Gujarat HC: Department Can't Recover Already Sanctioned GST Refunds Through Section 73 Proceedings

Introduction

In a significant ruling for GST taxpayers, the Gujarat High Court in Patanjali Foods Ltd. v. Union of India (R/SCA/17298/2024) has clarified that once a GST refund is sanctioned, the tax authorities cannot initiate recovery proceedings under Section 73 of the CGST Act. Instead, the proper course available to the department is to file an appeal under Section 107 or seek revision under Section 108 of the Act.

Case Background

Patanjali Foods Ltd., engaged in manufacturing and selling edible oil, had filed a refund application on December 5, 2023, for the period February-March 2021 under the inverted duty structure scheme. The refund application was initially scrutinized through a show cause notice, with the department ultimately granting the refund after passing a sanction order on January 12, 2024.

However, on April 25, 2024, the department issued a notice under Section 73 claiming that the refund of Rs. 1,70,07,091 was erroneously granted and needed to be recovered with interest and penalties. This led to an Order-in-Original dated September 10, 2024, confirming the demand along with a penalty of Rs. 17,00,709.

Court's Analysis

The High Court, consisting of Justice Bhargav D. Karia and Justice D.N. Ray, made several important observations:

1. Finality of Refund Orders: The Court held that once a refund is sanctioned through a quasi-judicial order, it attains finality unless challenged through proper appellate mechanisms.
2. Proper Recourse for Department: If the department believes a refund was erroneously granted, the appropriate legal remedy is to file an appeal under Section 107 or seek revision under Section 108 of the CGST Act, rather than initiating recovery proceedings under Section 73.
3. No Review Through SCN: The Court categorically stated that "no show cause notice could be issued by the respondents to take away the benefits of a quasi-judicial order in the petitioner's favour."

Striking Down of the Circular

A key aspect of the judgment was the Court's decision to strike down paragraph 2(2) of Circular No. 181/13/2022-GST dated November 10, 2022. This paragraph had stipulated that the restriction on refund claims under Notification No. 9/2022-Central Tax dated July 13, 2022, would apply to all refund applications filed after July 18, 2022, even if they pertained to tax periods before the notification.

The Court declared this provision "wholly arbitrary, discriminatory and ultra-vires Section 54 of the GST Act as well as violating Article 14 of the Constitution of India" for several reasons:

1. Creation of Artificial Class: The Court found that the circular created an artificial distinction between taxpayers based solely on the date of filing refund applications, even though all applications were filed within the statutory limitation period.
2. Retrospective Application: The Court noted that the notification itself stated it would apply prospectively from July 18, 2022, yet the circular attempted to deny refunds for periods prior to this date.
3. Previous Precedent: The Court referenced its earlier decision in Ascent Meditech Ltd. v. Union of India where it had struck down paragraph 2(1) of the same circular on similar grounds.
4. Violation of Statutory Rights: The Court emphasized that Section 54(1) of the GST Act clearly provides a two-year limitation period for filing refund applications, which was further extended due to the COVID-19 pandemic via Notification No. 13/2022.

Key Takeaways for Taxpayers

1. Protected Refunds: Once a refund is granted after due adjudication, it cannot be reversed through Section 73 proceedings.
2. Importance of Limitation Period: Refunds filed within the statutory period of limitation cannot be denied merely because notification restrictions came into effect after the relevant tax period.
3. Departmental Remedies: The tax department must follow the proper appellate procedure (Section 107/108) to challenge any refund order they believe was incorrectly issued.
4. Invalidity of Retrospective Circulars: Administrative circulars cannot retrospectively deny rights that existed during the relevant tax period, particularly when the underlying notification itself specifies prospective application.

Author's View: Legal Principles Against Penalizing Actions Previously Approved by Authorities

The Gujarat High Court's ruling in the Patanjali Foods case reinforces a fundamental legal principle: no person should be penalized for actions that have been duly approved by competent authorities. This principle, which permeates various areas of administrative law, deserves closer examination.

The Contradiction of Penal Proceedings Against Approved Actions

When a taxpayer receives a sanctioned refund after due adjudication by proper authorities, subsequent proceedings to recover that refund with penalty under Section 73 create an inherent contradiction. The taxpayer acted in good faith by applying for a refund within the statutory limitation period, and the authority exercised its quasi-judicial powers to grant that refund. To later penalize the taxpayer for receiving what the authorities themselves approved violates principles of natural justice and legitimate expectation.

The penal element is particularly troubling. Penalties are meant to deter and punish deliberate non-compliance or wrongdoing. How can a taxpayer be penalized for an "error" that was explicitly sanctioned by the same department seeking to impose the penalty? This approach undermines the certainty and predictability that tax administration should provide.

Finality of Quasi-Judicial Orders

A refund sanctioning order is not merely administrative; it represents the culmination of a quasi-judicial process where submissions are made, evidence is examined, and a determination is reached. The principle of finality of quasi-judicial orders is essential for legal certainty. If such orders can be arbitrarily reversed through parallel proceedings rather than proper appeals, it renders the entire adjudication process meaningless.

The legal system provides specific remedial mechanisms for authorities who discover errors in their decisions: appeals and revisions. These mechanisms include appropriate safeguards, time limitations, and procedural requirements that balance the interests of revenue collection with taxpayer rights. Bypassing these mechanisms through Section 73 proceedings circumvents these safeguards.

Legitimate Expectation and Legal Certainty

The doctrine of legitimate expectation protects citizens who have reasonably relied on official decisions. Once a refund is sanctioned, taxpayers make financial and business decisions based on that approval. The principle of legal certainty demands that government actions be predictable and reliable, allowing citizens to plan their affairs accordingly.

When tax authorities attempt to recover amounts they previously approved, along with penalties, they create profound uncertainty in the tax system. This uncertainty extends beyond the immediate financial impact to undermine confidence in administrative decision-making processes more broadly.

Proportionality and Proper Recourse

The principle of proportionality requires that administrative actions be appropriate to their objectives. If authorities discover an erroneous refund, the proportionate response is to appeal or seek revision of the original order – not to initiate fresh proceedings with penal consequences.

Section 107 (appeals) and Section 108 (revision) provide the balanced, proper recourse for authorities. These provisions acknowledge the quasi-judicial nature of the original decision and provide an appropriate framework for correcting genuine errors within specified time frames and procedures.

Conclusion

This judgment brings significant relief to taxpayers who have already received refund sanctions, as it prevents the department from arbitrarily initiating recovery proceedings under Section 73. It establishes a clear procedural boundary that tax authorities must respect the finality of quasi-judicial orders unless properly appealed against through the mechanisms specifically provided in the law.

For businesses that have received GST refunds, this ruling serves as a valuable precedent against subsequent attempts by the department to recover amounts through the issuance of show cause notices under Section 73 after the refund has already been sanctioned. The striking down of the circular further protects taxpayers' rights against retrospective application of restrictions.