Refund of amount paid during investigation under GST

The article contains how the refund of amount paid during investigation may be claimed on the basis of High Court Judgment M/s BUNDL TECHNOLOGIES PRIVATE LIMITED Vs THE UNION OF INDIA AND ANR. I hope the article will be helpful to the readers.

Under this article I would like to analysis the case when the refund may be claimed against deposit of tax, penalty etc.. made during the course of investigation. The investigation team treated that payment made by the person as voluntary payment made even though the said payment was made under circumstances of pressure and compulsion created by the investigating team.

The Hon’ble High Court of Karnatka in the case of M/s BUNDL TECHNOLOGIES PRIVATE LIMITED Vs THE UNION OF INDIA AND ANR. treated the said deposited made unvoluntary and directed to consider the refund application and directed to pass the suitable orders within specified time.

In this case the petitioner made payment of Rs.27.51 crore during the course of investigation. The investigation is still going on even nine months elapsed from the initiation of the investigation. In between the petitioner filed a refund application against payment made during the course of investigation. The Department did not consider the refund application by giving his stand that the claim for refund is premature, as the same is made during the course of investigation.

The petitioner has filed the writ petition seeking for issuance of a writ of mandamus directing the respondents to refund an amount of Rs.27,51,44,157/- illegally collected from the petitioner.

To reach the final conclusion the Hon’ble Court would have to decide following matters:

1. Admissibility of the Writ Petition;

2. Payment was made under protest;

3. Illegal Collection from the petitioner during the investigation proceedings under threat and coercion;

4. Self-ascertainment and Section 74(5) of CGST Act and

5. Right of Bona fide Tax Payer to be treated with dignity

• Admissibility of the Writ Petition

The power of the High Court to issue appropriate direction directing refund either where assessment was without jurisdiction or where tax was collected without authority of law, is vested in the High Court and there is a difference between existence of power and exercise of such jurisdiction which depends on facts of the case on hand. If the court does come to a conclusion that the collection of amounts which even if were to be taxes, is without authority of law, the court possesses the power to issue appropriate direction upon determination of the validity of collection of amount/tax as being illegal to issue appropriate directions. The mere fact that application has been made for refund does not in any way take away the right of the petitioner to seek for appropriate direction in the present proceedings, as the application for refund has merely been deferred and in effect, no decision is taken, even otherwise, the question of alternate remedy is of no significance, when the eventual direction in the present writ is only for consideration of the refund application.”

The eventual remedy that the petitioner is seeking insofar as refund application is, a direction to consider the application de hors the investigation being carried out and in light of such stand, it cannot be stated that the statutory remedy of refund would displace the petitioner from the present proceedings and the petition is to be dismissed on such ground.

• Payment was made under protest

The payments made were to be construed as one made ‘under protest’ which could be gathered from the communication made by the petitioner to the Department after such payments were made. The contents of letter as given by the petitioner are as under:

“As an extension of our goodwill conduct and bona fide, we have deposited INR 15,00,00,000/- [Rupees Fifteen Crores only] with the Exchequer of Government during the pendency of inspection proceedings. The above deposit is without prejudice to and with full reservation of our rights and contentions to seek necessary refund at the appropriate time and therefore should not be regarded as an admission of liability. The Challan of payment of the aforesaid deposit is enclosed herewith for your ready reference as Annexure-‘E’.”

• Illegal Collection from the petitioner during the investigation proceedings under threat and coercion

The Hon’ble Court disbelieved the contentions of the respondents that the payments even as per the communication of the petitioner was made as a goodwill gesture and that the payments made are to be construed as payment of tax in furtherance of self-ascertainment as contemplated under Section 74(5) of the CGST Act.

The Hon’ble Court accepted the case of threat and coercion under which circumstances the petitioner would have to deposit the amount of Rs.27.51 crore.

The Directors of the petitioner Company in response to the summons issued under Section 70 of the CGST Act appeared before the Authorities at 20.00 hours on 28.11.2019 and were there till 4.00 a.m. on 29.11.2019.

The investigation is stated to have resumed at 2.00 p.m., on 29.11.2019 and continued till 5.00 a.m., of 30.11.2019. It is relevant to note that Rs.15.00 crore was paid on 30.11.2019 and a letter was addressed to the Authorities on 30.11.2019 and served on the Authorities on 02.12.2019 that payment was being made under protest.

The Directors of the petitioner Company were asked to appear by way of summons and in response to the same, the three persons appeared before the Authorities on 26.12.2019. The proceedings have extended till 2.30 a.m. on 26.12.2019. The Letter was addressed to the respondents which is duly acknowledged enclosing the DRC-03 Forms as per the communication at Annexure-‘M’ dated 27.12.2019. The payment of Rs.12.51 crores was made on 26/27.12.2019.

The above sequence of events relating to investigation and payments sourced from the pleadings of the respondents would demonstrate a nexus between the investigation and contemporaneous payment.

Insofar as the aspect as to whether amount is paid under coercion as asserted by the petitioner, suffice it to say that the amounts are paid contemporaneous to the very dates when investigation was being made and during times when the petitioner’s Officers or Directors were at the place of investigation, which fact is not in dispute. If it is that the petitioners were otherwise regularly filing their returns and paying taxes as evidenced from the table submitted, the dispute if any as regards to the wrongful availment of input tax credit as regards certain set of transactions is a matter that was pending investigation. But, instead of allowing investigation to proceed and be concluded, it appears that the Department has acted in undue haste insofar as to ensure that taxes were paid during the process of investigation. While considering the time at which the amount was deposited in the Cash Ledger and the date of deposit, it would indicate that amounts were paid during times when there was no legal obligation to make payment.

• Self-ascertainment and Section 74(5) of CGST Act

The stand of the Deptt. that payment has been made voluntarily and that such payment is to be construed to be the payment in furtherance of self-ascertainment under Section 74(5) of CGST Act. It is further submitted that the generation of DRC-03 would conclude the issue regarding the Department’s assertion of self-ascertainment.

The relevant extract of section 74(5) of the CGST Act is reproduced as under:

(5) The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.

Under sub-section (5) of Section 74, the person chargeable with tax may, before service of notice under sub-section (1) pay the amount of tax along with interest payable under Section 50 of CGST Act and a penalty equivalent to fifteen per cent of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment. Upon such ascertainment as contemplated under sub-section (5) of Section 74 of CGST Act, further legal procedure is contemplated to complete such process of ascertainment as contained in the provision. Section 74 includes sub-section (6) which provides for proper officer, on receipt of such information, shall not serve any notice under sub-section (1), in respect of the tax so paid or any penalty payable.

Under sub-section (7) of Section 74, the ‘proper officer’ is at liberty if he concludes that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to issue a notice as provided under sub-section (1) in respect of amount which falls short of the amount actually payable. Sub-section (8) of Section 74 provides that the person chargeable with tax under sub-section (1) pays the said tax along with interest and penalty within the time prescribed, and all proceedings in respect of the notice shall be deemed to be concluded.

Accordingly, it is clear that the procedure of self-ascertainment under sub-section (5) of Section 74 contains a scheme that is concluded after following the procedure under sub-sections (6), (7) and (8) of Section 74 of the CGST Act.

In the present case, it must be noted that though there is payment of tax and even if it is accepted that payment of tax is also followed by requisite Challan DRC-03, the mere payment of tax cannot be construed to be a payment towards self-ascertainment as contemplated under Section 74 (5) of CGST Act.

The Hon’ble Court relied upon the letter dated 30-11-2019 written by the petitioner to the respondent. The contents of the letter are reproduced as under:

“As an extension of our goodwill conduct and bona fide, we have deposited INR 15,00,00,000/- [Rupees Fifteen Crores only] with the Exchequer of Government during the pendency of inspection proceedings. The above deposit is without prejudice to and with full reservation of our rights and contentions to seek necessary refund at the appropriate time and therefore should not be regarded as an admission of liability. The Challan of payment of the aforesaid deposit is enclosed herewith for your ready reference as Annexure-‘E’.”

The letter of the petitioner dated 30.11.2019 is clear and unambiguous, wherein it is asserted by the petitioner that the amount is made in furtherance of their good will conduct and bona fide and that it is made during the pendency of the inspection proceedings and the deposit is without prejudice and with reservation of rights, and contention to seek necessary refund at the appropriate time and should not be regarded as an admission of liability.  Clearly, the payment of tax by itself even if construed to be voluntary will not by itself in any way lead to a conclusion that the same is paid in furtherance of self-ascertainment under Section 74(5) of CGST Act. The scheme of self-ascertainment as contained in sub-sections (5), (6), (7), (8) of Section 74 of CGST Act would not admit of making of payment and continuance of investigation. Upon payment of tax after collection of the same with penalty, if the same is accepted even before the issuance of notice under Section 74(1) during investigation, there ends the matter and there is nothing further to be proceeded with.

If it is that the petitioner has paid tax on self-ascertainment, the question of respondents contending that the investigation is pending would also indicate that the contention of self -ascertainment as made out by the respondent is clearly an afterthought. The respondents have not taken the stand that self-ascertained tax falls short and if that were to be so, it could have proceeded to issue notice as contemplated under Section 74(7) and could have even rejected the self-ascertainment in its entirety while asserting that it would issue notice under Section 74(1) of CGST Act, if facts so warrant. The stand of the respondents is ambiguous as self-ascertainment is put forward only as defence to the assertion of the petitioner that the payment of amount has been made involuntarily. Accordingly, the contention of payment being made by way of self-ascertainment is liable to be rejected.

In other 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 investigation. The court ruled in regard of self-ascertainment under 74(5) as under:

Merely because an assessee has, under the stress of 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, enquiry and investigation are on-going, 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.

• Right of Bona fide Tax Payer to be treated with dignity

In this context the Hon’ble Court observed that it must be noted that filing of return and payment of substantial taxes by the petitioner would clearly warrant for treating such tax payers with certain element of dignity. The details of tax paid during the relevant period of time speaks for itself. Such a tax payer who has been filing returns and paying taxes but who may dispute the Department’s claim as regards certain transactions only can be construed to be bona fide tax payer.

The Hon’ble Court cited two supreme judgements in this context.

Dabur India Limited and Another v. State of Uttar Pradesh and Others and connected matters (1990) 4 SCC 113 at Para 31

“Before we part with this case, two aspects have to be adverted to–one was regarding the allegation of the petitioner that in order to compel the petitioners to pay the duties which the petitioners contended that they were not liable to pay, the licence was not being renewed for a period and the petitioners were constantly kept under threat of closing down of their business in order to coerce them to make the payment. This is unfortunate. We would not like to hear from a litigant in this country that the Government is coercing citizens of this Country to make payment of duties which the litigant is contending not to be leviable. Government, of course, is entitled to enforce payment and for that purpose to take all legal steps but the Government, Central or State, cannot be permitted to play dirty games with the citizens of this country to coerce them in making payments which the citizens were not legally obliged to make. If any money is due to the Government, the Government should take steps but not take extra legal steps or manoeuvre….”

D.K. Basu V. State of West Bengal – (1997) 1 SCC 416

The precious right guaranteed by Article 21 of the Constitution of India cannot be denied to convicts, undertrials, detenus and other prisoners in custody, except according to the procedure established by law by placing such reasonable restrictions as are permitted by law. It cannot be said that a citizen ‘sheds off’ his fundamental right to life the moment a policeman arrests him. Nor can it be said that the right to life of a citizen can be put in ‘abeyance’ on his arrest. Any form of torture or cruel, inhuman or degrading treatment would fall within the inhibition of Article 21, whether it occurs during investigation, interrogation or otherwise….”

The judgment is rendered in the context of development of ‘custody jurisprudence’ which lists out protection of those in custody. A bona fide tax payer is required to be treated better than a ‘detenu and arrestee’.

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 investigation, it cannot be held that the Fundamental Rights including the right of a bona fide tax payer to be treated with appropriate dignity as enshrined under Article 21 of the Constitution of India would be kept in abeyance. We would not like to elaborate further but to leave it to the wisdom of the respondents as to the manner in which bona fide tax payers are to be treated.

• Conclusion

If the tax-payer makes payment during investigation under pressure and compulsion circumstances, without admission of liability, under protest etc. it shall not be treated payment made either as voluntary or under self-assessment even though DRC-03 has also been furnished. The tax-payer may claim refund in this account before concluding the investigation.

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