2025 (5) TMI 1983 - HC - GST

Witholding of Refund claim - Whether the Department can withhold the refund sanctioned by the Appellate Authority u/s 54(11) of the CGST Act on the ground that grant of refund is likely to adversely affect the revenue due to alleged malfeasance or fraud? - HELD THAT - The position under Section 54 (11) of the CGST Act 2017 has been recently considered by this Court in Shalender Kumar v. Commissioner Central Goods and Services Tax Delhi West Ors. 2025 (4) TMI 555 - DELHI HIGH COURT wherein the Court observed In the opinion of this Court the Department s opinion under Section 54 (11) cannot be relied upon on a standalone basis. In the absence of an appeal or any other proceeding pending challenging the order of the Appellate Authority the opinion under Section 54 (11) cannot result in holding back the refund. The refund having been permitted by the Appellate Authority and no order in review having been passed the Department cannot hold back the refund. In view of the above settled legal position under Section 54 (11) of the CGST Act that the opinion of the Department cannot be relied upon on a stand-alone basis without any challenge to the order by the Appellate authority it is directed that the refund amount be released in favour of the Petitioner along with the statutory interest. The Petitioner is free to file an application if the refund amount is not credited by 10th July 2025. Petition disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Petitioner is entitled to the refund of unutilized Input Tax Credit (ITC) under Section 54(3)(i) of the Central Goods and Services Tax Act, 2017 (CGST Act) in respect of export of mobile phones.

- Whether the Department can withhold the refund sanctioned by the Appellate Authority under Section 54(11) of the CGST Act on the ground that grant of refund is likely to adversely affect the revenue due to alleged malfeasance or fraud.

- The scope and applicability of Section 54(11) of the CGST Act regarding withholding refund when an appeal or further proceedings are pending.

- The entitlement of the Petitioner to interest on delayed refund under Section 56 of the CGST Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to Refund of Unutilized ITC under Section 54(3)(i) of the CGST Act

The Petitioner, engaged in export of mobile phones, claimed refund of unutilized ITC for the months of September and October 2022, filing refund applications in Form GST RFD-01. The refund claims were initially rejected by the Assistant Commissioner's office, leading to issuance of Show Cause Notices. Upon appeal, the Appellate Authority allowed the refund claims, setting aside the rejection orders.

The relevant legal framework is Section 54 of the CGST Act, which governs refund of tax or ITC. Clause (i) of the proviso to Section 54(3) specifically provides for refund of unutilized ITC in case of zero-rated supplies such as exports.

The Court noted that the Petitioner had complied with procedural requirements and the Appellate Authority's order confirmed the Petitioner's entitlement to refund based on examination of documents and rejection of the Department's contrary findings. The Appellate Authority relied on evidence such as electricity bills and income tax returns to affirm the Petitioner's bona fide existence and business activities, negating the Department's suspicion of malfeasance.

The Court emphasized that the Petitioner's refund claim was valid and that the Department's initial rejection lacked sufficient basis. The Appellate Authority's decision was binding unless challenged through proper appellate proceedings.

Issue 2: Withholding Refund under Section 54(11) of the CGST Act

The Department, invoking Section 54(11), withheld the refund sanctioned by the Appellate Authority, citing potential adverse impact on revenue due to alleged malfeasance or fraud. The Department's order stayed the refund pending final decision on appeals filed against the Appellate Authority's order.

Section 54(11) empowers the Commissioner to withhold refund if (i) the refund order is subject matter of pending appeal or other proceeding under the Act, and (ii) the Commissioner opines that grant of refund is likely to adversely affect revenue due to malfeasance or fraud, after giving the taxable person an opportunity of being heard.

The Court analyzed the scope of Section 54(11) in light of recent precedents, particularly a judgment where it was held that the Department's opinion under Section 54(11) cannot be relied upon in isolation. The Court clarified that mere intention or decision to file an appeal does not justify withholding refund unless an appeal or proceeding is actually pending.

In the present case, at the time of withholding, no appeal or proceeding challenging the Appellate Authority's order was pending. The Department's reliance solely on its opinion without a pending appeal was held to be impermissible. The Court referred to prior decisions which held that the benefit of an Appellate Authority's order cannot be denied merely because the revenue intends to challenge it.

The Court further observed that withholding refund contrary to the statutory provisions and judicial precedents would be detrimental even to the Department's own interest, as delayed refunds attract interest liability under Section 56.

Issue 3: Interest on Delayed Refund under Section 56 of the CGST Act

The Court noted that Section 56 mandates payment of interest on delayed refunds. Given the delay caused by withholding the refund, the Petitioner was entitled to interest for the period of delay. The Court directed that the refund be processed along with applicable interest within two months.

Issue 4: Effect of Pending or Future Appeals on Refund Processing

The Court clarified that if any appeal challenging the Appellate Authority's order is filed in the future, the processing of the refund directed by this order would be subject to the outcome of such appeal. However, until such appeal is filed and pending, the Department cannot withhold the refund.

This balanced approach preserves the Department's right to challenge the order while protecting the Petitioner's right to timely refund and interest.

3. SIGNIFICANT HOLDINGS

- "The Department's opinion under Section 54(11) cannot be relied upon on a standalone basis. In the absence of an appeal or any other proceeding pending, challenging the order of the Appellate Authority, the opinion under Section 54(11) cannot result in holding back the refund."

- "The order-in-appeal passed by the Appellate Authority cannot be ignored by the respondents solely because according to the revenue, the said order is erroneous and is required to be set aside."

- "Considering the fact that refund amounts are payable with interest for the delayed period for paying the refund, it would in fact be contrary to the interest of the Department itself to hold back the refund."

- The Court directed release of the refund amount along with statutory interest under Section 56, within two months, subject to any future appeal challenging the Appellate Authority's order.

- The Court preserved the Department's right to challenge the Appellate Authority's order but emphasized that mere intention or opinion without a pending appeal does not justify withholding refund.