WITHHOLDING OF REFUND CLAIM

[Mr. M. GOVINDARAJAN]

Refund of unutilized input tax credit

Section 54(3) of the Central Goods and Services Tax Act, 2017 provides that a registered person may claim refund of any unutilized input tax credit at the end of any tax period.  No refund of unutilized input tax credit shall be allowed in cases other than–

• zero rated supplies made without payment of tax;
•  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;
• where the goods exported out of India are subjected to export duty;
• 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.

Withholding of refund

Section 54(10) of the Act provides that where any refund is due to a registered person who has defaulted in furnishing any return or who is required to pay any tax, interest or penalty, which has not been stayed by any court, Tribunal or Appellate Authority by the specified date, the proper officer may-

• withhold payment of refund due until the said person has furnished the return or paid the tax, interest or penalty, as the case may be;
• deduct from the refund due, any tax, interest, penalty, fee or any other amount which the taxable person is liable to pay but which remains unpaid under this Act or under the existing law.

Interest

Where a refund is withheld the taxable person shall, notwithstanding anything contained in section 56, be entitled to interest at such rate not exceeding 6% as may be notified on the recommendations of the Council, if as a result of the appeal or further proceedings he becomes entitled to refund.

Issue

The issue to be discussed in this article is as to whether the Department may withhold refund on account of cancellation of GST registration with reference to decided case law.

Case law

In MR. BRIJ MOHAN MANGLA VERSUS UNION OF INDIA & ORS. - 2023 (3) TMI 327 - DELHI HIGH COURT the petitioner is engaged in the manufacturing of various types of liquid printing inks.  During May 2019 to December 2019 the petitioner was carrying on his business from the premises bearing the address A-80 Block, near Kasturi Ram Public School, DSIDC Industrial Area, Narela, Delhi 110040.  After that he is carrying on the business under the name of Standard Ink from the premises situated at Killa No. 4/24, Village Nathpur, Sonipat, Haryana.

The input tax credit in respect of the petitioner was accumulated to the tune of Rs.74,02,337/- during the period from May 2019 to December 2019.  Therefore he filed 6 separate refund applications for getting the refund from the Department at various dates from 09.12.2020 to 16.03.2021.  The Department did not process the said refund claims.  But the Department issued six show cause notices to the petitioner calling upon the petitioner to show cause as to why his claims for refund be not rejected for the following two reasons-

• The physical verification conducted on the petitioner’s premises on 05.02.2021 revealed that the concern was non-existent; and
•  The GSTIN registration of the petitioner was cancelled with effect from 19.02.2021.

The petitioner replied to the show cause notices to the Department.  The petitioner contended that during the relevant period, he was carrying on the business from the premises as declared (A-80 Block, near Kasturi Ram Public School, DSIDC Industrial Area, Narela, Delhi 110040). However, he had subsequently shifted his manufacturing activities to the current location in Haryana (Killa No. 4/24, Village Nathpur, Sonipat, Haryana).

The Authorities did not accept the reply given by the petitioner and rejected the claims filed by the petitioner.  Six separate orders were issued by the Revenue in this regard from the period 26.02.2021 to 25.05.2021.  The principal reason for rejecting the petitioner’s application was that he was not a ‘registered person’ and therefore, was not entitled to refund under Section 54(3) of the Act.

Being aggrieved with the orders passed by the Adjudicating Authority the petitioner filed six appeals before the Appellate Authority.  The Appellate Authority allowed the appeal filed by the petitioner on 20.09.2021.  The Appellate Authority held that the petitioner was carrying on his business from the relevant premises during the material time and had shifted its premises to Haryana thereafter.   The Appellate Authority also found that there was no doubt as to the genuineness of the said claims and the petitioner was a registered person at the time of filing of his applications for refund.   Therefore the provisions of Section 54(3) of the Act which enable only a registered person to make a claim for refund did not in any manner disentitle the petitioner for claiming the refunds.

The Revenue did not file appeal against the order of First Appellate Authority.    On 29.09.2021 the petitioner filed another application for refund (in Form GST RFD 01) along with an Order in Appeal dated 20.09.2021. The petitioner also enclosed therewith a certificate from a Chartered Account and an undertaking as required. The said application was not processed. Instead, the respondents issued a deficiency memo once again raising the same issues that were conclusively decided by the Appellate Authority by the order dated 20.09.2021. The petitioner responded to the said deficiency memos.

In the meanwhile, on 11.02.2021, the respondent also issued a Show Cause Notice calling upon the petitioner to show cause as to why its registration not be cancelled. The petitioner responded to the Show Cause Notice by furnishing a reply on 15.02.2021. However, the Superintendent, vide order dated 19.02.2021, cancelled the petitioner’s GSTIN registration.

The petitioner filed an application for revocation of the cancellation before the Deputy Commissioner, which was also rejected by an order dated 05.04.2021.    The petitioner field appeal against this order before the Appellate Authority.  The Appellate Authority allowed the appeal filed by the petitioner vide their order dated 20.10.2021.  The Appellate Authority set aside the order of Adjudicating Authority rejecting the claim of refund.  The Appellate Authority further directed the Department to restore the GSTN registration.

The petitioner once again filed refund claim which was not processed by the Department.  Therefore the petitioner filed the present writ petition before the High Court.  The Department contended before the High Court that since the petitioner was not found functioning at the given address.   If the petitioner’s registration is cancelled, the petitioner would no longer be a registered person and therefore, cannot apply for refund under Section 54(3) of the GST Act.  The Department further contended that it was going to file appeal against the order of Appellate Authority.  The time for filing appeal has been expired.  However, the Department contended that the limitation period for filing appeal was still there as per the circular dated 03.12.2019. 

The High Court considered the submissions of the parties to the present writ petition.  The High Court observed that the Department has not obtained any order against the order of Appellate Authority.   it is not open for the respondents to ignore the orders passed by the Appellate Authority merely on the ground that it has decided to appeal those orders. It would be debilitating to the rule of law, if the respondents are permitted to withhold implementation of the orders passed by the authority in this manner.

The High Court allowed the petition and directed the Department to process the petitioner’s claim for refunds including interest.  However the High Court would not preclude the respondents from availing their remedies against the orders passed by the Appellate Authority in accordance with law. In the event the respondents succeed in upsetting the appellate orders, it would be entitled to take consequential action for recovery of any amount that may have been disbursed albeit, in accordance with applicable law.