"Travelled Beyond SCN": Allahabad HC raps GST Dept for Inconsistent approach towards Unutilised ITC Refund Claims, Grants Relief to Samsung India [Read Order]

The Allahabad High Court has sharply criticised the Goods and Services Tax ( GST ) Department for the inconsistent approach towards the Unutilised Input Tax Credit ( ITC ) refund claims of the petitioner, Samsung India Electronics.

The petitioner is a company engaged in the export of Information Technology design and software development services pertaining to mobile devices to its overseas holding company, namely, M/s Samsung Electronics Company Limited, Korea in terms of prevalent service agreement dated January 1, 2019.

Such export of IT services is made by the Petitioner under Letter of Undertaking ( LUT ) without payment of IGST which constitutes zero rated supply as per Section 16 of the Integrated Goods and Services Tax Act, 2017.

The Petitioner had filed a refund claim of unutilised ITC of CGST, SGST, and IGST paid on various inputs and input services for the period of April 2019 to June 2019. After due consideration by the Department, said refund claim amounting to Rs. 6,36,69,447/- was sanctioned by the Department barring for an amount of Rs.7,500/- on the ground of claiming refund of unutilised ITC on invoices missing in the GSTR-2A returns.

The Petitioner then filed for the refund of the unutilised Input Tax Credits of CGST, SGST, and IGST paid on various inputs and input services, for the period of July – September, 2019 amounting to Rs.7,46,52,231/- and October – December, 2019 amounting to Rs.8,20,59,875/-. Against the aforesaid refund applications, deficiency memos under FORM GST-RFD-03 and later show cause notices were issued by the Department proposing to reject the refund for the aforesaid periods.

Thereafter, the Petitioner filed a reply to the show cause notices and attended personal hearing, after which the Department partially allowed the refund and rejected a portion of the demand on the ground that the specific goods are capital goods, and not inputs vide orders dated April 28, 2021 and November 8, 2021.

Thereafter, the Petitioner filed appeals against the aforesaid orders dated April 28, 2021 and November 8, 2021. The said appeals were rejected vide orders dated October 25, 2021 and February 24, 2023.

M.P. Devnath, counsel appearing on behalf of the Petitioner submitted that, “The Department has adopted an inconsistent approach in dealing with the refund applications of the Petitioner, despite the fact that each of the refund applications arise out of the same set of facts and circumstances, which is grossly incorrect in law.”

It was also mentioned that, for the subsequent and prior periods, except the period from July 2019 to March 2020, the refund claims have duly been sanctioned to the Petitioner on the same facts and circumstances only.”

It was also submitted that the Department has traveled beyond the scope of show cause notices.

The show cause notices and the refund rejection orders had rejected the refund on the ground that the specific goods are not consumed in the process of provision of output service and hence cannot be treated as inputs. However, the impugned orders had proceeded on a completely different ground and have held that the expenses incurred on specific goods were required to be capitalized in the books of accounts as per Accounting Standard 10, and hence, the same are covered under the ambit of capital goods in terms of Section 2(19) of the Central Goods and Services Tax Act, 2017.

Additional Chief Standing Counsel appearing on behalf of the respondents has made the following submissions:

The principle of res judicata does not apply in matters of taxation and merely because refund claims have been sanctioned previously, does not mean that the refund claims for subsequent periods will also be sanctioned.

He also submitted that, the Petitioner while preparing its financial statements has not adhered to the Accounting Standards. Specific goods have not been capitalized by the Petitioner in accordance with Accounting Standard 10.

The Bench observed that, “Taxation serves as the cornerstone of governmental revenue, facilitating the provision of public services and infrastructure. Essential to his system is consistency, ensuring that similar factual and legal circumstances are met with uniform treatment. Inconsistencies can erode public trust, undermine compliance, and ultimately compromise the integrity of the tax system. Consistency in taxation entails the application of standardized rules and principles to taxpayers confronting analogous factual and legal circumstances.”

The Allahabad High Court bench further noted that, “The inconsistency and irrationality displayed by the Department in withholding refund claims for July-September 2019 and October-December 2019, despite having sanctioned similar claims in the past and in the future are indefensible.”

With respect to capitalisation, it was observed that, “The Petitioner’s assertion aligns with the definition of inputs provided under the CGST Act, 2017 which includes any goods used or intended to be used in the course or furtherance of business.”

The Bench of Justice Shekhar B. Saraf noted that, “It is evident in the instant case that the Department has deviated from the show cause notice, and as such any order passed by it running contrary to the grounds taken in the show cause notice, cannot be sustained. Issuance of the show cause notice represents a pivotal juncture in legal or administrative proceedings, demarcating the boundaries within which any authority can exercise its powers.”

It was thus held that, “When facts and circumstances in a subsequent assessment year are the same, no authority, whether quasi-judicial or judicial, can generally be allowed to take a contrary view. The arbitrary withholding of refund claims for specific periods, despite past precedents and the absence of any material change in circumstances, is contrary to the principles of fairness and equity.”

It was also added that, “Capital goods are intended for long-term use and are typically subject to capitalization. However, inputs, are goods used in the day-to-day operations of the business and are not subject to capitalization.”

To Read the full text of the Order CLICK HERE

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