Delhi HC to Decide if GST Refund Limitation is Directory & Validity of Late Deficiency Memos

The Delhi High Court has taken up two substantial questions of law that could redefine GST refund litigation:

Limitation Period: Whether the two-year limitation period prescribed under Section 54(1) of the CGST Act is mandatory (an absolute deadline) or directory (flexible/condonable in genuine cases).
Deficiency Memos: Whether the department can issue a Deficiency Memo (Form GST RFD-03) after the statutory 15-day period (Rule 90) has lapsed, and whether such memos can be used to reject claims on substantive grounds like “limitation” rather than just procedural defects.

The Petitioner: Panna Handicrafts, an exporter/taxpayer seeking GST refunds.
The Claims: The petitioner filed refund applications which were met with resistance from the department.
The Rejection: The Revenue issued 11 Deficiency Memos against the refund claims.
The Grounds:
- Some claims were rejected/returned via these memos on the ground that they were time-barred (filed after 2 years).
- Other memos cited procedural discrepancies.
The Procedural Lapse: Crucially, several of these Deficiency Memos were issued beyond the 15-day statutory time limit prescribed under Rule 90(2) of the CGST Rules.
The Writ: The petitioner challenged these memos in the High Court, arguing they were illegal and that the limitation period itself is not absolute.

Assessee’s Arguments	Legal Basis
“May” implies Discretion	Section 54(1) states a registered person “may” make an application before the expiry of two years. The use of “may” instead of “shall” indicates the timeline is directory, not mandatory.
Memo $\neq$ Adjudication	A Deficiency Memo (Form RFD-03) is only to point out curable/procedural defects (missing docs). It cannot be used to adjudicate substantive issues like limitation. Rejection on limitation requires a Show Cause Notice (RFD-08) and a Speaking Order (RFD-06).
15-Day Deadline	Under Rule 90(2), the officer must issue a memo within 15 days. Memos issued after this period are invalid, and the application should be deemed acknowledged.
Judicial Precedent	High Courts (Jharkhand, Madras) have held that in appropriate circumstances (e.g., tax paid under mistake of law/Article 265), the refund timeline can be relaxed.

- Notice Issued: The Delhi High Court found merit in the arguments and issued notice to the Revenue, directing them to file a counter-affidavit on both the legal interpretation and the factual delays.
- Scope of Examination: The Court will specifically examine if the statutory scheme allows officers to “condone” delays in refund filings (treating Section 54 as directory) and the legal consequence of the department missing its own 15-day deadline for scrutiny.

The “Directory” Defence: If the Delhi HC rules that Section 54 is directory, it will open a massive window for taxpayers to claim older refunds, especially where tax was paid by mistake or under protest. This aligns with the principle that the government cannot retain money without authority of law (Article 265).
Deficiency Memo vs. Rejection Order: Taxpayers should verify if their refund was “returned” via a Memo or “rejected” via an Order. A Memo for a substantive legal point (like limitation or classification) is arguably an abuse of process and can be challenged.
The 15-Day Clock: This case reinforces that the 15-day timeline for officers (Rule 90) is as binding as the 2-year timeline for taxpayers. If the officer sleeps on the file for 16 days, they may lose the right to issue a deficiency memo, forcing them to process the claim on merits.
Action Point: Taxpayers with pending refund rejections based on “time-bar” or late deficiency memos should closely track this matter, as a favorable ruling could serve as a precedent to revive their claims.