2-year limitation period under Section 54 of the CGST Act not applicable to cases of refund of tax paid by mistake

The Hon’ble Andhra Pradesh High Court in the case of M/s. Nspira Management Services Private Limited Versus Assistant/ Deputy Commissioner of Central Tax, Nellore, Union of India. - 2025 (10) TMI 107 - ANDHRA PRADESH HIGH COURT held that the two-year limitation period prescribed under Section 54 of the CGST Act, 2017 does not apply to refund applications for tax paid by mistake on exempt services, as such payment is not “due tax” but one made without authority of law by virtue of Article 265 of the Constitution.​

Facts:

Nspira Management Services Private Limited (“the Petitioner”) is a company providing educational management and hostel accommodation services.

Assistant Deputy Commissioner of Central Tax (“the Respondent”) refused to process the Petitioner’s GST refund applications for July, 2017 to January, 2020 and February, 2020 to June, 2022, issuing defect memos citing expiry of the two-year limitation as per Section 54 of the CGST Act.

The Petitioner had taken residential dwellings on rent from the respective landlords so as to provide accommodation to the students. As the landlords had been charged tax on the invoices issued by them, the Petitioner has been paying tax on the renting of residential dwelling services. The Petitioner contended that GST was paid on renting residential dwellings only because landlords charged GST, despite this being an exempt service under Entry 12, Notification No. 12/2017-CT (Rate) dated June 28, 2027, and sought refund of tax so paid.

The Respondent contended that, following Section 54 and Circular No. 125/44/2019-GST, refund claims must be filed within two years of the “relevant date,” making the Petitioner’s claims time-barred.

Aggrieved by summary rejection via defect memos (without SCN, opportunity of hearing, or speaking order), the Petitioner filed writ petitions challenging the legality of the memos.

Issue:

Whether the two-year period prescribed under Section 54 of the CGST Act, 2017 bars refund applications for tax paid mistakenly on exempt services, and whether the authorities could reject such refund applications as time-barred via deficiency memos?

Held:

The Hon’ble Andhra Pradesh High Court in M/s. Nspira Management Services Private Limited Versus Assistant/ Deputy Commissioner of Central Tax, Nellore, Union of India. - 2025 (10) TMI 107 - ANDHRA PRADESH HIGH COURTheld as under:

• Observed that, under Article 265 of the Constitution, no tax can be collected without authority of law; any tax paid on exempt services is without authority.
• Noted that, the limitation under Section 54 applies to taxes validly collected, not to money paid by mistake due to misinterpretation or erroneous charging.
• Observed that, the eligibility of refund should be decided by conducting an adjudication process i.e by issuing SCN, affording opportunity to reply, and passing a reasoned order per Rule 92(3) of the CGST Rules, not by issuing a rejection/defect memo.
• Set aside the defect memos and directed the authorities to consider the refund applications without reference to the limitation period and pass appropriate orders within four weeks.

Our Comments:

The decision strongly aligns with Gujarat High Court in M/s. Comsol Energy Private Limited Versus State Of Gujarat - 2021 (6) TMI 827 - GUJARAT HIGH COURT and BINANI CEMENT LTD. Versus UNION OF INDIA - 2013 (6) TMI 417 - GUJARAT HIGH COURT, clarifying that the two-year ceiling is for direct refund claims on lawful taxes, not for recovery of taxes paid by mistake. The judgment harmonizes with Article 265 and supports a more substantive, natural justice-driven approach in refund dispute adjudication, moving beyond mere procedural rejection.

Relevant Provisions:

Section 54 of the CGST Act:

“Refund of tax.-

(1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed:

Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49, may claim such refund in such form and manner as may be prescribed.”

Entry 12, Notification No. 12/2017-CT (Rate), dated June 28, 2017:

“12. Heading 9963 or Heading 9972: Services by way of renting of residential dwelling for use as residence – Nil”

Rule 92(3) of the CGST Rules:

“Rule 92. Order sanctioning refund.-

(3) Where the proper officer is satisfied, for reasons to be recorded in writing, that the whole or any part of the amount claimed as refund is not admissible or is not payable to the applicant, he shall issue a notice in FORM GST RFD-08 to the applicant, requiring him to furnish a reply in FORM GST RFD-09 within a period of fifteen days of the receipt of such notice and after considering the reply, make an order in FORM GST RFD-06 sanctioning the amount of refund in whole or part, or rejecting the said refund claim and the said order shall be made available to the applicant electronically and the provisions of sub-rule (1) shall, mutatis mutandis, apply to the extent refund is allowed:

Provided that no application for refund shall be rejected without giving the applicant an opportunity of being heard.”

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