The Telangana High Court has ruled that a GST refund arising from an appellate order cannot be rejected merely because the tax department considers that order legally incorrect or proposes to challenge it before the Goods and Services Tax Appellate Tribunal (GSTAT).

The Division Bench of Chief Justice Aparesh Kumar Singh and Justice G.M. Mohiuddin quashed an order rejecting a consequential refund claim of ₹19.33 crore. The Court directed the refund authority to reconsider the application and pass a fresh, reasoned order within four weeks.

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The Court held that an order passed by the GST appellate authority remains operative and binding unless it is stayed, modified or set aside by a competent forum. An internal departmental review or a decision to file a further appeal cannot suspend the operation of such an order.

The writ petition was filed by ADV Industrial Services Private Limited, a company engaged in renting and leasing pre-fabricated warehouse buildings.

The dispute originated from an investigation initiated by the Directorate General of GST Intelligence, Hyderabad Zonal Unit. The company received a summons under Section 70 of the Central Goods and Services Tax Act, 2017, on September 16, 2022.

The investigation concerned input tax credit allegedly availed in contravention of Section 17 of the CGST Act.

The DGGI alleged that the company had wrongly availed ITC of ₹19,33,34,320 on works contract services used for constructing warehouses. According to the department, the credit was blocked under Section 17(5) of the CGST Act.

During the investigation, the company reversed or paid the disputed amount under protest. It reversed ₹15,99,60,570 from its unutilised input tax credit balance through Form GST DRC-03 and paid another ₹3,33,73,750 in cash in instalments.

The company maintained that the ITC was legally admissible and relied on the litigation involving Safari Retreats Private Limited.

A show-cause notice dated December 15, 2023, was subsequently issued under Section 74 of the CGST Act, proposing recovery of the disputed credit along with interest and penalty.

The adjudicating authority, through an order dated September 13, 2024, confirmed the demand of ₹19.33 crore with applicable interest and penalty. It also appropriated the entire amount already paid or reversed by the company.

Appellate Authority Sets Aside ITC Demand

The company challenged the adjudication order before the GST appellate authority.

By an order dated September 16, 2025, the appellate authority allowed the appeal and set aside the adjudication order. It examined the restrictions imposed under Sections 17(5)(c) and 17(5)(d) of the CGST Act.

Relying on the Supreme Court’s decision in Chief Commissioner of Central Goods and Service Tax v. Safari Retreats Private Limited, the appellate authority held that construction intended to be sold, leased or licensed could not be treated as construction undertaken on the taxpayer’s “own account” for the purposes of Section 17(5)(d).

The authority also applied the tests laid down by the Supreme Court in Bharti Airtel Limited v. Commissioner of Central Excise, Pune and concluded that the warehouse superstructure and Kirby steel constituted movable property.

It further found that electrical installations, fire hydrants, sprinklers and painting were not covered by the restriction under Section 17(5)(d).

Although the substructure, 1.5-metre wall, dock area, flooring and apron were treated as immovable property, the authority held that the restriction did not apply because the construction was intended for leasing and was not undertaken on the company’s own account.

The appeal was consequently allowed and the entire adjudication order was set aside.

The company filed a refund application on October 28, 2025, seeking repayment of ₹19,33,34,320.

The department asked the company to furnish DRC-03 challans, details of payments reflected in its GSTR-3B returns and a certificate concerning unjust enrichment. The company submitted the documents, including a chartered accountant’s certificate.

However, the refund authority rejected the entire claim on January 12, 2026.

One of the reasons given was that the appellate order had not attained finality because the competent authority had reviewed it, considered it legally improper and decided to file an appeal before the GSTAT.

The refund officer also referred to the company’s depreciation schedule and the alleged capitalisation of expenditure relating to warehouse construction as a “building” in its books.

The High Court examined whether the September 16, 2025 appellate order was operative and binding when the refund claim was rejected.

Referring to Section 107(16) of the CGST Act, the Court noted that every order passed by the appellate authority is final and binding on the parties, subject to the remedies available under Sections 108, 113, 117 and 118.

The Court observed that when the refund rejection order was passed on January 12, 2026, no authority had stayed, modified or set aside the appellate order.

The department filed its appeal before the GSTAT only on March 25, 2026, more than two months after rejecting the refund.

The subsequent filing of the GSTAT appeal could not retrospectively make the appellate order inoperative on the date of the refund decision, the Bench held.

“The mere decision to challenge the appellate order, or the subsequent filing of an appeal, did not amount to a stay or suspension of the operation of the Order-in-Appeal,” the Court observed.

The High Court found that the refund authority had effectively reopened and disregarded findings already recorded by the appellate authority.

An internal review or administrative decision to challenge the appellate order could not nullify or suspend that order. If the department believed the appellate findings were incorrect, it was required to pursue the remedies provided under the CGST Act.

The refund authority could not use the refund proceedings to indirectly reconsider the company’s substantive entitlement to ITC, the Court said.

This principle also applied to the authority’s reliance on the company’s accounting treatment and depreciation schedules. Even if the department believed that additional material required reconsideration of the appellate findings, its remedy was to raise the matter before the competent appellate or revisional forum.

The Court held that a subordinate or implementing authority cannot disregard the operative findings of a superior appellate authority simply because the department disagrees with them or intends to file an appeal.

Relying on the Supreme Court’s judgment in Union of India v. Kamalakshi Finance Corporation Limited, the Bench reiterated that judicial discipline requires subordinate authorities to follow orders passed by higher appellate forums.

It also referred to Godrej Sara Lee Limited v. Excise and Taxation Officer-cum-Assessing Authority, where the Supreme Court held that a concluded decision remains binding even if it is unacceptable to the revisional authority.

The department argued that the appellate authority had only set aside the tax demand and had not expressly directed the grant of a refund or decided the company’s eligibility under Section 54.

Rejecting this reasoning, the High Court held that the absence of an express refund direction did not extinguish the company’s right to seek consequential relief.

Once the adjudication order and the demand of ₹19.33 crore were set aside, the amount paid and appropriated towards that demand could not continue to be retained merely on the strength of the now-invalid demand.

The company was entitled to invoke the refund mechanism under Section 54, subject to satisfying the applicable procedural requirements.

The Court noted that Section 54 itself recognises refund claims arising as a consequence of appellate orders. The department had also treated the date of communication of the appellate order as the relevant date and accepted that the company’s refund application was filed within the prescribed limitation period.

The refund authority’s role was therefore limited to examining whether the statutory requirements for processing the consequential refund had been fulfilled. It could not re-adjudicate the demand already set aside by the appellate authority.

The Court further held that if the department intended to withhold the refund because of further proceedings, it was required to follow Section 54(11) of the CGST Act.

Under Section 54(11), a refund may be withheld where the order giving rise to it is under appeal or further proceedings are pending, and the Commissioner forms an opinion that granting the refund is likely to adversely affect revenue because of malfeasance or fraud. The taxpayer must also be given an opportunity of hearing.

The statutory requirements were not satisfied in the present case.

No departmental appeal was pending when the refund was rejected. The order did not record any opinion by the Commissioner that granting the refund would adversely affect revenue because of fraud or malfeasance committed by the company. The company was also not given a hearing before the refund was withheld on the basis of the proposed appeal.

The department could not circumvent Section 54(11) by rejecting the application on the ground that the appellate order was under review, the Court held.

The respondents also contended that the writ petition should not be entertained because the company could file a statutory appeal under Section 107 against the refund rejection order.

The High Court rejected the objection, observing that an alternative remedy is not an absolute bar to writ jurisdiction where an order suffers from jurisdictional error, breach of natural justice, manifest arbitrariness or perversity.

The Court found that the refund officer lacked jurisdiction to reopen the substantive findings of the appellate authority. It also found a failure to independently apply mind because the decision was materially influenced by the review section’s opinion that the refund should not be granted.

The Bench further noted that an appeal against the refund order would lie before an officer subordinate to the Principal Commissioner, who had already expressed an opinion against granting the refund and decided to challenge the appellate order. In those circumstances, the alternative remedy could not be regarded as efficacious.

The High Court consequently quashed the refund rejection order dated January 12, 2026, and remanded the matter to the refund authority for fresh consideration.

It directed the authority to pass a reasoned and speaking order on the refund application within four weeks of receiving the judgment.

The Court clarified that if the department seeks to withhold the refund because of pending or further proceedings, it must strictly comply with Section 54(11), including satisfaction of all statutory conditions and provision of an opportunity of hearing to the company.

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