GST Refund Cannot Be Rejected Merely Because Department Plans To Challenge Appellate Order: Telangana High Court

The Telangana High Court has recently ruled that a GST refund authority cannot reopen an ITC dispute already decided by an appellate authority merely because the department proposes to challenge that order.

An appellate order remains operative unless it is stayed, modified, or set aside in accordance with law. If the department seeks to withhold the refund while further proceedings are pending, it must comply with the requirements of Section 54(11) of the CGST Act.

A Division Bench of Chief Justice Aparesh Kumar Singh and Justice G.M. Mohiuddin made the observation while dealing with ADV Industrial Services Private Limited's challenge to rejection of its ₹19.33 crore refund claim.

“A subordinate or implementing authority cannot, while exercising a distinct statutory function, disregard the operative findings of a superior appellate authority merely because the Department considers those findings to be incorrect or proposes to challenge them. The statutory remedy of appeal is available to the Department precisely for the purpose of challenging an appellate order. Until such order is modified, stayed or set aside by the competent forum, the subordinate authorities are required to give effect to the operative order in accordance with law", the court noted.

ADV Industrial Services is engaged in renting and leasing pre-fabricated warehouse buildings. The dispute arose from a Directorate General of GST Intelligence (DGGI) investigation into alleged ineligible input tax credit (ITC) on works contract services received for construction of warehouses.

The company stated that it reversed ₹15.99 crore from its unutilised ITC balance and paid another ₹3.33 crore in cash through DRC-03, under protest.

The adjudicating authority later confirmed the ₹19.33 crore demand and appropriated the amount already paid or reversed by the company. The appellate authority subsequently allowed the company's appeal and set aside the Order-in-Original confirming the demand.

The appellate authority examined Sections 17(5)(c) and 17(5)(d) of the CGST Act. Section 17(5)(c) restricts ITC in specified cases involving works contract services. Section 17(5)(d) deals with ITC on goods or services used for construction of immovable property in specified circumstances.

In this case, the appellate authority held that the Section 17(5)(c) restriction did not sustain the demand.

It also held that the construction was intended for leasing and was not undertaken on the taxpayer's “own account” in the manner contemplated under Section 17(5)(d).

The company then sought a refund of ₹19.33 crore. The refund authority rejected the claim, relying partly on the department's review of the appellate order and its proposed challenge before the GSTAT. It also relied on material concerning capitalization and depreciation of the warehouse-related expenditure.

The court held that this effectively reopened the substantive ITC issue. If the department considered the appellate decision erroneous or requiring reconsideration because of additional material, its remedy was to pursue the statutory appellate or revisional mechanism instead of questioning the decision during refund proceedings.

The court also rejected the argument that the refund claim could not be considered because the appellate order did not expressly direct payment of the refund. Setting aside the demand gave rise to a consequential refund claim, which still had to be processed under Section 54.

Section 54 is the provision governing GST refunds. Section 54(11) specifically deals with withholding a refund when the order giving rise to it is under appeal or further proceedings are pending, subject to specified conditions. It permits withholding where the Commissioner forms the opinion that releasing the refund is likely to adversely affect revenue because of malfeasance or fraud. The taxpayer must also be given an opportunity of being heard.

Those conditions were not met when the refund was rejected. No appeal against the appellate order was pending then, no such opinion of the Commissioner was recorded, and the company was not given the required hearing. The department filed its GSTAT appeal only later, on March 25, 2026.

The court therefore quashed the January 12, 2026, refund rejection order and remanded the claim for fresh consideration. It directed that if the department seeks to withhold the refund because of pending or further proceedings, it must strictly comply with Section 54(11). A fresh, reasoned, and speaking order must be passed within four weeks.

For Petitioner: Avinash Desai, Senior Counsel, represented by Sri Kopal Sharraf

For Respondent Nos. 2 and 3: Bokaro Sapna Reddy, Senior Standing Counsel for CBIC

For Respondent Nos. 4 to 6: Dominic Fernandes