2025 (4) TMI 1145 - HC - GST

Refund claim - rejection of refund by deficiency memo on the ground that refund not allowed in case of payment made voluntary by DRC-03 - HELD THAT - On perusal of the affidavit-in-reply it appears that the respondent No. 4 has referred to the facts of the case without considering the issue raised in the petition for rejection of the refund claim of the petitioner by issuing deficiency memo in FORM GST RFD-03. Rule 90 of the GST Rules prescribes acknowledgement where the application relates to a claim of refund either from the electronic cash ledger or electronic credit ledger filed by the assessee as per Rule 89 (1) of the Rules. Rule 90 of the Rules prescribes the procedure while accepting or pointing out the deficiency in the application filed by the assessee in FORM GST RFD-01 - Rule 89 and 90 are the procedural rules with regard to filing of refund application and acknowledgement of such refund application so as to cure the deficiency in the refund application filed by the assesee. Therefore at the stage of acknowledgement of the refund application filed by the assessee in FORM GST RFD-01 the same could not have been rejected by respondent No. 4 by stating Refund not allowed in cases payment made voluntary by DRC-03 . Rule 92 of the Rules provides for orders sanctioning refund and after deficiency in the refund application is cured by the assessee a separate procedure is prescribed to pass an order either accepting or rejecting the refund application in FORM GST RFD-06 sanctioning the amount of refund or to grant an opportunity of hearing by issuing notice in FROM GST RFD-08. Conclusion - The respondent No. 4 has inspite of pointing out the deficiency in the application filed by the petitioner in FORM GST RFD-01 rejected the same by issuing deficiency memo in GST RFD-03 stating that declaration is not in accordance with the procedure prescribed by the GST Rules. Respondent No. 4 therefore ought to have pointed out the deficiency and could not have observed so in the deficiency memo for not allowing the refund as the petitioner has made payment in DRC-03. Such declaration or order is not contemplated in Rule 90(3)of the GST Rules. The impugned deficiency memo dated 30.09.2024 is hereby quashed and set aside and the matter is remanded back to the respondent No. 4 to consider the refund application filed by the petitioner in FORM GST RFD-01 in accordance with the Rules and take appropriate decision as to whether there is deficiency in the application or not - Petition disposed off by way of remand.

The core legal questions considered by the Court in this matter are:

1. Whether the respondent authorities were justified in rejecting the refund application by issuing a deficiency memo in FORM GST RFD-03, on the ground that "Refund not allowed in cases payment voluntary by DRC-03."

2. Whether the procedure prescribed under Rule 90(3) of the Central/State Goods and Service Tax Rules, 2017 (GST Rules) was correctly followed, particularly concerning the issuance of deficiency memos and rejection of refund claims.

3. Whether the retention of the amount deposited by the petitioner without issuance of a show cause notice or acknowledgment in FORM DRC-04 violates Article 265 of the Constitution of India.

4. Whether the refund claim made by the petitioner for the Financial Year 2017-18 was barred by limitation under Sections 73 or 74 of the GST Act.

Issue-wise Detailed Analysis

1. Legality of Rejection of Refund Application by Issuing Deficiency Memo in FORM GST RFD-03

Relevant legal framework and precedents: The GST Rules, particularly Rules 89, 90, and 92, govern the procedure for filing refund applications, issuance of acknowledgments, pointing out deficiencies, and sanctioning or rejecting refunds. Rule 90(3) mandates that if deficiencies are noticed in the refund application, the proper officer shall communicate such deficiencies via FORM GST RFD-03, requiring the applicant to rectify and file a fresh application. Rule 92 prescribes the procedure for sanctioning or rejecting refund applications after examination and opportunity of hearing.

Court's interpretation and reasoning: The Court examined the procedural requirements under Rule 90 and Rule 92 and concluded that the issuance of a deficiency memo under FORM GST RFD-03 is intended solely to point out deficiencies requiring rectification and not to reject the refund claim. The Court observed that the respondent No. 4 improperly rejected the refund application at the stage of deficiency communication by stating "Refund not allowed in cases payment voluntary by DRC-03," which is not contemplated under Rule 90(3).

Key evidence and findings: The petitioner deposited Rs. 7,01,154/- under FORM GST DRC-03 mistakenly for the FY 2017-18. The refund application was filed in FORM GST RFD-01 and was rejected by issuing a deficiency memo in FORM GST RFD-03 dated 30.09.2024 stating that refund is not allowed for voluntary payments made by DRC-03. The Court noted that no show cause notice was issued before retention of the amount, and no acknowledgment in FORM DRC-04 was issued.

Application of law to facts: The Court held that the deficiency memo cannot be used as a vehicle to reject the refund claim outright. Instead, it must only point out deficiencies to be rectified by the applicant. The rejection of the refund claim without following the prescribed procedure under Rule 92, including issuance of notice and opportunity of hearing, was improper.

Treatment of competing arguments: The petitioner argued that the deficiency memo was wrongly used to reject the refund claim, contrary to the procedural safeguards under the GST Rules. The respondents did not controvert the procedural provisions under Rules 89 and 90 but failed to justify the rejection at the deficiency memo stage. The Court found the petitioner's submissions persuasive and the respondents' arguments inadequate.

Conclusions: The Court quashed the deficiency memo dated 30.09.2024 and remanded the matter to the proper officer to consider the refund application in accordance with the rules, ensuring adherence to the prescribed procedure.

2. Violation of Article 265 of the Constitution of India

Relevant legal framework: Article 265 mandates that no tax shall be levied or collected except by authority of law. The petitioner contended that retention of the deposited amount without issuance of a show cause notice or acknowledgment in FORM DRC-04 violated this constitutional provision.

Court's interpretation and reasoning: The Court observed that the amount was retained by the department without following due process, including issuance of a show cause notice or acknowledgment. This procedural lapse indicated non-compliance with the constitutional mandate under Article 265.

Key evidence and findings: The petitioner's payment was made mistakenly, and no proper procedural safeguards were followed before retention of the amount by the department.

Application of law to facts: The Court found that the retention of the amount without due process was impermissible and warranted refund unless justified by proper procedure.

Treatment of competing arguments: The respondents did not provide a satisfactory justification for the retention without following due process.

Conclusions: The Court implicitly supported the petitioner's contention that retention without lawful authority violated Article 265, reinforcing the need for adherence to procedural safeguards.

3. Limitation under Sections 73 and 74 of the GST Act

Relevant legal framework: Sections 73 and 74 of the GST Act prescribe limitation periods for recovery of tax demands. The petitioner argued that any proceedings under these sections for FY 2017-18 were time-barred.

Court's interpretation and reasoning: The Court noted the petitioner's submission that the payment was made mistakenly for FY 2017-18 and that any proceedings under Sections 73 or 74 had become time-barred. The Court did not find any contrary material from the respondents to dispute the limitation plea.

Key evidence and findings: The petitioner's payment and refund claim pertain to FY 2017-18, and the relevant limitation period had expired.

Application of law to facts: The Court accepted that the refund claim was not barred by limitation and that the department's retention of the amount was not justified on limitation grounds.

Treatment of competing arguments: Respondents did not effectively counter the limitation argument.

Conclusions: The Court found merit in the petitioner's contention that the refund claim was not barred by limitation.

4. Procedural Compliance and Fairness in Refund Proceedings

Relevant legal framework: The GST Rules emphasize procedural fairness, including issuance of notices, opportunity of hearing, and adherence to prescribed forms and timelines.

Court's interpretation and reasoning: The Court emphasized that the refund application process is procedural and the proper officer must follow the steps sequentially: acknowledgment of application, pointing out deficiencies if any, allowing rectification, and only thereafter passing an order sanctioning or rejecting the refund with reasons and opportunity to be heard.

Key evidence and findings: The respondent No. 4 failed to comply with these procedural safeguards by rejecting the refund claim at the deficiency memo stage without giving an opportunity of hearing or issuing a show cause notice.

Application of law to facts: The Court held that the procedural lapses vitiated the rejection and warranted quashing of the deficiency memo and remand for fresh consideration.

Treatment of competing arguments: The petitioner underscored the procedural irregularity, while respondents did not provide a valid justification for deviation from the prescribed procedure.

Conclusions: The Court directed adherence to the procedural safeguards under the GST Rules in considering the refund application afresh.

Significant Holdings

"At the stage of acknowledgement of the refund application filed by the assessee in FORM GST RFD-01, the same could not have been rejected by respondent No. 4 by stating 'Refund not allowed in cases payment voluntary by DRC-03.'"

"Rule 90 of the GST Rules prescribes the procedure while accepting or pointing out the deficiency in the application filed by the assessee in FORM GST RFD-01. Therefore, the deficiency memo can only point out deficiencies and cannot reject the refund application."

"No application for refund shall be rejected without giving the applicant an opportunity of being heard." (Rule 92(3))

"The impugned deficiency memo dated 30.09.2024 is hereby quashed and set aside and the matter is remanded back to the respondent No. 4 to consider the refund application filed by the petitioner in FORM GST RFD-01 in accordance with the Rules and take appropriate decision as to whether there is deficiency in the application or not."

Core principles established include the mandatory procedural safeguards in refund claims under GST, the limited scope of deficiency memos, the requirement of opportunity of hearing before rejection, and adherence to constitutional mandates on taxation.

Final determinations on each issue are that the rejection of the refund claim via deficiency memo was improper; retention of the amount without due process violated constitutional provisions; the refund claim was not barred by limitation; and the refund application must be reconsidered following proper procedure.

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