GST Refund Can Be Withheld During Anti-Evasion Probe Involving Fraud, Malfeasance: Delhi High Court

The Delhi High Court has held that the pendency of an Anti-Evasion investigation, coupled with the Commissioner's finding of suspected fraud or malfeasance, can justify withholding a GST refund under Section 54(11) of the Central Goods and Services Tax Act even when no appeal against the order granting the refund is pending.

The Division Bench of Justices Anil Kshetarpal and Shail Jain made the observation while dismissing a petition filed by an electronics exporter, which had sought release of a refund of over ₹3.15 crore arising from an appellate order in its favour.

The Court was considering whether the Commissioner had rightly invoked Section 54(11) of the CGST Act to withhold the refund.

For context, Petitioner had filed five refund applications claiming a total refund of ₹3,15,30,605.03 for the period between November 2023 and January 2024.

The refund claims were initially rejected by the Department, primarily on the ground that complete supporting documents had not been submitted. Petitioner challenged the orders before the Appellate Authority, which allowed all five appeals.

The Competent Authority decided to move GSTAT but meanhile, Petitioner filed a consolidated refund claim. The Commissioner thereafter invoked Section 54(11) and withheld the refund.

Before the High Court, Petitioner argued that a mere decision or contemplation to file an appeal could not amount to a pending proceeding for the purpose of Section 54(11). It also contended that the refund could not be withheld in the absence of a judicial stay against the appellate order.

The Court however noted that Section 54(11) contains two cumulative requirements:

First, the order giving rise to the refund must be the subject matter of an appeal, further proceedings, or any other pending proceeding under the CGST Act.

Second, the Commissioner must independently form an opinion, after giving the taxpayer an opportunity of hearing, that granting the refund is likely to adversely affect revenue on account of fraud or malfeasance.

The Bench clarified that the provision is not confined to a formally instituted appeal.

"The width of the expression 'any other proceedings under this Act is pending' is deliberate," the Court observed, adding that, “Section 54(11) is a self-contained, statutorily engrafted safeguard for protection of revenue, operating independently of, and not contingent upon, any separate stay granted by a court or tribunal.”

The Court distinguished its earlier decisions in Mandy Enterprises v. Deputy Commissioner and Alex Tour & Travel v. Assistant Commissioner CGST, where it had held that the Revenue could not withhold a refund merely because it proposed to challenge an appellate order in the absence of a stay.

It noted that those cases involved a proposed appeal without independent material of fraud or malfeasance. In the present case however, the Department relied upon an Anti-Evasion Wing investigation which had already commenced before the appellate order granting the refund was passed.

The Court summarised the investigation material by noting that six suppliers had been found non-existent or non-operational, transporters had denied movement of the goods and the manufacturer's sales records did not reflect the Petitioner in the supply chain of the mobile phones claimed to have been exported.

It thus observed that the Commissioner's decision was not based merely on an apprehension, but followed an examination of Petitioner's supply chain.

The Court also rejected Petitioner's argument that the investigation could not constitute a pending proceeding merely because the subsequent show-cause notice had been issued later.

It distinguished between the pendency of an investigation and the subsequent issuance of a show-cause notice, observing that the investigation was already underway when the refund was withheld.

As such, the Court dismissed the petition with liberty to Petitioner to raise its further contentions before GSTAT.

For Peitioner: Senior Advocate Sunil Dalal along with Advocate Faraz Anees, Kartik Vashisht, Abhimanyu Singh Tomar, Ajay Kumar and Yash

For Respondents: Raj Kumar, CGSC. Mr. Aditya Singla, SSC.