Karnataka HC quashes Denial of Mistakenly Paid IGST Refund after Duly Paid to State Authorities [Read Order]

In a significant ruling addressing refund claims for taxes wrongly paid under the Goods and Services Tax (GST) regime, the Karnataka HC has quashed multiple orders passed by the Assistant Commissioner of Central Taxes denying refund of Integrated GST (IGST) erroneously paid by Merck Life Science Pvt. Ltd.

The Court held that the taxpayer was entitled to refund under Section 19 of the IGST Act, 2017 read with Section 77 of the CGST Act, 2017, and directed the Central Tax Authorities to process and release the refunds within 30 days.

The petitioner, Merck Life Science Pvt. Ltd., a company engaged in intermediary services to foreign entities, had during July, August, September, October, and November 2017, paid IGST under a bona fide belief that the services rendered by it qualified as export of services, constituting inter-State supply.

Upon realising in March 2018 that the supplies were actually intra-State supplies, the company discharged the correct liability by paying State GST (SGST) and Central GST (CGST) to the Karnataka authorities. Subsequently, Merck filed refund applications on 30.03.2024 before the Central Tax Authorities seeking return of the IGST earlier paid in error.

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However, the refund applications were rejected through separate orders dated 25.05.2024 and 27.05.2024 on the ground that the refund claims were time-barred under Section 54 of the CGST Act.

Counsel for the petitioner, Bharat B. Raichandani, argued that the refund of tax wrongly paid to the wrong Government authority is governed not by Section 54, but by Section 19(1) of the IGST Act (tax paid under wrong classification of supply), Section 77(1) of the CGST Act (tax paid under wrong head), and Rule 89(1A) of the CGST Rules.

It was submitted that limitation under Section 54 does not apply to refunds flowing from Section 19/77. The petitioner emphasized that it had already paid the appropriate SGST/CGST to the State authorities, and the Central authorities were unjustly retaining the IGST, amounting to a violation of Article 265 of the Constitution ("no tax shall be collected except by authority of law").

Reliance was placed on decisions of the Madras HC in Lenovo (India) Pvt. Ltd., the Andhra Pradesh HC in Nspira Management Services Pvt. Ltd., and Louis Dreyfus Company Pvt. Ltd. which held that such refunds cannot be denied on limitation when the tax itself was not legally payable.

The Central Tax Department argued that since the refund application was filed beyond the two-year period prescribed under Section 54(1), it was barred by limitation.

Justice S.R. Krishna Kumar held that the authorities had committed a serious error in applying Section 54 to a refund claim that arose specifically from wrongful payment of tax under mistaken classification of supply, which is squarely governed by Section 19 of the IGST Act and Section 77 of the CGST Act.

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It was noted that the source of power to grant refunds emanates from Section 19(1) of the IGST Act and Section 77(1) of the CGST Act. Section 54 is inapplicable where tax is paid under a bona fide mistake as inter-State instead of intra-State supply

The Court also noted that the taxpayer had already paid the correct SGST/CGST and retaining the IGST would result in unjust enrichment of the Central Authorities.

Furthermore, the Court relied on several High Court judgments affirming that the limitation under Section 54 is directory, not mandatory, in refund claims involving taxes paid under mistaken belief.

Allowing all writ petitions, the Karnataka High Court quashed the refund rejection orders and held that the authorities erred in applying limitation under Section 54 while directing the Central Tax Authorities to process and sanction the refund within 3 months of receiving the order.

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