Refund claims under Section 54 CGST must be processed; DRC-03 payments during Section 74(5) search not voluntary

HC allowed the writ petition, holding that the deficiency memos rejecting the refund applications under Section 54 CGST Act were legally untenable. It found the refund applications in proper form with requisite documents, and ruled that such applications cannot be rejected merely alleging lack of supporting material. HC further held that amounts paid in DRC-03 during search proceedings under Section 74(5) were not voluntary, and therefore could be claimed as refund under Section 54. The impugned deficiency memos dated 20-05-2025 and 21-05-2025 were quashed, and respondents were directed to process the refund applications and pass orders in accordance with law.

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ISSUES PRESENTED AND CONSIDERED

1. Whether deficiency memos in Form GST RFD-03 issued on the ground of alleged non-submission of supporting documents could lawfully be issued where refund applications in Form GST RFD-01 were accompanied by the documents specified in Rule 89(2) of the CGST Rules and system-generated receipts were obtained.

2. Whether payments made by a taxpayer during inspection/search proceedings by filing Form DRC-03 under Section 74(5) of the CGST Act can be treated as voluntary self-ascertainment (thereby precluding refund) when payments were made in the circumstances of search/inspection; and whether such payments, if made under coercion, are refundable under Section 54.

3. What procedural obligations bind the proper officer under Rules 89, 90 and 92 of the CGST Rules (acknowledgement in Form RFD-02, deficiency communication in Form RFD-03, issue of DRC-04 on payment in DRC-03) and the consequences of non-compliance for processing/refusal of refund claims.

4. Whether the impugned deficiency memos constituted an unlawful, colourable exercise of administrative power requiring judicial interference (and the appropriate relief if so).

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Validity of deficiency memos when RFD-01 applications were filed with documents mandated by Rule 89(2)

Legal framework: Section 54(1) CGST Act permits refund claims in prescribed form and within two years from relevant date; Rule 89(1)/(2) prescribes filing in Form GST RFD-01 and enumerates documentary evidence required in Annexure 1; Rule 90(1)-(3) requires the proper officer, within fifteen days, to scrutinise and (a) if complete in terms of Rule 89(2)/(3)/(4) to issue acknowledgement in Form GST RFD-02 (time period for 60-day processing to run from that date), or (b) where deficiencies are noticed, to communicate them in Form GST RFD-03 requiring fresh filing after rectification.

Precedent treatment: The Division Bench of the Delhi High Court (AB Enterprises/National Internet Exchange) is followed: an application can be rejected as deficient only if it is incomplete as per Rule 89(2)/(3)/(4); absence of ancillary documents not specified in Rule 89(2) does not render application deficient; the period for processing runs from date of acknowledgement under Rule 90(2) if application is complete.

Interpretation and reasoning: Where the refund application is accompanied by the documents explicitly required by Rule 89(2), the proper officer's role is to acknowledge and process the claim, not to adjudicate merits at the initial scrutiny stage. The issuance of RFD-03 is permissible only if the application is incomplete in terms of Rule 89; a mere desire for additional or different documents that are not mandated by Rule 89(2) does not convert a complete application into a deficient one. In the present facts the petitioner filed RFD-01 applications supported by certificates/annexures and system receipts; consequently the RFD-03s issued on 20-05-2025 and 21-05-2025 lacked legal tenability.

Ratio vs. Obiter: Ratio - deficiency memo can validly be issued only if application is incomplete per Rule 89(2)/(3)/(4); otherwise RFD-02 acknowledgement and processing obligation arises. Obiter - the proper officer may, after issuance of acknowledgement, still issue RFD-08 (notice) if further verification shows the refund is not due.

Conclusion: Deficiency memos issued solely on the asserted ground of missing documents were legally untenable where the mandatory Rule 89(2) documents were on record; proper officer was obliged to acknowledge and process the refund application in accordance with Rules 90 and 92.

Issue 2 - Voluntariness of payments under Section 74(5) during search/inspection and refundability

Legal framework: Section 74(5) provides an option for a person to pay, before service of notice under s74(1), tax with interest under s50 and penalty of 15% on the basis of self-ascertainment and to inform the proper officer in writing. Rule 142(2) requires that where payment is made in DRC-03 an acknowledgement in DRC-04 be made available electronically. Section 54 provides refund remedy and time-limits; Section 50 prescribes interest.

Precedent treatment: The Court relied on persuasive and binding authorities that payments extracted or obtained during search/inspection may not be voluntary. The Supreme Court's guidance (Radhika Agarwal) and multiple High Court precedents (Gujarat, Delhi, coordinate benches of this High Court) are followed: recovery during search without adjudication is contrary to law; s74(5) contemplates voluntary self-ascertainment and does not authorise coercion; where payments are made under compulsion, courts have granted refund; Rule 142(2) non-compliance (no DRC-04) is material to voluntariness assessment.

Interpretation and reasoning: The voluntary character required by s74(5) is factual and contextual: payments made in the milieu of prolonged inspections, late-night recordings, summons, absence of prior adjudication/ascertainment and without the safeguards (advice to postpone DRC-03 to after officers leave; issuance of DRC-04) may be rendered involuntary. Circulars/instructions of CBIC (referred to in precedent) reinforce that recovery without due process is impermissible and that taxpayers may yet voluntarily pay, but coercion/threat of arrest is prohibited. Where prima facie circumstances indicate coercion, taxpayer is entitled to seek refund; the Revenue retains the right to later pursue substantive proceedings (but cannot retain funds collected without lawful basis).

Ratio vs. Obiter: Ratio - payments made during search/inspection are not ipso facto voluntary under s74(5); voluntariness is to be judged by circumstances including compliance with Rule 142 procedure and presence/absence of coercion; payments made under compulsion are refundable. Obiter - administrative guidelines (e.g., advising filing DRC-03 after officers leave) are recommended safeguards; disciplinary consequences for officers acting coercively are noted but ancillary.

Conclusion: On the material, payments made in DRC-03 during inspection/search could not be characterised as voluntary self-ascertainment; therefore they are amenable to refund under Section 54 if the refund application is otherwise complete and the payments were not duly recognised by DRC-04/acknowledgement procedure. The petitioner's claims warranted processing and could not be rejected on the ground relied upon by the respondents.

Issue 3 - Procedural obligations under Rules 89, 90, 92 and Rule 142 and consequences of non-compliance

Legal framework: Rule 89(2) prescribes documentary requisites; Rule 90(1)-(3) prescribes scrutiny, acknowledgement (RFD-02) and deficiency communication (RFD-03); Rule 92 prescribes sanction order and withholding; Rule 142(2) requires issue of DRC-04 acknowledgement after payment via DRC-03.

Interpretation and reasoning: The statutory/regulatory scheme creates a clear sequential process: (a) complete RFD-01 + Rule 89(2) docs ? (b) scrutiny within 15 days ? (c) if complete, RFD-02 issued and time for disposal under s54(7) runs; (d) if not complete, RFD-03 must specify deficiencies and invite rectification; (e) payments via DRC-03 must be acknowledged by DRC-04. Failure to follow these steps (not issuing RFD-02 where application is complete; issuing RFD-03 notwithstanding completeness; failing to issue DRC-04) undermines procedural legitimacy and may render subsequent retention of funds or refusal to process arbitrary.

Ratio vs. Obiter: Ratio - procedural non-compliance by revenue officers (failure to issue RFD-02 or DRC-04 where due, or issuing RFD-03 when application is complete) vitiates the administrative action and entitles the taxpayer to relief by mandamus/quashing. Obiter - the proper officer may still verify merits and withhold/refuse refund after giving opportunity (Form RFD-08/RFD-09) where material supports withholding under s54(10)/(11).

Conclusion: Proper officers are bound to follow the Rules; where they do not, their actions (deficiency memos, refusals) may be quashed and the refund application ordered to be processed in accordance with the statutory scheme.

Issue 4 - Whether the impugned deficiency memos were a colourable exercise of power and appropriate relief

Interpretation and reasoning: Applying the legal framework and precedents to the facts, the Court found that the RFD-01 applications were filed with the documents required by Rule 89(2) (certificates by chartered accountants, undertakings, annexures, system receipts). The issuance of RFD-03s on 20-05-2025 and 21-05-2025 on the stated ground was therefore legally untenable. Further, payments made during inspection under DRC-03 were, on the authorities and circumstances, not to be treated automatically as voluntary self-ascertainment; the petitioner's right to seek refund and to have the applications processed was established. Consequently the deficiency memos amounted to an improper exercise of administrative power.

Ratio vs. Obiter: Ratio - quashing is warranted where (a) the refund application is complete under Rule 89(2) and (b) deficiency memos are issued without legally tenable justification; and where payments made during inspections are shown prima facie to be non-voluntary, the taxpayer is entitled to have refund claims processed. Obiter - Revenue retains lawful remedies to investigate and, if justified after proper adjudication and opportunity, withhold refund under s54(10)/(11) or recover amounts.

Conclusions

1. Deficiency memos dated 20-05-2025 and 21-05-2025 were quashed as they lacked legal tenability given compliance with Rule 89(2) and the statutory processing regime under Rules 90/92.

2. Payments made during search/inspection by filing DRC-03 cannot be conclusively treated as voluntary self-ascertainment under Section 74(5) where the factual matrix indicates coercion or procedural safeguards (e.g., DRC-04 acknowledgement, instructions to defer payment) were absent; such payments may be refundable under Section 54 subject to proper verification.

3. The proper officer is required to issue Form RFD-02 where the RFD-01 is complete, process the refund within statutory time-limits, and comply with DRC-03/DRC-04 formalities when payments are made; departure from this procedure may render executive action liable to be set aside and refund claims to be processed.

4. The appropriate judicial relief is quashment of the impugned deficiency memos and a direction to process the refund applications and grant consequential relief arising from that quashment, subject to the revenue's right to examine merits and follow statutory adjudication safeguards (including opportunity of hearing and use of RFD-08/RFD-09/RFD-06/RFD-07 where justified).

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