Tax Authority Cannot Reject Consequential GST Refund Without Stay Order or Compliance With Withholding Safeguards

ORDER

1. Heard Sri Avinsah Desai, learned Senior Counsel representing Sri Kopal Sharraf, learned counsel for the petitioner; Ms. Bokaro Sapna Reddy, learned Senior Standing Counsel for Central Board of Indirect Taxes and Customs (CBIC) appearing for respondent Nos.2 and 3; and Mr. Dominic Fernandes, learned counsel for respondent Nos.4 to 6 – Directorate General of GST Intelligence (DGGI) and perused the record.

2. The present writ petition is filed with the following prayer:

“.to issue a writ or an order or a direction, more particularly a writ in the nature of Mandamus: (i) Declaring the actions of Respondent No. 7 is passing the Refund Rejection Order dated 12.01.2026 in Form GST-RFD-06 bearing ARN number AA361025043086J as being illegal, arbitrary, unconstitutional and without jurisdiction and in contravention to the provisions of the Central Goods and Services Act, 2017 and consequently; Direct the Respondent No.7 to sanction the refund application of the Petitioner for Rs. 19,33,34,320/-paid/reversed by the Petitioner vide DRC-03, by setting aside the Refund Rejection Order dated 12.01.2026 in Form GST-RFD-06 bearing ARN number AA361025043086J; and pass such other order or orders as this Court may deem fit and proper in the circumstances of the case.”

3. The petitioner is a private limited Company engaged in the business of renting and leasing pre-fabricated warehouse buildings to its clients/customers. The petitioner is duly registered under the Central Goods and Services Tax Act, 2017 (for short ‘CGST Act’) and has been regularly filing its GST returns for the relevant periods, including from 2017-18 to 2021-22.

4. The genesis of the present dispute lies in an investigation initiated by the Directorate General of GST Intelligence (DGGI), Hyderabad Zonal Unit. On 16.09.2022, the petitioner received a summons under Section 70 of the CGST Act, calling upon it to produce certain documents in connection with an enquiry into the alleged availment of ineligible Input Tax Credit (ITC) purportedly in contravention of Section 17 of the CGST Act.

5. During the course of investigation, the DGGI authorities alleged that the petitioner had availed ineligible ITC amounting to Rs.19,33,34,320/- in respect of works contract services received for construction of warehouses, which according to the Department was blocked under Section 17(5) of the CGST Act. The petitioner states that during the investigation and under protest, it was compelled to reverse/pay the aforesaid amount, as follows:

6. The petitioner consistently maintained that it was legally entitled to avail the said ITC and communicated the same to the respondents. In particular, the petitioner relied upon the judgment of the Orissa High Court in Safari Retreats Private Limited v. Chief Commissioner of Central GST  (Orissa)/2019 SCC Online Ori 443 , which was then pending consideration before the Hon’ble Supreme Court.

7. Thereafter, following the investigation, a show-cause notice dated 15.12.2023 was issued to the petitioner under Section 74 of the CGST Act, alleging irregular availment of ITC and proposing recovery of the said amount together with applicable interest and penalty.

8. The petitioner duly filed its reply to the show-cause notice and participated in the personal hearings. However, respondent No.3 passed Order-in-Original No.75/2024-25-Adjn(ADC)-GST dated 13.09.2024 (for short ‘Order-in-Original’), confirming the demand of Rs.19,33,34,320/- along with applicable interest and penalty. The Order-in-Original further appropriated the entire amount of Rs.19,33,34,320/- which had already been paid/reversed by the petitioner through Form GST DRC-03.

9. Aggrieved by the Order-in-Original dated 13.09.2024, the petitioner preferred an appeal before respondent No.2. The appeal was numbered as Appeal No.80/2024-RR-GST-Comm. After hearing the parties and considering the material placed on record, respondent No.2 passed Order-in-Appeal No. HYD-GST-RRC-APP1-41-2025-26, dated 16.09.2025 (for short ‘Order-in-Appeal’), allowing the appeal and setting aside the Order-in-Original.

10. In the Order-in-Appeal dated 16.09.2025, the appellate authority undertook a detailed examination of the applicability of Section 17(5)(c) and (d) of the CGST Act and recorded, inter alia, the following findings:

On the basis of the aforesaid findings, the appellate authority concluded that the demand confirmed by the adjudicating authority was unsustainable and accordingly passed the following operative order:

“the appeal is allowed and the impugned order is set aside.”

11. Consequent upon the Order-in-Appeal, the petitioner filed an application for refund in Form GST-RFD-01 dated 28.10.2025, seeking refund of Rs.19,33,34,320/-. The application was acknowledged by the Department vide Form GST-RFD-02 dated 11.11.2025.

12. On 05.12.2025, respondent No.7 issued a notice for Rejection of Application for Refund in Form GST-RFD-08, seeking certain information and documents, including copies of the DRC-03 challans, details of the payments reflected in the GSTR-3B returns and a certificate relating to unjust enrichment. The petitioner duly responded to the said notice vide its reply dated 10.12.2025 and furnished the information and documents sought by the respondent, including the Chartered Accountant’s (CA) Certificate relating to unjust enrichment.

13. Thereafter, instead of deciding the refund application on the basis of the material already furnished, respondent No.7 issued a further notice for Rejection of Application for Refund dated 24.12.2025 raising additional grounds for proposed rejection. The petitioner submitted a detailed reply dated 29.12.2025 dealing with and refuting the grounds raised therein. Respondent No.7 thereafter passed the impugned Refund Rejection Order dated 12.01.2026 in Form GST-RFD-06, rejecting the petitioner’s refund claim in its entirety.

14. The learned Senior Counsel for the petitioner advanced the following submissions:

“Subject to the provisions of section 108 or section 113 or section 117 or section 118, an order passed by the Appellate Authority under this section shall be final and binding on the parties.”

That the observation of respondent No.7 that the Order-in-Appeal “does not direct refund” is misconceived. The absence of an express direction for refund in the Order-in-Appeal does not, by itself, authorize a subordinate refund authority to disregard the appellate findings or to reopen the substantive question of admissibility of the ITC which stood adjudicated by the appellate authority.

15. The learned Standing Counsel appearing for the respondents has advanced the following submissions:

16. We have taken note of the respective submissions urged and perused the material on record.

17. The first and foremost question that arises for consideration is whether the Order-in-Appeal dated 16.09.2025 was operative and binding upon the respondents as on the date of the impugned order dated 12.01.2026, and whether respondent No.7 was justified in declining to give effect to the findings recorded therein.

18. In this regard, it is apposite to reproduce the Section 107(16) of the CGST Act which reads as under:

(16) Every order passed under this section shall, subject to the provisions of Section 108 or Section 113 or Section 117 or Section 118 be final and binding on the parties.

A plain reading of the said provision demonstrates that the statutory scheme makes an order passed by the appellate authority under Section 107 of the CGST Act binding upon the parties, subject to the specific statutory remedies contemplated under Sections 108, 113, 117 and 118 of the CGST Act. Consequently, merely because a further statutory remedy may be available or contemplated, the appellate order does not cease to operate unless it is modified, stayed, or set aside in accordance with law.

19. In the present case, the following facts are material:

In these circumstances, the Order-in-Appeal dated 16.09.2025 remained operative and binding upon the parties as on 12.01.2026. The subsequent filing of an appeal before the GSTAT, does not retrospectively render the Order-in-Appeal inoperative as on the date when the impugned order was passed. In the absence of any order staying, modifying or setting aside the Order-in-Appeal, the respondents were required to give due effect to the appellate decision in accordance with law.

20. It is pertinent to note that the observation contained in para 11.4 of the impugned order that the Order-in-Appeal “has not attained the finality” cannot, therefore, justify the rejection of the petitioner’s refund claim. Even assuming that the Department was entitled to pursue the statutory remedy against the Order-in-Appeal, 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 said para 11.4 is extracted hereunder for ready reference:

11.4 In the instant case the amounts were paid by the taxpayer voluntarily. during the investigation. Hence, the ratio laid down in the said case laws is not applicable to the present case. The present Order-in-Appeal has not attained the finality inasmuch as the competent authority has reviewed the same, found it not legal and proper and decided to file an appeal before Hon’ble GSTAT. Further, the Case laws cited by the taxpayer during the personal hearing pertain to the appeals against refund sanction order. Appellate orders against refund sanction are treated as orders u/s 54(5) of the CGST Act, 2017. While the present order of appellate authority is-against the confirmed demand of irregular ITC

21. The respondent No.7, while processing the petitioner’s refund claim, has effectively reopened and disregarded findings which had already been adjudicated upon by the appellate authority, which are evident from the following:

22. The aforesaid course of action is contrary to the principle of judicial discipline. A subordinate or implementing authority cannot, while exercising a distinct statutory function, disregard the operative findings of a superior appellate authority merely because the Department considers those findings to be incorrect or proposes to challenge them. The statutory remedy of appeal is available to the Department precisely for the purpose of challenging an appellate order. Until such order is modified, stayed or set aside by the competent forum, the subordinate authorities are required to give effect to the operative order in accordance with law.

23. The Hon’ble Supreme Court in Union of India v. Kamalakshi Finance Corporation Ltd. 1992 Supp (1) SCC 443, emphasized the importance of judicial discipline and held, in substance, that the orders of higher appellate authorities are binding upon subordinate authorities and cannot be disregarded merely because the Department considers them erroneous. The Apex Court also recognized that the Department has its statutory remedies for challenging an order and cannot, pending such challenge, permit subordinate authorities to act contrary to the binding decision.

24. Likewise, in Godrej Sara Lee Ltd. v. Excise and Taxation Officer-cum-Assessing Authority (2025) 11 SCC 808 , the Hon’ble Supreme Court held that “Once the issue stands finally concluded, the decision binds the State, a fortiori, the Revisional Authority. The decision of the Tribunal may not be acceptable to the Revisional Authority, but that cannot furnish any ground to such authority to perceive that it is either not bound by the same or that it need not be followed.”

25. In the present case, respondent No.7 has no power to reopen, indirectly questioning or refusing to give effect to the substantive findings of the operative Order-in-Appeal on the very issue which formed the basis of the demand. The impugned order, to the extent that it proceeds on such an approach, is contrary to the principles of judicial discipline and the statutory scheme governing appellate orders, and is liable to be set aside.

26. The petitioner submits that the refund claimed by it constitutes consequential relief flowing from the Order-in-Appeal. The relief sought by the petitioner in the appeal before the appellate authority was for setting aside the Order-in-Original, together with all consequential reliefs and the appellate authority, having considered the matter, allowed the appeal in its entirety and set aside the Order-in-Original. Consequently, the demand of Rs.19,33,34,320/- confirmed therein ceased to have any legal effect and the amounts paid by the petitioner towards the said demand could not thereafter continue to be retained by the respondents, merely on the basis of a demand which had been set aside. The setting aside of the demand thus gave rise to the petitioner’s claim for consequential refund of the amounts paid and appropriated towards the said demand, subject to the statutory procedure prescribed under Section 54 of the CGST Act. The fact that the Order-in-Appeal did not separately direct payment of refund does not alter the nature of the relief claimed, since the refund arises as a consequence of the demand itself having been set aside by the appellate authority.

27. The observation of respondent No.7 in paragraph 11.6 of the impugned order that the Order-in-Appeal “does not direct refund nor adjudicate refund eligibility under Section 54” is misplaced. The absence of an express direction to grant refund in the Order-in-Appeal does not extinguish the petitioner’s right to seek consequential refund. The appellate authority allowed the appeal in its entirety and set aside the Order-in-Original; the petitioner thereafter invoked the statutory refund mechanism under Section 54 for obtaining the consequential monetary relief arising from the appellate decision. Thus, the question before the refund authority was whether the petitioner satisfied the statutory requirements for processing the consequential refund claim, and not whether the substantive demand which had already been set aside could be readjudicated.

28. It is to be noted that under Section 54 of the CGST Act, the scheme itself recognizes refund claims arising as a consequence of appellate orders. Section 54(1), read with the Explanation thereto, prescribes the period within which an application for refund is required to be made and specifically recognizes, for purposes of determining the relevant date, cases where the tax becomes refundable as a consequence of an order of an appellate authority. The Department itself, in the impugned order, has treated the date of communication of the appellate order as the relevant date for the petitioner’s consequential refund claim and has recorded that the application dated 28.10.2025 was filed within the prescribed period. Therefore, the respondent No.7 could not construe the Order-in-Appeal narrowly on the ground that it did not contain an express direction for refund.

29. Further, the setting aside of the demand constituted the legal basis for the petitioner’s consequential refund claim, which was thereafter required to be processed in accordance with Section 54 of the CGST Act. Thus, the refund application was not an independent attempt to reopen the substantive dispute relating to the demand, but a statutory claim for consequential relief arising from the Order-in-Appeal.

30. The petitioner’s submission that respondent No.7 ought to have invoked the specific power under Section 54(11) of the CGST Act, if the respondents intended to withhold the refund, is well-founded. Section 54(11) of the CGST Act provides a specific statutory mechanism for withholding a refund where the order giving rise to such refund is the subject matter of an appeal or further proceeding, or where any other proceedings under the Act are pending, subject to the conditions stipulated therein. The said provision reads as under:

(11) Where an order giving rise to a refund is the subject matter of an appeal or further proceedings or where any other proceedings under this Act is pending and the Commissioner is of the opinion that grant of such refund is likely to adversely affect the revenue in the said appeal or other proceedings on account of malfeasance or fraud committed, he may, after giving the taxable person an opportunity of being heard, withhold the refund till such time as he may determine.

31. It is to be noted that Section 54(11) contemplates, inter alia, that if the order giving rise to the refund is the subject matter of an appeal or further proceeding, or that other proceedings under the Act are pending; and the Commissioner is of the opinion that grant of the refund is likely to adversely affect the revenue in such appeal or proceedings on account of malfeasance or fraud; an opportunity of being heard has to be afforded to the person concerned, before the refund is withheld.

32. In the present case, the statutory requirements under Section 54(11) were not satisfied as on the date of the impugned order dated 12.01.2026, for the following reasons: