VAT Credit cannot be treated as Pre-Deposit for GST Adjustments: Delhi HC directs Refund [Read Order]

In a recent ruling, the Delhi High Court has directed the authorities to issue a refund of Rs. 22 crores along-with interest as per Section 42 of the Delhi Value Added Tax Act, 2004 from the date it fell due till realisation. It was observed that the VAT credit cannot be treated as a Pre-deposit for Goods And Services Tax (GST) Adjustments. 

A Division bench of Justice Yashwant Varma and Justice Dharmesh Sharma observed the decision in the case of Otis Elevator Company (India) Ltd. v. Commissioner of Value Added Tax & Ors. that “a pre-deposit does not partake the character of tax or duty, and thus the Tax Department is neither entitled in law to retain the pre-deposit amount in question nor could it utilize the same for adjustment purposes towards tax liability for different assessment years.”

The petitioner, FEMC Pratibha Joint Venture, engaged in executing work contracts for the Delhi Metro Rail Corporation Ltd, had been discharging its VAT liability under the Delhi Value Added Tax Act and the Central Sales Tax Act, 1956.

The petitioner claimed a refund of excess tax credit, which had arisen due to Input Tax Credit. This refund amounted to Rs. 17,10,15,285 for the 4th quarter of 2015-16 and Rs. 5,44,39,148 for the 1st quarter of 2017-18, along with applicable interest under Section 42 of the DVAT Act.

The petitioner had faced delays and non-responsive actions from the tax authorities in processing the refund. After sending a letter requesting the refund in November 2022, the petitioner received the impugned adjustment order. This order led the petitioner to send an objection letter, citing a violation of Section 38(2) of the DVAT Act. Subsequently, default notices of tax and interest were issued for various quarters, dating back to 2015-16 and 2016-17.

Apparently, even for the said period, a default assessment had been passed ex parte by the AVATO on 26 March 2022, and the copy of the order was only provided to the petitioner on 30 January 2023. In the impugned assessment order, a demand of Rs. 5,13,69,367/- was raised, claiming the additional tax amount of Rs. 3,02,34,329/- along with additional interest of Rs.2,11,35,038/-, and the same has also been adjusted with the refund claimed in the returns filed by the petitioner.

The High Court pointed to the principles laid down in the decision Flipkart India Private Limited v. Value Added Tax Officer, Ward 300 & Ors. that:

1. that the time limit for processing and issuing of refunds has to be scrupulously adhered to by the department in terms of Section 38 of the Act; and
2. that wherever the department seeks to obtain necessary information under Section 5920 of the DVAT Act from the dealer after filing of return, steps be taken within time limit envisaged under Section 38 of the DVAT Act; and
3. that it is it is only when an enforceable demand in the nature of tax or duty is pending against the assessee that any amount of pre-deposit can be adjusted and not otherwise; and
4. that in case the time limit prescribed under Section 38 of the DVAT Act is not adhered to, the department has no legal right to justify retention of the amount of pre-deposit.

The bench stated that “A fortiori the impugned adjustment letter dated 18 November, 2022 cannot be sustained in law since the mandate of Section 38 read with Section 392 and 59 of the DVAT Act was not followed. Therefore, the petitioner is entitled to the refund claimed.”

Hence, the Court invalidated the challenged adjustment order dated November 18, 2022, and instructed the refund of Rs. 17,10,15,285/- for the fourth quarter of 2015-16 and Rs. 5,44,39,148/- for the initial quarter of 2017-18, inclusive of interest in accordance with Section 42 of the DVAT Act, to be calculated from the due date until it is realized.

Furthermore, the court ordered that the refund should be processed within three weeks from the date of this judgment. However, concerning the contested default notices, unless under specific circumstances, the petitioner is granted the right to challenge them through a statutory appeal before the Appellate Tribunal, following the legal procedures.

To Read the full text of the Order CLICK HERE

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