The Goods and Service Tax Appellate Tribunal (GSTAT), has held that a cash refund of accumulated input tax credit can be recovered as an erroneous refund under Section 73 of the GST law and also upheld an interest demand of ₹44,51,491 against the assessee after the company repaid a refund of ₹90,35,671.
The bench of Pradeep Kumar Vyas (Judicial Member) and Chandra Bhushan Singh (Technical Member) has observed that the tax department could initiate erroneous-refund proceedings under Section 73 even though it had neither appealed against nor revised the original refund sanction order.
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The Bench clarified that its ruling does not give the department a general power to reopen concluded refund decisions or disregard an existing appellate order.
The appellant/assessee had claimed a refund of ₹24.61 crore for July 2017 to March 2018 on account of an inverted duty structure, under which input tax credit accumulates because the tax rate on inputs exceeds the rate on output supplies.
In February 2019, the refund officer rejected most of the claim, including amounts relating to input services and capital goods, but sanctioned ₹90,35,671. The department later concluded that even this smaller amount was inadmissible. According to its calculation under Rule 89(5), the prescribed refund formula produced no positive refund entitlement.
The department issued a notice under Section 73 seeking recovery of ₹90,35,671 with interest. Following the Supreme Court’s decision in Union of India v. VKC Footsteps India Pvt. Ltd., which upheld the amended Rule 89(5) formula, the assessee repaid the principal amount on November 8, 2021. It did not pay interest.
The adjudicating authority then confined the outstanding demand to ₹44,51,491 in interest. The first appellate authority upheld that demand, prompting petitioner’s appeal before the Tribunal.
The petitioner argued that the 2019 refund sanction was a quasi-judicial order made after scrutiny of its claim. Since the department had not challenged that order through an appeal under Section 107(2) or revision under Section 108, the company contended that the department could not effectively overturn it through a Section 73 notice.
The company also argued that Section 73 did not expressly refer to “ITC erroneously refunded”. In its view, a refund sourced from accumulated input tax credit could not be treated as “tax erroneously refunded” under that provision.
On interest, the petitioner submitted that Sections 50 and 73 did not provide a sufficient statutory basis to charge interest on this kind of refund. It said that the later insertion of Rule 88B could not justify an interest demand for an earlier period. It had repaid the principal as a precaution after the Supreme Court’s ruling, rather than admitting liability for interest.
The Tribunal rejected the argument that the refund’s ITC origin placed it outside Section 73. It distinguished credit held in an electronic ledger from credit converted into a cash refund under Section 54(3). Once money is paid to a taxpayer as a refund, the Tribunal held, a payment exceeding the amount permitted by law is capable of being treated as an erroneous refund.
The Bench acknowledged that the original refund sanction was a statutory adjudicatory order with legal effect. It nevertheless held that the department’s failure to appeal or revise that order did not, by itself, remove its power to proceed under Section 73 on the facts before it.
In reaching that conclusion, the Tribunal distinguished decisions concerning the finality of refund orders. It noted, in particular, that there was no departmental appellate order affirming petitioner’s refund which the Section 73 proceedings sought to override. Here, the department had put forward a specific calculation under the Rule 89(5) formula and given petitioner notice of the basis for recovery.
The Tribunal noted that the departmental calculation yielded a negative maximum refund figure and therefore no positive amount payable to petitioner. The company had not supplied an alternative Rule 89(5) calculation demonstrating that any part of the ₹90,35,671 remained refundable.
The Bench said the Supreme Court’s VKC Footsteps judgment settled the validity and interpretation of the amended formula, but did not itself calculate petitioner’s refund. The petitioner’s repayment of the principal was also not treated as an admission of every argument made by the department.
The scope of the appeal mattered: the petitioner had quantified only the ₹44,51,491 interest demand as disputed. It had not sought an order restoring the ₹90,35,671 principal amount. The Tribunal therefore addressed the surviving interest dispute.
Reading Sections 73 and 50 together, the Tribunal held that the GST law provides authority to charge interest on an erroneous refund. It observed that Section 73 expressly links recovery of an erroneous refund with interest under Section 50. Paying the principal alone did not bring the proceedings to a close under Section 73(8), which requires payment of the amount together with applicable interest.
The Bench rejected the argument that interest could begin only after the refund was formally found recoverable. It held that neither the original sanction of the refund nor the absence of fraud removed the statutory interest consequence once the refund was determined to be erroneous. It also found that VKC Footsteps had upheld an existing rule; it had not created a new liability in 2021.
The parties agreed that the petitioner received the refund on February 13, 2019, and repaid it on November 8, 2021. The Tribunal found the ₹44,51,491 demand consistent with interest at 18% per annum on ₹90,35,671 for 999 days, subject to rounding. The petitioner had not established a specific error in the rate or arithmetic.
The Tribunal dismissed petitioner’s appeal and affirmed the interest demand. Its conclusion on the department’s power under Section 73 was expressly confined to the facts and procedural setting of this case.
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