Deficiency Memo for refund claim filed- A Weapon for?

[Atul Rathod]

Background

One of the good moves taken by the CBIC during Covid-19 to help taxpayers is granting the refund under fast track mode. It was good to see that CBIC has released the good amount of refund claim in short span of time.

However, this article is with respect to the deficiency memo issued by the refund authority at preliminary verification of refund claim filed by the applicant. The issuance of deficiency memo is nothing new in the GST regime, infect the process was available in earlier regime as well.

In GST regime, with the issuance of deficiency memo, applicant is asked to file a fresh refund claim and two years of time limit from relevant date would be considered for fresh application though the original application was filed within the time limit mentioned in the section 54 of the act. However, in earlier regime the time limit from relevant date would be considered for original application filed and not for the fresh application. The same was also substantiated by many judgements/decisions given by Hon’ble Courts/Tribunals. Let us discuss in detail, the process/background for issuance of deficiency memo:

Legal Provision

A registered person claiming a refund claim needs to file a refund application within two years from relevant date in accordance with section 54 read with rule 89 of the CGST Rules.

• On receipt of the refund application, acknowledgement in Form RFD-02 needs to be given clearly indicating the date of filing the claim, if the refund is related to electronic cash ledger. [Rule 90(1)]
• For refund claim pertaining to other than refund claim of electronic cash ledger, proper officer within 15 days of filing the said application needs to scrutinize the application for its completeness. [Rule 90(2)]
• If the said application is found to be complete in the term of rules 89(2), (3), (4) of the CGST Rules, 2017, acknowledgment needs to be given in Form RFD-02 indicating the date of filing the application.
• [Rule 90(2)] However, if any deficiencies are noted by the proper officer, same shall be communicated to the applicant by issuance of deficiency memo in Form RFD-03 along with asking applicant to file a fresh refund application after rectification of such deficiencies. [Rule 90(3)]
• Further, when deficiency memo is issued by the proper officer under rule 90(3) of the Rules, the amount debited at the time of filing refund application shall be recredited to the electronic credit ledger. [Rule 93(1)]
• Where any proper officer is satisfied that refund is not eligible, a notice shall be issued by the proper office in form RFD-08, requiring applicant to furnish the reply in the form RFD- 09 within a period of 15 days from the notice and follows up with PH and order. {Rule 94(3)]

Analysis:

As mentioned in the above provisions of the Act & Rules, if a refund application is not at the satisfaction of proper officer and certain deficiencies are noted by the proper officer, he shall issue a deficiency memo. However, it is important to note that the along with the deficiency memo, a proper officer suggesting us to file the fresh refund application and recrediting the amount in the electronic credit ledger of the applicant.

This scenario becomes very dangerous when the application for the refund was filed within the last week of the due date. As in that scenario, rectification of deficiency memo would result in filing the fresh application after due date as it would be considered for the fresh refund application and not for the original refund application. If the said scenario takes place, there is always a high probability that refund claim could be treated as time-barred application by the department and gets the good opportunity to hold the refund claim until get settled at the higher forum (considering the benefit as procedural lapse cannot take away the substantive benefit) which would be very time consuming and also block the working capital of the applicant.

It is further important to note that, certain deficiencies such as HSN of the inward supplies etc. are such that wherein department is bound to give as the same are mandatory requirements mentioned in the circular no. 135 dated 31 March 2020. Further lot of requirements are mentioned as per the master circular no 125 dated 18 November 2020 which has replace all the refund circulars issued prior to the date of 18 November 2020. However, the said discrepancies may not be acceptable to the applicant as the same could be either not mandatory as per the Act/Rules or same could be treated as small deviation not having an impact on the refund claim. In such a scenario, filing of fresh application again with small rectification, would be prejudice to the applicant and could result into time-barred application.

It has been seen practically that, department is very particular about the format of refund claim as given in circular and rejecting the refund claim even if HSN is missed in the annexure of statement of inward supplies or due to similar avoidable errors. Of Couse, the same is at the discretionary nature of the proper officer. In this background, department should look into the effect of such discrepancies on the refund claim rather than going into the mere procedure as per the circular. It would create a more hassle for the applicant to resubmit the fresh application.

Further, getting recredited the ITC in electronic ledger is forcing applicant to file fresh refund application. Therefore, one must take utmost care that refund claims are filed in advance of the due dates and in line with the formats provided in the circulars.

It was seen that before master circular dated 18 November 2020, officers have started issuing show cause notices in case the applicant does not response to the deficiency memo. However, with the issuance of master circular the said window was closed saying if the deficiency memo is issued, SCN is not required to be issued. Though in some cases it was also seen that, show cause notice was issued if the reply to the deficiency memo was not issued.

However, in case where do not wish to give SCN it makes the purpose of rule 94(3) ineffective. As, it is fundamentally settled principle that any refund claim must be rejected by way of SCN although in many cases, order used to be issued. Without a show cause notice a refund cannot be rejected as laid down in many judgements. It is settled principle that if the circular is contrary to the legal provisions thereby it is non est in law as held by the Hon’ble SC in the case of Commissioner v. Ratan Melting and Wire Industries - 2008 (10) TMI 5 - SUPREME COURT

It has also been seen that many a times, department does not give the deficiency memo within 15 days of application filed which result in making the refund claim time barred as the fresh application could result in beyond time limit of 2 years from relevant date. The subject matter has been already represented before CBIC.

Master Circular and its analysis:

In the circular dated 4 September 2018 it was mentioned that no show cause notice is required to be issued if the resubmission of the application is not made on account of deficiency memo issued.

In the master circular dated 18 November 2019 it was mentioned that since a submission of refund application on account of deficiency memo is fresh application therefore the same shall also be made within two years from the relevant date.

Though the rules request for filing of fresh refund application in case of deficiency memo but nowhere mentions either old application is invalid/ rejected, or calculation of relevant date shall be made from the resubmission of fresh application. It only circular bought that thought process into light.

Further rejection of refund claim by deficiency memo makes the rule 92(3) unwarranted which says any rejection of refund claims shall be made through form RFD-08.

Department must give clarification that if due to error in the refund application does not impact the refund claim majorly, the due date for the refund shall be considered for the original application filed. Else it would be treated as weapon to the department for making the application time barred, if the same has been filed in the last week of the due date.

Earlier regime:

There is catena of judgements where it was decided by Hon’ble High Court and Hon’ble Tribunal that time limit of due date shall be calculated from the initial date of application filed and not after the application filed rectifying the errors mentioned in deficiency memo.

Way forward/ Suggestions:

• One must need not wait to file the refund claim in the last week of the due date and plan the refund claim in advance.
• Refund claim shall be filed in accordance with requirement mentioned in the master circular no. 125 & also 135.
• Way of appeal can be opted against deficiency memo, if the deficiency memo itself is the rejection of refund claim and wherein resubmission of refund claim making its a time barred.
• Circular needs to be amended clarifying that two years shall be calculated for originally filed application and not for the revised one as the same would create havoc. Apologies for the grammatical errors.

Views are fully personal. For any comments/suggestions author may be reached at [email protected].

Written by CA Atul Rathod