounts (though deposited voluntarily) paid under protest has been acknowledged in the GST era also by various High Courts time and again.

So, if when the due process of investigation is under progress and the tax-payer makes payment under the circumstances only known to have convinced him, but without admission of liability (or) if we can say under protest, etc. the courts are of the view that it shall not be treated payment made either as voluntary or under self-assessment even though DRC-03 has also been furnished.  The courts have held that he is eligible for consequential reliefs.

One should understand that in cases where the refund claim is not granted the Taxpayer though has paid the amount Under protest is ultimately stuck with Financial Stress, till the final decision by the adjudicating/appellate authority. In this contest, can it be fairly conceded that the ratio of the erstwhile decisions be used as a binding precedent in the GST era too?  One may have his own reservations.

What is the right recourse, Is it still inconclusive?  Well, may not be!