Indelible tale of deficiency memo and interest in delayed refunds

[Navjot Singh]

After filing the refund application as per Section 54 of the CGST Act, 2017, if any deficiencies are noted by the proper officer then as per Rule 90(3) of the CGST Rules, same shall be communicated to the applicant by the issuance of deficiency memo in Form RFD-03 along with asking the applicant to file a fresh refund application after rectification of such deficiencies.

Recently, Hon’ble Delhi High Court in the case of JIAN INTERNATIONAL VERSUS COMMISSIONER OF DELHI GOODS AND SERVICES TAX 2020 (7) TMI 611 - DELHI HIGH COURT held that the Ld. Adjudicating authority has no right to find a Deficiency in refund application after 15 days.

Synopsis

Facts of the Case

• The writ petition was filed seeking a direction to the Jurisdictional Authorities to grant refund claimed under Section 54 of the GST Act.
• The petitioner states that in accordance with Statute, the proper officer is required to refund at least 90% percent of the refund claimed on account of zero-rated supply of goods or services or both made by registered persons within a period of 7 days from the date of acknowledgment.
• He states that despite the period of 15 days from the date of filing of the refund application expired, the proper officer has till date neither pointed out any deficiency/ discrepancy in FORM GST RFD-03 nor it has issued any acknowledgment in FORM GST RFD-02.
• It was also stated that the Petitioner further states that even for the refunds for the months of September and November 2017, the petitioner had to file Writ Petition (No.6337/2019) and it was only thereafter the Department had refunded the tax along with partial interest.

Court’s Observation

• Rules 90 and 91 of GST Rules provide a complete code with regard to acknowledgment, scrutiny, and grant of refund.
• The said Rules also provide a strict timeline for carrying out the aforesaid activities.
• For instance, Rules 90(2) and (3) of the GST Rules states that within 15 days from the date of filing of the refund application, the respondent has to either point out discrepancy/ deficiency in FORM GST RFD-03 or acknowledge the refund application in FORM GST RFD-02.
• In the event of default or inaction to carry out the said activities within the stipulated period, consequences like payment of interest are stipulated in Section 56 of the GST Act.
• Admittedly, no acknowledgment and deficiency memo has not been issued in respect of refund application within the stipulated time, the refund application would be presumed to be complete in all respects in accordance with sub-rule (2), (3) and (4) of Rule 89 of GST Rules.

Order

• Consequently, this Court is of the view that the proper officer has lost the right to point out any deficiency, in the petitioner’s refund application, at this belated stage.
• Accordingly, this Court directs the respondent to pay to the petitioner the refund along with interest in accordance with law within two weeks.

SONOROUS OBSERVATION

To allow the respondent to issue a deficiency memo today would amount to enabling the Respondent to process the refund application beyond the statutory timelines as provided under Rule 90 of the CGST Rules, referred above. This could then also be construed as a rejection of the petitioner’s initial application for refund as the petitioner would thereafter have to file a fresh refund application after rectifying the alleged deficiencies. This would not only delay the petitioner’s right to seek refund but also impair petitioner’s right to claim interest from the relevant date of filing of the original application for refund as provided under the Rules.

What is the issue?

Before the discussion of the issue, the procedure of adjudication is briefed for your ready reference:- Master Circular 125/44/2019 GST dated 18^th November 2019 further modified vide Circular No.135/05/ 2020 – GST dated 31.03.2020 clarified various issues related to refunds and introduced the procedure for electronic submission and processing of refund applications in supersession of earlier Circulars viz. Circular No. 17/17/2017-GST dated 15.11.2017, 24/24/2017- GST dated 21.12.2017, 37/11/2018- GST dated 15.03.2018, 45/19/2018- GST dated 30.05.2018 (including corrigendum dated 18.07.2019), 59/33/2018-GST dated 04.09.2018, Circular No. 125/44/2019 - GST, 70/44/2018-GST dated 26.10.2018, 79/53/2018-GST dated 31.12.2018 and 94/13/2019-GST dated 28.03.2019.

• Time Limit & Condition for Issuing acknowledgment in GST-RFD-02:-

If the application for refund is complete in terms of sub-rule (2), (3) and (4) of rule 89 of the CGST Rules, an acknowledgment in FORM GST RFD-02 should be issued within 15 days of the filing of the refund application.

• Date from which 15 days shall be calculated:-

Either an acknowledgment or a deficiency memo should be issued within the aforesaid period of 15 days starting from the date of the generation of ARN of GST-RFD-01. Once an acknowledgment has been issued in relation to a refund application, no deficiency memo, on any grounds, maybe subsequently issued for the said application.

• Consequences of the issuance of Deficiency Memo

1. The refund application would not be further processed and a fresh application would have to be filed.
2. Any amount of input tax credit/ cash debited from electronic credit/ cash ledger would be re-credited automatically once the deficiency memo has been issued.

(It may be noted that the re-credit would take place automatically and no order in FORM GST PMT-03 is required to be issued)

3. The applicant is required to rectify the deficiencies highlighted in deficiency memo and file fresh refund application electronically in FORM GST RFD-01 again for the same period and this application would have a new and distinct ARN.

• A deficiency memo can be issued again?

An application has been submitted afresh, pursuant to a deficiency memo, the proper officer will not serve another deficiency memo with respect to the application for the same period unless the deficiencies pointed out in the original deficiency memo remain un-rectified, either wholly or partly, or any other substantive deficiency is noticed subsequently.

Hence, the circle of issuance of a deficiency memo shall continue until the file is complete in all respect.

• Debatable Point ~ Application filed in pursuance of Deficiency Memo

Since a refund application filed after correction of deficiency is treated as a fresh refund application, such a rectified refund application, submitted after correction of deficiencies, shall also have to be submitted within 2 years of the relevant date, as defined in the explanation after sub-section (14) of section 54 of the CGST Act.

• Issuance of Show Cause of Notice after the deficiency memo

1. Vide N.N. Circular No. 59/33/2018-GST dated 4^th September 2018, It was noticed by the CBIC that, few field formations are issuing show-cause notices to the claimants in cases where the refund application is not re-submitted after the issuance of a deficiency memo.
2. These SCNs are being subse-quently adjudicated and orders are being passed in FORM GST RFD-04/06.
3. It is clarified that show-cause-notices are not required to be issued where deficiency memos have been issued.
4. A refund application which is re-submitted after the issuance of a deficiency memo shall have to be treated as a fresh application.
5. No order in FORM GST RFD-04/ 06 can be issued in respect of an application against which a deficiency memo has been issued and which has not been resubmitted subsequently.

Our View

Calculation of Interest ~ In the light of Erstwhile Regime

• Since application filed in pursuance of deficiency memo is treated as a fresh application hence if refund disbursements are delayed then the calculation of interest shall be form filing of the new application or original application?
• In the earlier regime, as per the provisions of Section 11BB of the Central Excise Act, 1944 the interest payment is due after a period of three months from the date of refund application till the payment of the refund.
• Further, it is worthwhile to note that there was no clause in these provisions that the date of payment of interest gets postponed by any order of the Court.

(See M/s. Tirupati Pipe & Allied Industries Pvt. Ltd. v. CCE - 2007 (10) TMI 240 - CESTAT, MUMBAI , M/s. Aglowmed Ltd. v. CCE, Vapi - 2008 (7) TMI 713 - CESTAT, AHMEDABAD, M/s. J.K. Cement Works v. ACCE & C - 2004 (2) TMI 78 - RAJASTHAN HIGH COURT and AC v. M/s. J.K. Cement Works - 2004 (10) TMI 574 - SC ORDER, Jayanta Glass Ltd. v. CCE, Kolkata - 2004 (2) TMI 89 - CESTAT, NEW DELHI, Rama Vision Ltd. v. CCE, Meerut - 2004 (6) TMI 53 - CESTAT, NEW DELHI and M/s. Surajbhan Synthetics (P) Ltd. v. CCE - 2014 (7) TMI 24 - CESTAT BANGALORE

• From the afore-extracted provisions that Section 11BB of the Act comes into play only after an order for refund has been made under Section 11B of the Act.
• Section 11BB of the Act lays down that in case any duty paid is found refundable and if the duty is not refunded within a period of three months from the date of receipt of the application to be submitted under sub-section (1) of Section 11B of the Act, then the applicant shall be paid interest at such rate, as may be fixed by the Central Government, on expiry of a period of three months from the date of receipt of the application.
• The Explanation appearing below Proviso to Section 11BB introduces a deeming fiction that where the order for a refund of duty is not made by the Proper Officer but by an Appellate Authority or the Court, then for the purpose of this Section the order made by such higher Appellate Authority or by the Court shall be deemed to be an order made under sub-section (2) of Section 11B of the Act.
• It is clear that the Explanation has nothing to do with the postponement of the date from which interest becomes payable under Section 11BB of the Act.
• Manifestly, interest under Section 11BB of the Act becomes payable, if, on expiry of a period of three months from the date of receipt of the application for a refund, the amount claimed is still not refunded.
• Thus, the only interpretation of Section 11BB that can be arrived at is that interest under the said Section becomes payable on the expiry of a period of three months from the date of receipt of the application under Sub-section (1) of Section 11B of the Act and that the said Explanation does not have any bearing or connection with the date from which interest under Section 11BB of the Act becomes payable.

Reference may be made to the decision of this Court in Union of India & Anr. Versus Shreeji Colour Chem Industries - 2008 (9) TMI 12 - Supreme Court. It is evident from a bare reading of the decision that insofar as the reckoning of the period for the purpose of payment of interest under Section 11BB of the Act is concerned, the emphasis has been laid on the date of receipt of the application for refund. In that case, having noted that application by the assessee requesting for a refund, was filed before the Assistant Commissioner on 12th January 2004, the Court directed payment of statutory interest under the said Section from 12th April 2004 i.e. after the expiry of a period of three months from the date of receipt of the application. Thus, the said decision is of no avail to the revenue.

In the view of aforementioned judgments it was held by the Hon’ble Apex Court, the liability of the revenue to pay interest under Section 11BB of the Act commences from the date of expiry of three months from the date of receipt of the application for a refund under Section 11B(1) of the Act and not on the expiry of the said period from the date on which order of refund is made.

Further, it is a well-settled proposition of law that fiscal legislation has to be construed strictly and one has to look merely at what is said in the relevant provision; there is nothing to be read in; nothing to be implied and there is no room for any intendment.

(See Cape Brandy Syndicate Vs. Inland Revenue Commissioners [1921] 1 K.B. 64 and Ajmera Housing Corporation & Anr. Vs. Commissioner of Income Tax 2010 (8) TMI 35 - SUPREME COURT).

Now, in the GST Regime, the procedure of adjudication has been changed. Hence in our view, it will be an injustice to the interests of the taxpayers if calculation of interest on delayed refund is, from the fresh application not from the Original application.

Businesses facing a cash flow crunch due to the lockdown are served with the deficiency memos that have blocked the release of GST refunds even The government of India has been resorting to all possible means during the COVID-19 led shutdown in the country to curtail the fiscal menace. The Central Government released GST so that businesses do not face an acute liquidity crunch.

There are bona fide instances wherein the first refund applications were filed within the prescribed time limits but because of the error on the part of authorities. The deficiency memo was not provided within 15 days and when the application is filed afresh, the same get time-barred.                                .

Now, the Delhi High Judgement (Supra) brings relief for many taxpayers whose refund is stuck in the department for a long time.