A Proposed Departmental Appeal Cannot Put GST Refunds in Cold Storage

Why This Refund Ruling Matters Now

Refund disputes under GST often appear procedural on the surface, but they carry serious commercial consequences. A refund blocked for months can affect working capital, business planning and trust in the tax system. The Orissa High Court decision in M/s. Rashmi Agency Versus Deputy Commissioner CT & GST Circle, Cuttack-I City and others. - 2026 (7) TMI 75 - ORISSA HIGH COURT, therefore deserves close attention. It explains a simple but powerful rule: a refund cannot be withheld merely because the Department may file an appeal in future.

The judgment deals with Section 54(11) of the CGST Act and the corresponding Odisha GST provision. This provision authorises withholding of a refund in limited circumstances. However, the power is not open-ended. It cannot be used as a routine protective tool whenever the Department is unhappy with an appellate order. The Court made it clear that a contemplated appeal is not the same as a pending appeal. Until an appeal or other proceeding is actually pending, and until the statutory conditions are satisfied, the refund cannot be refused on the ground that the Department still has time to challenge the appellate order.

For senior officers and professionals, the ruling is important because it balances revenue protection with taxpayer rights. It does not say that the Department can never challenge an appellate order. It also does not say that a refund must be released even when the statutory conditions for withholding are satisfied. What it says is more disciplined. If the Department wants to withhold a refund, it must act within the four corners of Section 54(11), Rule 92(2) and Form GST RFD-07. Administrative anxiety cannot replace statutory conditions.

The Search Deposit That Became a Refund Battle

The facts were not complex, but they reveal a common problem. During a DGGI search operation under Section 67 of the GST Act in respect of Hotel Rashmi Plaza, an amount of Rs. 33,00,000/- was recovered on 10.08.2023 through Form GST DRC-03. The petitioner stated that the amount was paid under protest. A further complication was that the deposit was made under the GSTIN of M/S Rashmi Agency, though the investigation concerned Hotel Rashmi Plaza.

The petitioner claimed a refund. The first refund order did not grant relief. The petitioner then filed an appeal under Section 107 of the GST Act. The Additional Commissioner of State Tax, by order dated 27.02.2026, allowed the appeal in full. The appellate authority observed that the collection was made during inspection in contravention of CBIC Instruction No. 01/2022-23 and judicial principles. It was also observed that the taxpayer was not liable to pay tax and interest in the manner in which the amount had been collected. The appellate authority directed that any excess payment be refunded as per law.

After succeeding in the appeal, the petitioner filed a refund application in Form GST RFD-01 on 05.03.2026 for Rs. 33,00,000/-. A show cause notice was issued on 24.04.2026, and the petitioner replied on 29. 04.2026. However, the Deputy Commissioner passed an order dated 02.05.2026 in Form GST RFD-06, refusing to consider the refund application at that stage. The reason was that the State had six months under Section 112(3) to file an appeal before the GST Appellate Tribunal. According to the authority, granting a refund before the expiry of that period would be premature and might adversely affect revenue.

This is where the legal issue became sharp. Could a refund flowing from an appellate order be withheld merely because the Department still had time to file an appeal? Could the Deputy Commissioner treat the appellate order as not final merely because a further appeal was possible? The Orissa High Court answered these questions in favour of statutory discipline.

Section 54(11) Is Not a General Waiting Room

Section 54(11) permits withholding of a refund in specified circumstances. The language is important. It applies where an order giving rise to a refund is the subject of an appeal or further proceeding, or where any other proceeding under the Act is pending. Even then, a refund can be withheld only if the Commissioner forms an opinion that granting the refund is likely to adversely affect revenue in such appeal or proceeding on account of malfeasance or fraud.

Two conditions therefore travel together. First, there must be an appeal, further proceeding, or other pending proceeding. Secondly, there must be a proper opinion that the refund would adversely affect revenue because of malfeasance or fraud. A mere possibility that an appeal may be filed in future does not satisfy the first condition. A general fear that recovery may become difficult does not satisfy the second condition. The power is conditional, not automatic.

The Court also read Section 54(11) along with Rule 92(2) of the GST Rules. Rule 92(2) requires the proper officer or the Commissioner, as the case may be, to pass an order in Part A of Form GST RFD-07 when a refund is withheld under Section 54(10) or Section 54(11). The form requires reasons to be recorded. This is not an empty clerical step. Form GST RFD-07 is a statutory form. It is the place where the authority must disclose why the refund is being withheld and how the statutory conditions are satisfied.

This part of the judgment is highly practical. In many cases, authorities refer to Section 54(11) as if the mere mention of the provision is enough. The Court rejected that approach. Quoting a section does not create jurisdiction. The authority must show that the facts fit the section. If the facts do not meet the statutory conditions, the power cannot be used.

An Appellate Order Must Be Obeyed Unless It Is Stayed

A central theme of the judgment is respect for appellate orders. The petitioner had already succeeded before the appellate authority. That order had not been stayed, reversed, varied or modified by any competent forum when the Deputy Commissioner refused to consider the refund. In such circumstances, the subordinate authority could not sit over the appellate order.

The principle is well settled. In UNION OF INDIA Versus KAMLAKSHI FINANCE CORPORATION LTD. - 1991 (9) TMI 72 - Supreme Court, the Supreme Court emphasised that subordinate authorities must follow appellate orders. Administrative discipline requires lower authorities to give effect to appellate orders, even if they believe the order is wrong, unless it is stayed or set aside in the manner known to law. This principle is not a matter of courtesy. It is essential for certainty in tax administration.

The Orissa High Court also referred to TIRUPATI BALAJI DEVELOPERS PVT. LTD. & ORS. Versus STATE OF BIHAR & ORS. - 2004 (4) TMI 575 - Supreme Court, and ORISSA FOREST CORPORATION LTD. Versus ASSTT. COLLECTOR, C. EX., SAMBALPUR AND OTHERS - 1982 (2) TMI 72 - ORISSA HIGH COURT. These decisions support the broader proposition that administrative and quasi-judicial authorities must act within the hierarchy and respect binding orders. If every subordinate authority could ignore an appellate order merely because a further appeal is possible, the appellate process would lose practical meaning.

This principle is especially important in refund matters. A taxpayer who succeeds on appeal should not be pushed into a second round of uncertainty merely because the Department may decide to file a further appeal later. If the Department seeks protection, it can file the appeal and seek appropriate orders. But until that is done, the appellate order cannot be treated as suspended by mere imagination.

Forms, Reasons and Jurisdiction Must Travel Together

The judgment gives due importance to the statutory form and procedure. In Indure Limited Versus Commissioner of Sales Tax, Cuttack, Orissa and others - 2006 (7) TMI 572 - ORISSA HIGH COURT it was recognised that statutory rules and forms are part of the statutory framework. They cannot be treated as decorative formats. When the law prescribes a particular form for exercising a power, the form must be respected.

The Court also referred to BP. Enterprises Versus State of Orissa and others - 2008 (8) TMI 807 - ORISSA HIGH COURT, for the principle that the authority must keep jurisdictional requirements in mind. In Sarda Mines Private Limited v. State of Odisha, 2026 SCC OnLine Ori 2303, the Orissa High Court reiterated the familiar rule that where law requires a thing to be done in a particular manner, it must be done in that manner or not at all. The same discipline applies to Section 54(11).

The practical message is clear. A refund withholding order cannot be passed in a casual or protective manner. The authority must identify the pending appeal or proceeding. It must record why a refund would adversely affect revenue in that proceeding. It must link that risk to malfeasance or fraud. It must grant the opportunity of a hearing. It must pass a reasoned order in the statutory form. If these steps are missing, the action becomes vulnerable.

This approach protects both sides. It protects revenue in genuine cases where a refund may prejudice pending proceedings involving fraud or malfeasance. At the same time, it protects taxpayers from indefinite withholding based on vague apprehension. Section 54(11) is a shield for revenue in proper cases. It is not a blanket pause button for refunds.

The Delhi Line: Proposed Appeal Is Not Pending Appeal

The Orissa High Court also drew support from the Delhi High Court's line of cases. In Alex Tour And Travel Private Limited Versus Assistant Commissioner, CGST, Division-Janakpuri - 2023 (5) TMI 505 - DELHI HIGH COURT, the Delhi High Court held that the Revenue cannot refuse to comply with an appellate order merely because it proposes to file an appeal. Unless there is a stay from a competent forum, the refund flowing from the appellate order must be processed. The Department remains free to challenge the appellate order, but the proposed challenge does not, by itself, suspend the order.

In Truth Fashion Versus Commissioner Of DGST Delhi & Ors - 2025 (5) TMI 371 - DELHI HIGH COURT, the Delhi High Court explained the same point with direct reference to Section 54(11). The Court held that Section 54(11) applies where the order giving rise to the refund is already the subject of an appeal. A mere decision to prefer or institute an appeal does not qualify. In simple terms, an intention to appeal is not an appeal.

The Orissa High Court also noticed Shalender Kumar Versus Commissioner Delhi West CGST Commissionerate & Ors. - 2025 (4) TMI 555 - DELHI HIGH COURT. There, too, the Delhi High Court held that a refund cannot be withheld in the absence of a pending appeal or other proceeding, even if the Department intends to challenge the appellate order. The Court also referred to G S Industries and Brij Mohan Mangala while reinforcing the same principle.

These decisions are valuable because they create a clear working rule for GST officers and taxpayers. If the appellate authority has granted relief and no stay exists, the order must be implemented. If the Department files an appeal later and succeeds, recovery can be made in accordance with law. But taxpayers cannot be denied the benefit of an unstayed appellate order merely because the Department may act in future.

Search Payments and CBIC Instruction No.01/2022-23

The background of the dispute also involved recovery during search. The appellate authority observed that the collection was made during inspection in contravention of CBIC Instruction No. 01/2022-23. That instruction was issued to regulate the deposit of tax during search, inspection or investigation. Its broader purpose is to prevent coercive recovery during investigation and to ensure that voluntary payments are truly voluntary.

The Orissa High Court did not finally decide the refund in the writ proceedings. It set aside the order refusing to consider the refund and remitted the matter for fresh consideration. However, it directed the authority to keep in view the CBIC instruction, the petitioner's reply, the documents and the observations made in the judgment. This direction is important. It shows that procedural legality in refund matters is connected with fairness in investigation-stage deposits.

A payment made during search may later become the subject of refund if it is shown that it was not legally due or was collected contrary to instructions and settled principles. Once an appellate authority has accepted the taxpayer's case, the refund cannot be stalled on vague grounds. The Department must either comply or proceed strictly under law.

Revenue Protection Cannot Be Built on Administrative Suspense

The Department argued that if a refund were granted before the expiry of the period for filing an appeal under Section 112, recovery could become difficult if the State later succeeded before the Tribunal. This concern is understandable from an administrative perspective. But the Court held, in substance, that such concern must be addressed through lawful remedies, not through premature withholding.

The law already provides the Department a route. It can file an appeal. It can seek appropriate interim protection. It can invoke Section 54(11) if the statutory conditions are satisfied. What it cannot do is treat the mere availability of appeal time as an automatic stay. The limitation period for filing an appeal is not a refund-freezing period.

This is the most useful practical lesson from the judgment. A right to appeal and a stay of the order appealed against are two different things. Filing an appeal may create a pending proceeding. Obtaining a stay may prevent implementation. But merely having time to file an appeal does neither. Until the Department takes legally recognised steps, the taxpayer cannot be deprived of the benefit of an appellate order.

A Measured Result, Not a Windfall

The final order was carefully framed. The High Court set aside the Deputy Commissioner's order dated 02.05.2026 and remitted the matter for fresh consideration of the refund application of Rs.33,00,000/-. The authority was directed to decide the matter within two weeks from the production of the order, after granting a reasonable opportunity of hearing and considering the reply dated 29.04.2026, the documents, CBIC Instruction No.01/2022-23 and the Court's observations.

The Court also left it to the petitioner to raise all contentions, including the Deputy Commissioner's jurisdiction to invoke Section 54(11). This means the judgment did not mechanically order a refund without examination. It corrected the unlawful refusal to consider the refund and required a fresh, reasoned decision in accordance with the law.

This measured approach is important. It keeps the adjudicatory balance intact. The taxpayer gets protection against arbitrary withholding. The Department retains the right to decide the refund application afresh within the limits of the law. If a valid statutory ground exists, it can be examined. But the earlier reason, namely that the Department still had time to appeal, was held legally insufficient.

The Larger Message: Refund Discipline Is Tax Discipline

M/s Rashmi Agency reinforces a clear principle: GST refunds cannot be withheld for administrative convenience. Section 54(11) may be used only when its statutory conditions are satisfied, namely, a pending appeal or proceeding, a reasoned opinion that refund may prejudice revenue, and compliance with Rule 92(2) through Form GST RFD-07.

The Department may challenge an appellate order, but until that order is stayed or reversed, it must be respected. A proposed appeal cannot operate as an automatic stay. The lasting message is simple: lawful revenue protection is permissible, but refund delay without statutory authority is not allowed.

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CA. RAJ JAGGI