The Madras High Court has directed the State GST authorities to refund tax amounts collected during a surprise inspection, holding that their failure to issue an acknowledgement in Form GST DRC-04 was fatal in the circumstances of the case.
The bench of Justice N. Senthilkumar set aside four orders concerning the financial years 2020-21 to 2023-24. The authorities were directed to refund the amounts remitted under IGST, CGST and SGST within eight weeks from receipt of a copy of the judgment.
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The petitioner/assessee is the textile manufacturing firm challenging the conclusion of proceedings through Form GST DRC-05 and seeking repayment of amounts it alleged had been collected under coercion.
The petitioner manufactured and supplied cotton yarn, poly-cotton yarn and synthetic fibres. Its business had been converted from a proprietorship into a partnership.
According to the firm, the assets and liabilities were transferred through book adjustments, tax invoices were raised for the transfer of assets, and the relevant transactions were disclosed in GST returns.
The dispute arose following a surprise inspection on October 19 and 20, 2023. The petitioner stated that these dates coincided with the wedding of the managing partner’s sister at Karur, approximately 50 kilometres from the business premises.
The firm alleged that its request to postpone the inspection until October 21 was declined. Instead, an accounting staff member was required to assist the inspecting officials.
According to the petitioner, the staff member was compelled to log into the GST portal and make payments from the electronic credit ledger through Form GST DRC-03 without obtaining the managing partner’s permission. The petitioner further alleged that the managing partner was subsequently compelled to sign documents and a statement accepting the demands.
The department denied the allegations and maintained that the payments were voluntary.
The petitioner submitted a representation protesting the payments and requesting a refund.
The following day, the authorities issued an intimation in Form GST DRC-01A concerning reverse charge liability on freight expenses, allegedly ineligible input tax credit under Section 17(5), a difference in the taxable value of machinery sold, and reversal of ITC relating to discounts received.
The petitioner replied on November 22, maintaining that the inspection payments were involuntary and disputing the sustainability of the demand.
A show cause notice in Form GST DRC-01 followed on December 15, 2023. According to the petitioner, the notice treated the proposed liabilities as already discharged and contained nil proposals.
The judgment also records that the petitioner accepted the tax proposals concerning freight expenses, the difference in machinery sale value and ITC reversal on discounts. Its challenge nevertheless concerned the manner of collection, consideration of its objections and the procedure adopted to conclude the proceedings.
The authorities dropped the proposed interest levy after considering the submission that the disputed ITC had not been utilised. They subsequently issued the impugned Form GST DRC-05 orders.
The State argued that inspection under Section 67 did not require the physical presence of the partners and that an authorised representative had assisted the officials.
It further submitted that payments through the GST portal required login credentials and a one-time password sent to the registered mobile number and email address. Since the inspecting officers had no access to the OTP, the department contended that the petitioner’s side had consciously authenticated and voluntarily made the payments.
The department also argued that allegations of coercion involved disputed questions of fact requiring evidence and could not be determined in writ proceedings.
It relied on the 17-day interval between the payments and the petitioner’s protest to question the allegation of coercion. Since the tax had been paid and the interest proposal dropped, the department maintained that the proceedings were properly concluded through Form GST DRC-05.
The High Court rejected the department’s objection concerning the delay in submitting the protest.
The court observed that a wedding involves substantial preparation, family participation and customary formalities extending beyond the ceremony. The Court recognised that the inspection coincided with the wedding, affecting the partners’ availability at the business premises.
Although no specific explanation had initially been furnished for the 17-day delay, the Court held that the delay alone could not justify rejecting the petitioner’s claim.
The Court emphasised that customs and procedures associated with significant family events could not be brushed aside mechanically.
The decisive procedural issue emerged from the department’s counter-affidavit.
The authorities stated that they had initiated steps to issue an acknowledgement in Form GST DRC-04 after the DRC-03 payments. However, the petitioner demanded a refund at that stage, following which the authorities issued a show cause notice and afforded a personal hearing.
The Court found that Form GST DRC-04 had not actually been issued. It also held that the petitioner’s representation dated November 6, 2023, had not been considered.
Relying on the Calcutta High Court Division Bench decision in ATR Malleable Casting (P.) Ltd. v. Inspector of Central Taxes, reported in (2024) 164 taxmann.com 78 (Calcutta), the Court held that the absence of Form GST DRC-04 was fatal to the department’s case.
The cited decision addressed Rule 142(2), under which a taxpayer communicates payment through Form GST DRC-03 and the proper officer issues an acknowledgement accepting the payment in Form GST DRC-04.
Applying that reasoning to the facts before it, the Madras High Court concluded that the impugned orders could not stand.
The High Court set aside the orders and directed the authorities to refund the inspection payments for 2020-21, 2021-22, 2022-23 and 2023-24, as sought in the petitions.
The refund must be made within eight weeks from receipt of a copy of the judgment. The operative direction does not award interest.
The Court additionally stated that, if the petitioner intended to file an appeal, it could do so manually within twelve weeks from receipt of the order. The petitioner had complained of technical difficulties in filing an online appeal.
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