The Bombay High Court in a recent case, quashed the Goods and Service Tax (GST) refund recovery in absence of issuance of Valid show cause notice (SCN) and due to no granting of hearing opportunity.
Power Engineering (India) Pvt. Ltd. is a registered EOU under the GST regime and is involved in the production and export of electronic goods. In order to encourage export-led manufacturing, the company avails itself of customs and IGST exemptions on imported raw materials under a number of customs notifications, including one dated March 31, 2003.
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The business owes IGST on export and then claims refunds under Section 16 of the IGST Act for completed goods that are exported after being created with both domestic and imported inputs.
Rule 96(10) of the CGST Rules, 2017 limited IGST refunds on exports for firms that got inputs under tax exemption, which gave rise to the controversy. This rule served as the foundation for the department’s refund recovery action. It was introduced with a notification dated October 9, 2018, and it was repealed with effect from October 8, 2024.
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According to the tax authorities, the petitioner violated Rule 96(10) by improperly claiming ₹6.88 crore in IGST refunds between FY 2017–18 and 2021–22. As a result, on July 10, 2024, a recovery order was issued under Section 74 of the CGST Act, which handles cases involving fraud.
Mr. Bharat Raichandani, the petitioner’s counsel, contested the recovery order’s legitimacy and procedurality. He maintained that the order violated both statutory provisions and natural justice principles since it was issued without providing a show cause notice (SCN) in accordance with Sections 73 or 74 and without giving the parties a chance to be represented.
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The petitioner focused on the procedural error in the issuance of the contested order rather than pressing the legitimacy and retroactive application of Rule 96(10), despite raising more general concerns about these issues.
A division bench consisting of Justice Bharati Dangre and Justice Nivedita P. Mehta examined the department’s October 19, 2022, and November 7, 2023, show cause notice, which simply asked for details about the refund claims. It was determined that these were not formal SCNs but rather informative queries.
The Court underlined that a comprehensive SCN detailing the claimed liability and giving the taxpayer a chance to reply is required by Section 73(1) of the CGST Act. Additionally, the format and procedural flow for these notices and adjudications are governed by Rule 142 of the CGST Rules.
The Court noted that the recovery order circumvented these required steps, which goes against the rule that when a statute specifies a course of action, it must be followed without exception.
The Bombay High Court struck down the July 10, 2024, recovery decision due to a procedural error, but it did not address the fundamental legal issues raised by Rule 96(10). If required, the Court permitted the Revenue to start new procedures, but only under strict adherence to Sections 73 and 74 of the CGST Act, guaranteeing due process.
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