Facts of the Case

M/s Priyadarshini Filaments Private Limited filed an application dated 03.04.2019 seeking refund under Section 54 of the CGST Act, 2017. The refund application was processed by the tax authorities and rejected by order dated 21.08.2019.

Aggrieved by the rejection of its refund claim, the petitioner preferred an appeal before the Appellate Authority. The Appellate Authority also dismissed the appeal by Order-in-Appeal dated 11.02.2020/14.02.2020.

Consequently, the petitioner approached the Karnataka High Court challenging both the original adjudication order and the appellate order. The petitioner also sought relief concerning the stipulation relating to lapsing of credit and the cut-off date for refund contained in Notification No. 20/2018-Central Tax (Rate) dated 26.07.2018.

The dispute principally concerned accumulated input tax credit relating to goods lying in stock with the petitioner and not cleared as on 31.07.2018. According to the petitioner, the input tax credit attributable to such stock would not lapse and the petitioner would consequently be entitled to refund.

The petitioner had submitted various documents along with the refund claim, including a summary of stock as on 31.07.2018 and material concerning the stock available with the petitioner, which was subsequently cleared, as certified by the Chartered Accountant.

The petitioner’s grievance was that the authorities rejected the refund claim without properly considering the specific contention that the stock was lying uncleared as on 31.07.2018 and, therefore, the corresponding input tax credit would not lapse.

Issues Involved

  1. Whether the rejection of the petitioner’s refund claim under Section 54 of the CGST Act was sustainable when the adjudicating and appellate authorities had allegedly failed to properly consider the relevant pleadings, documents and stock records.
  2. Whether input tax credit relating to goods lying in stock with the petitioner and not cleared as on 31.07.2018 would lapse under Notification No. 20/2018-Central Tax (Rate) dated 26.07.2018.
  3. Whether the authorities properly considered the clarification issued through the Circular dated 24.08.2018.
  4. Whether the stock summary, Chartered Accountant’s report and other supporting documents produced by the petitioner were properly examined before rejecting the refund claim.
  5. Whether the adjudicating authority was justified in declining to follow the Gujarat High Court judgment in Shabnam Petrofils Pvt. Ltd. vs Union of India without assigning cogent or valid reasons.
  6. Whether the orders rejecting the refund claim were unreasoned and therefore liable to be set aside with a direction for fresh reconsideration.

Petitioner’s Arguments

The petitioner submitted that it had made a refund application dated 03.04.2019 under Section 54 of the CGST Act, 2017, but the same was rejected on 21.08.2019 and the subsequent appeal was also dismissed.

The petitioner relied upon the Notification dated 26.07.2018 and contended that the earlier Notification dated 28.06.2017 had been amended. The petitioner pointed out the relevant stipulation concerning accumulated input tax credit lying unutilised in balance after payment of tax for and up to July 2018 on inward supplies received up to 31.07.2018.

It was further argued that the Notification dated 26.07.2018 had been clarified by the Circular dated 24.08.2018.

The petitioner specifically contended that the goods forming part of its stock were not cleared as on 31.07.2018. Therefore, according to the petitioner, the input tax credit attributable to such stock would not lapse and the petitioner would be entitled to refund.

The petitioner submitted that it had furnished relevant documentary evidence along with the refund application, including:

  • Summary of stock as on 31.07.2018;
  • Details concerning stock available with the petitioner;
  • Evidence concerning subsequent clearance of such stock; and
  • Chartered Accountant’s certification/report.

According to the petitioner, the tax authorities failed to properly consider and appreciate these documents and the specific factual contention concerning stock remaining uncleared as on 31.07.2018.

The petitioner further relied upon the following judgments:

Shabnam Petrofils Pvt. Ltd. vs Union of India — 2019 (29) G.S.T.L. 225 (Guj.)

Samtel India Ltd. vs Commissioner of Central Excise, Jaipur — 2003 (155) E.L.T. 14 (S.C.)

Eicher Motors Ltd. vs Union of India — 1999 (106) E.L.T. 3 (S.C.)

The petitioner also submitted that although the decision of the Gujarat High Court in Shabnam Petrofils Pvt. Ltd. had been challenged before the Supreme Court, the judgment had not been stayed and the challenge was pending adjudication.

Respondents’ Arguments

The respondents supported the impugned orders passed by the adjudicating authority and the Appellate Authority.

The respondents contended that there was no merit in the writ petition and that the petition was liable to be dismissed.

Court’s Findings

The Karnataka High Court found substance in the petitioner’s contention that input tax credit relating to goods lying in stock and not cleared as on 31.07.2018 would not lapse and that the petitioner claimed entitlement to refund in light of the relevant Notifications and Circulars.

The Court specifically observed that the petitioner’s contention based on Notification dated 26.07.2018 and the clarificatory Circular dated 24.08.2018 had not been considered or appreciated by the authorities in their proper perspective.

The Court noted that this failure had resulted in an erroneous conclusion while rejecting the petitioner’s refund claim.

The High Court also observed that the authority passing the Order-in-Original had declined to follow the Gujarat High Court judgment in Shabnam Petrofils Pvt. Ltd. vs Union of India without assigning any cogent or valid reasons.

Another significant finding was that the petitioner had produced relevant documents along with the refund claim, including:

  • Details of stock;
  • Chartered Accountant’s report; and
  • Other supporting material intended to establish that the stock was available with the petitioner and had not been cleared as on 31.07.2018.

The Court held that the adjudicating authority and the Appellate Authority had passed the impugned orders without taking into account, or without properly and correctly considering and appreciating:

  • The petitioner’s pleadings;
  • Documentary material on record;
  • Relevant Notifications;
  • Relevant Circulars; and
  • Judgments relied upon by the petitioner.

Accordingly, the High Court characterised the impugned orders as clearly unreasoned and held that they deserved to be set aside.

Court Order

The Karnataka High Court allowed the writ petition and passed the following directions:

  1. The writ petition was allowed.
  2. The Order-in-Appeal dated 11.02.2020 and the original order dated 21.08.2019 were set aside.
  3. The matter was remitted back to Respondent No. 4, namely the adjudicating authority, for fresh reconsideration of the petitioner’s refund claim.
  4. The adjudicating authority was directed to reconsider the refund claim while bearing in mind:
    • The pleadings of the petitioner;
    • Documents relied upon by the petitioner;
    • Judgments relied upon by the petitioner; and
    • Observations made by the High Court.
  5. Fresh reconsideration was directed to be undertaken in accordance with law as expeditiously as possible and, in any event, within three months from the date of receipt of a copy of the High Court’s order.
  6. Liberty was reserved in favour of the petitioner to produce additional pleadings and documents before the adjudicating authority.
  7. The adjudicating authority was directed to consider such additional material and proceed further in accordance with law.

Important Clarification

The High Court did not directly sanction the refund amount to the petitioner by finally determining the refund entitlement on merits. Instead, it set aside the original and appellate rejection orders and remanded the matter to the adjudicating authority for fresh reconsideration in accordance with law.

Therefore, the central ratio emerging from the order is that a GST refund claim cannot be rejected through an unreasoned decision without proper consideration of relevant stock records, Chartered Accountant’s report, Notifications, clarificatory Circulars, pleadings, documentary evidence and judicial precedents specifically relied upon by the claimant.

The Court also treated as significant the failure of the adjudicating authority to assign cogent or valid reasons while declining to follow the Gujarat High Court judgment in Shabnam Petrofils Pvt. Ltd. vs Union of India.

Further, the controversy concerning stock lying uncleared as on 31.07.2018 required proper factual examination in the context of Notification No. 20/2018-Central Tax (Rate) dated 26.07.2018 and the clarificatory Circular dated 24.08.2018. The High Court therefore required a fresh adjudication based on the complete record rather than sustaining the earlier rejection.

Sections and Legal Provisions Involved

·         Section 54 of the Central Goods and Services Tax Act, 2017 (CGST Act) — Refund of tax and accumulated input tax credit.

·         Articles 226 and 227 of the Constitution of India — Constitutional writ and supervisory jurisdiction of the High Court.

·         Notification No. 20/2018-Central Tax (Rate), dated 26.07.2018 — Relevant to the treatment/lapsing of accumulated unutilised input tax credit in respect of specified goods and the cut-off connected with inward supplies received up to 31.07.2018.

·         Circular dated 24.08.2018 — Clarification relied upon in relation to the operation and effect of the Notification dated 26.07.2018.

Link to download the order -

https://www.mytaxexpert.co.in/uploads/1783407481_1196compressed.pdf

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