2025 (1) TMI 831 - HC - GST

Refund of the GST amount paid - GST paid on an advance for a contract that was later rescinded due to non-performance by the supplier - HELD THAT - Admittedly, the contract in question having been breached by the other party thereto, the Assessee has recovered the amount by encashing the bank guarantee. The amount remitted to the Exchequer by way of GST component in contemplation of discharge of contract by execution could not have been retained by the State when the contract failed. It is as simple as that. Levy of tax is on the transaction; if transaction fails what is paid in advance needs to be refunded. The learned Single Judge has structured the impugned judgment on this inarticulate premise, which cannot be faltered. The vehement submission of learned AAG that no refund can be granted as a matter of course, unless the requirement of Sec. 54 of Karnataka Goods and Service Tax Act, 2017, appears to be very attractive at the first blush. However, a deeper examination shows it otherwise. Sec. 54 (1) of the Central GST Act, 2017 is in pari material with the said provision of the State Act. The Apex Court in OSWAL CHEMICALS AND FERTILIZERS LIMITED vs. COMMISSIONER OF CENTRAL EXCISE, BOLPUR 2015 (4) TMI 352 - SUPREME COURT construed the term any person employed in Sec. 11B of the Central Excise Act, 1944 to include even the purchaser of goods and therefore purchasers too can seek refund of Central Excise Duty. The same analogy applies to the case of Respondent-Assessee. The Revenue could not have declined the refund on the ground that Credit Note was not issued by the other party to the contract ie., the vendor, upon whom essentially the duty to pay tax rested inasmuch as the question of issuing such a note would not arise since goods were never delivered and that there was a gross breach of contract because of which it was rescinded and the price paid in advance was retrieved by encashing the bank guarantee. Conclusion - The tax should not be retained by the state when the underlying transaction fails. The appellant shall refund or cause to be refunded the GST amount to the Respondent-Assessee within a period of eight weeks. Appeal dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

Whether the refund of GST paid on an advance for a contract that was later rescinded due to non-performance by the supplier is justified under the applicable legal framework.
Whether the learned Single Judge was correct in setting aside the refund rejection orders and directing the refund of the GST amount to the Assessee.
Whether the procedural requirements under Section 54 of the CGST/SGST Act, 2017, were appropriately considered in granting the refund.
Whether the absence of a credit note from the supplier affects the Assessee's right to a refund.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of GST Refund

Relevant Legal Framework and Precedents: The case revolves around Section 54 of the CGST/SGST Act, 2017, which governs the refund of taxes. The precedent set in OSWAL CHEMICALS AND FERTILIZERS LIMITED vs. COMMISSIONER OF CENTRAL EXCISE was considered, where the term 'any person' was interpreted to include purchasers seeking refunds.
Court's Interpretation and Reasoning: The court reasoned that since the contract was breached and the advance was recovered, the GST component paid should be refunded as the transaction did not materialize.
Key Evidence and Findings: The contract was rescinded, and the advance payment was recovered by encashing the bank guarantee. The GST amount was paid in anticipation of contract execution, which did not occur.
Application of Law to Facts: The court applied the principle that tax is levied on transactions, and if a transaction fails, the tax paid in advance should be refunded.
Treatment of Competing Arguments: The Revenue argued that procedural requirements under Section 54 were not met, while the Assessee contended that retaining the GST amount would amount to unjust enrichment by the state.
Conclusions: The court concluded that the refund was justified as the contract failed, and retaining the GST amount would be without statutory justification.

Issue 2: Validity of the Single Judge's Order

Relevant Legal Framework and Precedents: The judgment was based on the principles of unjust enrichment and restitution.
Court's Interpretation and Reasoning: The court upheld the Single Judge's decision, emphasizing that the GST amount should not be retained by the state when there was no GST liability.
Key Evidence and Findings: The Single Judge observed that the GST amount was retained without any liability, which was unjust.
Application of Law to Facts: The court applied the doctrine of unjust enrichment, concluding that the state should not retain the GST amount.
Treatment of Competing Arguments: The Revenue's procedural arguments were dismissed in favor of the substantive justice argument presented by the Assessee.
Conclusions: The court affirmed the Single Judge's order, directing the refund of the GST amount.

Issue 3: Procedural Requirements under Section 54

Relevant Legal Framework and Precedents: Section 54 of the CGST/SGST Act, 2017, outlines the procedure for claiming refunds.
Court's Interpretation and Reasoning: The court found that the procedural requirements should not bar the refund when the substantive right to refund is clear.
Key Evidence and Findings: The court noted that the GST portal and returns reflected the payment, supporting the refund claim.
Application of Law to Facts: The court emphasized the substantive right to refund over procedural technicalities.
Treatment of Competing Arguments: The court dismissed the Revenue's argument about procedural non-compliance, focusing on the substantive issue of unjust enrichment.
Conclusions: The court concluded that procedural requirements should not prevent the rightful refund.

Issue 4: Absence of Credit Note

Relevant Legal Framework and Precedents: The requirement for a credit note is typically part of the tax adjustment process.
Court's Interpretation and Reasoning: The court held that the absence of a credit note did not preclude the refund since the goods were never delivered, and the contract was rescinded.
Key Evidence and Findings: The court noted that the supplier's obligation to issue a credit note was moot due to non-delivery.
Application of Law to Facts: The court applied the principle that the absence of a credit note should not bar the refund when the contract was not performed.
Treatment of Competing Arguments: The court dismissed the Revenue's argument about the necessity of a credit note, emphasizing the breach of contract.
Conclusions: The court concluded that the absence of a credit note did not affect the Assessee's right to a refund.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning: "Levy of tax is on the transaction; if transaction fails what is paid in advance needs to be refunded."
Core Principles Established: The judgment reinforced the principle that tax should not be retained by the state when the underlying transaction fails, emphasizing the doctrines of unjust enrichment and restitution.
Final Determinations on Each Issue: The court upheld the Single Judge's order, directing the refund of the GST amount to the Assessee within eight weeks and dismissing the appeal filed by the Revenue.

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