GST Refund Rejection Without Mandatory Notice Cannot Be Cured At Appellate Stage: GSTAT Thane

The Thane Bench of the Goods and Services Tax Appellate Tribunal (GSTAT) on 22 October held that a GST refund claim cannot be rejected without issuing a mandatory show cause notice and granting a hearing, and that an opportunity to present the case at the appellate stage cannot cure this statutory violation.

A Bench comprising Judicial Member Ramesh Nair and Technical Member Prallhad S. Paranjape set aside the appellate orders upholding the partial rejection of refund claims filed by Lavino Kapur Cottons Pvt. Ltd. and remanded the matters for fresh consideration. It stated:

“A post-decisional hearing at the appellate stage cannot serve as a substitute for a pre-decisional statutory notice. By failing to issue FORM GST RFD-08, the Adjudicating Authority deprived the Appellant of the right to know the precise grounds for the “Mismatch of ITC” and the opportunity to furnish a specific, document-backed reply in FORM GST RFD-09”.

The appeals were filed by Vikram Inderjit Kapur, a director of Lavino Kapur Cottons Pvt. Ltd., challenging orders that upheld the partial rejection of the company's refund claims for various tax periods between June 2019 and September 2022.

The company, a 100% Export Oriented Unit engaged in manufacturing and exporting absorbent cotton, claimed refunds of accumulated input tax credit (ITC) on account of exporting its finished products without payment of domestic GST.

For August 2020, the company claimed a refund of Rs. 63,17,232. The adjudicating authority sanctioned part of the claim but rejected Rs. 18,09,402 on the ground of an “ITC mismatch” without issuing a show cause notice in Form GST RFD-08 or granting a hearing before rejecting the disputed amount.

The company challenged the rejection before the first appellate authority. Although the appellate authority acknowledged the violation of Rule 92(3) of the Central Goods and Services Tax (CGST)/Maharashtra Goods and Services Tax (MGST) Rules, 2017, it upheld the rejection because the company had failed to produce certain supporting documents during the appellate proceedings.

Before the Tribunal, the company argued that the failure to issue the mandatory show cause notice violated the principles of natural justice. It also relied on Notification No. 30/2020-Central Tax and Circular No. 142/12/2020-GST to contend that the restriction on ITC under Rule 36(4) should be applied cumulatively for February to August 2020 in view of the relaxations introduced during the COVID-19 pandemic.

The department acknowledged that the adjudicating authority had not issued Form GST RFD-08 before partially rejecting the refund claim. However, it argued that the defect had been cured because the company had opportunities to present its case during the appellate proceedings.

Rejecting this contention, the Tribunal held that Rule 92(3) mandates the issuance of Form GST RFD-08 and an opportunity of being heard before rejecting a refund claim, wholly or partially. It observed that the failure to issue the notice deprived the company of an opportunity to understand the specific grounds for the alleged ITC mismatch and submit a detailed, document-backed reply before the rejection. It observed:

“The language of the statute is unambiguous and mandatory. The use of the word “shall” in Rule 92(3) combined with the absolute embargo in the proviso makes it abundantly clear that the Adjudicating Authority has no jurisdiction or discretion to reject a refund claim, either wholly or partially, without first issuing a notice in FORM GST RFD-08 and affording the applicant a personal hearing.”

Further, the Bench held that the first appellate authority, having acknowledged the violation of Rule 92(3), should have remanded the matter to the adjudicating authority instead of upholding the rejection on merits.

It did not examine the substantive dispute over the ITC mismatch or the applicability of the COVID-19-related relaxations. It set aside the impugned appellate orders and the corresponding original orders to the extent that they rejected the refund claims.

Accordingly, the GSTAT remanded the matters to the adjudicating authority for fresh consideration in accordance with law.

For Appellant: Surinder Mehra, Chartered Accountant

For Respondent: Chhagan D. Jaybhay