IGST refund cannot be withheld without Sections 73/74 recovery; Rule 92(3) notice not substitute show-cause

HC allowed the writ petition, holding that the department could not withhold IGST refund on the ground of alleged excess ITC without initiating proper recovery proceedings under Sections 73 or 74 of the CGST Act. A notice under Rule 92(3) cannot be deployed as a substitute for a show-cause notice to deny refund when no discrepancy exists in the refund claim. The audit report disclosed no wrongful ITC for FY 2019-20, and any demands for other periods had already been raised and deposited. Finding no justifiable basis for non-grant of refund and violation of principles of natural justice, HC set aside the impugned order and directed refund.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether refund of IGST relatable to export transactions for specified months in 2024 could be rejected on the ground of alleged excess Input Tax Credit availed in Financial Year 2019-20.

1.2 Whether, in the absence of a show cause notice under Sections 73 or 74 of the Central Goods and Services Tax Act, 2017, the Department could rely on a notice and order under Rule 92(3) of the Central Goods and Services Tax Rules, 2017 to deny or withhold refund by treating alleged excess ITC as a ground for rejection.

1.3 Whether the absence of any adverse finding or demand regarding ITC for Financial Year 2019-20 in the Department's audit for the period 1 April 2018 to 31 March 2024 affects the legality of the refund rejection.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Rejection of IGST refund on basis of alleged excess ITC for FY 2019-20 and use of Rule 92(3) without proceedings under Sections 73/74

Legal framework

2.1 The Court considered Sections 73 and 74 of the Central Goods and Services Tax Act, 2017, which govern "determination of tax ... not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised" up to Financial Year 2023-24, and mandate issuance of a show cause notice by the proper officer as a precondition for recovery, interest and penalty proceedings.

2.2 The Court also considered Rule 92(3) of the Central Goods and Services Tax Rules, 2017, which prescribes issuance of FORM GST RFD-08 where refund claimed is found not admissible, requiring a reply in FORM GST RFD-09 and enabling sanction or rejection of the refund application after considering such reply, with an opportunity of hearing.

2.3 The Court relied on the principles articulated by the Supreme Court regarding the nature and role of a show cause notice as the initiation of "proceedings" under the GST regime, emphasising it as a mandatory pre-condition for raising a tax/ITC demand and as a necessary safeguard in quasi-judicial adjudication.

Interpretation and reasoning

2.4 The Court noted that the Department's basis for issuing RFD-08 and rejecting the refund was an alleged excess availment of ITC for Financial Year 2019-20 detected on comparison of GSTR-2A and GSTR-3B, quantified at Rs. 6,04,117.56.

2.5 The Court recorded that it was an admitted position that no show cause notice had been issued under Section 73 or 74 of the CGST Act in respect of the alleged excess ITC for Financial Year 2019-20 or otherwise.

2.6 The Court held that, under the scheme of the CGST Act, if the Department is of the view that an assessee has wrongly availed or utilised ITC, it must initiate proceedings in accordance with Sections 73 or 74 by issuance of a show cause notice, and that such show cause notice marks the initiation of proceedings for determination of liability and possible recovery and penalty.

2.7 Applying the Supreme Court's exposition of "initiation of proceedings", the Court held that the statutory framework does not permit treating any action other than the issuance of a show cause notice as initiation of proceedings for determination of alleged excess ITC.

2.8 The Court further held that Rule 92(3) cannot be used as a substitute for proceedings under Sections 73 or 74. A notice under Rule 92(3) (RFD-08), being part of the refund processing mechanism, cannot be deployed to effectuate recovery or adjudication of alleged excess ITC when no separate proceedings under Sections 73 or 74 have been initiated.

2.9 The Court observed that in the present case there was no discrepancy pointed out in relation to the refund claims themselves (which related to export shipping bills for 2024), and the alleged excess ITC pertained to a different financial year (2019-20). Therefore, withholding or rejecting refunds for 2024 on the ground of alleged excess ITC in 2019-20, without following the statutory procedure under Sections 73/74, was impermissible.

2.10 The Court clarified that while the Department is free to take action in accordance with law regarding any wrongly availed ITC, such action must be through properly initiated proceedings under Sections 73 or 74 and not by blocking or denying refunds in unrelated refund proceedings through a Rule 92(3) notice.

Conclusions

2.11 The Department cannot reject or withhold IGST refunds for the Petitioner's export transactions for 2024 on the basis of alleged excess ITC in Financial Year 2019-20 in the absence of a show cause notice and proceedings under Sections 73 or 74 of the CGST Act.

2.12 A notice under Rule 92(3) (RFD-08) in refund proceedings cannot be used to initiate or effect recovery proceedings for alleged excess ITC; the proper course is to issue a show cause notice under Sections 73/74 and follow the prescribed adjudicatory process.

2.13 The rejection of the refund applications on the ground of alleged excess ITC for 2019-20, without initiation of proceedings under Sections 73 or 74, was contrary to the statutory scheme and therefore unsustainable.

Issue 3: Effect of Department's audit findings for 1 April 2018 to 31 March 2024 on legality of refund rejection

Interpretation and reasoning

2.14 The Court examined the audit report for the period 1 April 2018 to 31 March 2024 and noted that, while certain demands relating to ITC were raised for Financial Years 2020-21, 2022-23 and 2023-24 and had been deposited by the assessee, there was no mention or "whisper" of any wrongly claimed ITC for Financial Year 2019-20.

2.15 The absence of any adverse audit finding or demand for 2019-20, taken together with the absence of a show cause notice under Sections 73 or 74, reinforced the Court's conclusion that there was no justifiable basis in law for denying the refunds claimed for the 2024 period.

Conclusions

2.16 The fact that the comprehensive audit for 1 April 2018 to 31 March 2024 did not raise any demand for alleged excess ITC in 2019-20 further undermines the Department's reliance on such alleged excess ITC as a ground for refund rejection.

2.17 In the circumstances, there was no justifiable cause for non-grant of the IGST refunds, and the impugned refund rejection order was liable to be set aside.

2.18 The Court accordingly set aside the impugned refund rejection order and directed payment of the total IGST refund amount, along with applicable statutory interest, within a stipulated period.

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