TIMELINE FOR REFUND UNDER SECTION 38(3) OF THE DELHI VALUE ADDED TAX, 2004

[Mr. M. GOVINDARAJAN]

Section 38 of the Delhi Value Added Tax, 2004 (‘Act’ for short) deals with the refunds.

• Section 38 (1) provides that any amount of tax, penalty and interest that is in excess of the amount due from a person shall be refunded to him by the Commissioner.
• Section 38 (2) permits the Commissioner to first apply such excess to recover any other amount that is due under the Act or the Central Sales Tax Act, 1956.
• Section 38(3) provides the assessee with the option of getting the refund or carrying it forward to the next tax period as a tax credit. Section 38(3)(a) provides the timeline for the refund from the date on which the return is furnished or claim for refund is made as-

• within one month, if the period for refund is one month;
• within two months, if the period for refund is a quarter.

• Section 38(4) provides that if notice has been issued under Section 58 or additional information has been sought under Section 59, then the amount shall be carried forward to the next tax period as tax credit.
• Section 38(5) provides that the Commissioner may, as a condition of the payment of a refund, demand security from the person within 15 days from the date on which the return was furnished or claim for the refund was made.
• Section 38(6) provides that the Commissioner shall grant refund within15 days from the date the dealer furnishes the security to his satisfaction.
• Section 38(7) provides certain exclusions while calculating the period.
• Section 38(8) provides that no amount shall be refunded to the dealer or may be applied by the dealer unless the Commissioner is satisfied that the dealer has refunded the amount to the purchaser.
• Section 38(9) provides that the amount may be refunded to the seller or may be applied by the seller and the Commissioner may reassess the buyer to deny the amount of the corresponding tax credit claimed by such buyer, whether or not the seller refunds the amount to the buyer.
• Section 38(10) provides that where a registered dealer sells goods and the price charged for the goods is expressed not to include an amount of tax payable under this Act the amount may be refunded to the seller or may be applied by the seller without the seller being required to refund an amount to the purchase.
• Section 38(11) provides that no refund shall not be allowed to a dealer who has not filed any return that is due under the Act.

The issue to be discussed in this article is as to whether the timeline for refund under Section 38(3) of the Act must be mandatorily followed while recovering dues under the Act by adjusting them against the refund amount with reference to decided law.

In COMMISSIONER OF TRADE AND TAXES VERSUS FEMC PRATIBHA JOINT VENTURE - 2024 (5) TMI 123 - SUPREME COURT held that the timeline for refund under Section 38(3) of the Act must be mandatorily followed while recovering dues under the Act by adjusting them against the refund amount.

In the above said case FEMC Pratibha Joint Venture, the respondent in this case, is engaged in the execution of works contracts for the Delhi Metro Rail Corporation. For this purpose, the respondent made purchases. The respondent claimed refund of excess input tax credit-

• Rs. 17,10,15,285/- for the 4th quarter of 2015-16 through revised return filed on 31.03.2017; and
• Rs. 5,44,39,148/- for the 1st quarter of 2017-18 through return filed on 29.03.2019.

The respondent also claimed interest in both of the above refunds under Section 42 of the Act. Since the respondent did not received refund the respondent sent a letter to the Department on 09.11.2022 with the request to consider its refund claims. In the meantime, the appellant issued notices to the respondent on 30.03.2020, 23.03.2021, 30.03.2021, and 26.03.2022 calling for the payment of dues as contained in the said notices. The Value Tax Officer passed an adjustment order dated 18.11.2022 to adjust dues contained in the above said 4 notices, against the respondent’s claims for refund.

Being aggrieved against the order of the Department, the respondent filed a writ petition before the High Court. The High Court quashed the adjustment order and the default notices on 21.09.2023. The High Court also directed the Department to refund the two claims of the respondent along with interest till the date of realization. The High Court also directed the respondent to file statutory appeal under Section 74 of the Act. The High Court, while deciding the above considered the following-

• the department must scrupulously adhere to the time limit for processing and issuing the refunds under Section 38.
• Whenever the department seeks to obtain necessary information under Section 59 of the Act, it must take steps within the time limit envisaged under the Act.
• the refund amount can be adjusted only when an enforceable demand in the nature of tax or duty is pending against the assessee.
• The department does not have any legal right or justification to retain the amount beyond the time limit prescribed under Section 38 of the Act.

The High Court held that the mandate of the Act has not been followed and hence the adjustment order is not maintainable.

The Department filed the present civil appeal before the High Court. The Supreme Court restricted the issues to the issue of quashing of the adjustment order as ordered by the impugned High Court order. The appellant submitted the following before the Supreme Court-

• The timelines specified in Section 38(3) are only to ensure that interest is paid if the refund is delayed beyond the statutorily prescribed period.
• The timeline cannot be used to denude the power to adjust refund amounts against outstanding dues under Section 38(2).
• The refund can be adjusted as long as outstanding dues exist at the time when the refund is processed, even if it is beyond the stipulated timeline.

The respondent supported the order of High Court.

The Supreme Court observed that the findings of the High Court are based on Section 38 of the Act. The Supreme Court analyzed the provisions of section 38 in detail. For the present case Section 38(3)(a)(ii) is relevant as both the refunds in the present case pertain to quarter tax periods. as per Section 38(3)(a)(ii), the refund should have been processed within two months from when the returns were filed (31.03.2017 and 29.03.2019), which comes up to 31.05.2017 and 29.05.2019. The Department issued the default notices are dated 30.03.2020, 23.03.2021, 30.03.2021, and 26.03.2022. Therefore, it is clear that the default notices were issued after the period within which the refund should have been processed. Section 38(2) only permits adjusting amounts towards recovery that are ‘due under the Act’. Therefore, the Supreme Court held that the department is not justified in retaining the refund amount beyond the stipulated period and then adjusting the refund amount against the amounts due under default notices that were issued subsequent to the refund period. The Supreme Court further did not accept the contentions of the Department that the purpose of the timeline provided under sub-section (3) is only for calculation of interest under Section 42 would defeat the object of the provision. Such an interpretation would effectively enable the department to retain refundable amounts for long durations for the purpose of adjusting them on a future date. This would go against the object and purpose of the provision.

The Supreme Court dismissed the appeal filed by the Department and confirmed the order passed by the High Court.