Court’s decision
The Karnataka High Court delivered a detailed ruling holding that the repeated issuance of RFD-03 deficiency memos to the Petitioner was arbitrary and legally unsustainable. The Court found that the Respondent authority had issued multiple deficiency memos dated 20.05.2025 and 21.05.2025 rejecting the Petitioner’s refund applications under the GST regime without conducting meaningful verification of documents. The Court emphasised that refund claims filed under the GST legislation cannot be rejected mechanically, especially when the Petitioner had furnished statutory undertakings, Chartered Accountant certificates under Section 54, and complete supporting evidence demonstrating the incidence of tax.
The Court quashed all impugned RFD-03 deficiency memos and directed the Respondent authority to re-examine the refund claims on merits in accordance with law. The Court stressed that GST officers are required to apply the mind, record reasons for rejection, and follow the statutory scheme under Section 54 of the CGST and KGST Acts, read with the corresponding Rules. The Court recognised that the Petitioner’s payments through DRC-03 during inspection were recorded as “receivables” and supported by CA certification confirming that tax incidence had not been passed on to any other person. The Court held that such documentary evidence could not be brushed aside without cogent reasoning. Accordingly, the authority was directed to process the refund, conduct due verification, and pass a reasoned order within the prescribed timelines.
Facts
The Petitioner, a registered assessee under the GST enactments, filed several refund applications claiming return of amounts paid through DRC-03 during inspection proceedings. These payments were recorded in the Petitioner’s financial statements as receivables. Each refund application contained supporting documentation, including automated ARN receipts, particulars of IGST amounts, and declarations stating that taxes were paid under duress. The Petitioner furnished multiple undertakings dated 30.04.2025 acknowledging that in the event of non-compliance with Section 16(2)(c) read with Section 42, the refunded amount would be returned with interest. The Petitioner also submitted Chartered Accountant certificates certifying that the incidence of tax had not been passed on to any other person.
Despite this, the Respondent authority issued multiple deficiency memos on 20.05.2025 and 21.05.2025 for different refund applications. These memos were issued without detailed scrutiny or explanation. Aggrieved, the Petitioner approached the High Court seeking quashing of the deficiency memos and a mandamus directing the authority to process the refund claims lawfully and to grant interest on delay.
Issues
The primary issues before the Court were:
- Whether repeated issuance of RFD-03 deficiency memos without adequate reasoning violates the statutory framework governing GST refunds.
- Whether the Respondent authority is required to consider Chartered Accountant certificates, undertakings under Section 16 and Section 42, and financial statements while processing refund applications.
- Whether the Respondent can deny verification of refund solely on the basis of technical deficiencies despite the existence of complete documentation.
- Whether the Petitioner is entitled to a direction for reconsideration of the refund applications in accordance with law.
Petitioner’s arguments
The Petitioner contended that all statutory requirements under Section 54 of the CGST and KGST Acts were complied with. It was argued that the refund applications were complete, supported by CA certificates confirming that the incidence of tax had not been passed on, and accompanied by undertakings to return refunds with interest if statutory conditions failed. The Petitioner submitted that the deficiency memos were issued in a mechanical and repetitive manner without recording any specific defects. It was urged that the Respondent acted arbitrarily, failed to examine documents, and violated the scheme of GST Rules which envision meaningful verification and reasoned orders. The Petitioner sought quashing of the memos and issuance of a mandamus directing fresh processing.
Respondent’s arguments
The Respondent authority sought to justify issuance of the deficiency memos by stating that the refund applications lacked certain particulars and therefore could not be processed. It was contended that the format and procedural requirements necessitated issuance of deficiency memos and that the Petitioner must furnish further documentation to complete the refund claims. The Respondent argued that refund claims filed under “Any other (specify)” required additional scrutiny, and that payments through DRC-03 during inspection needed deeper verification before sanction.
Analysis of the law
The Court analysed the statutory framework under Section 54 of the CGST and KGST Acts, noting that refund claims must be examined in accordance with Rule 89. It emphasised the central principle that refund rejection must be supported by cogent reasons and not based on vague procedural objections. The Court took note of the CA certificates which explicitly stated that the incidence of tax had not been passed on and that payments made through DRC-03 were not against any forward or reverse charge liability. The Court held that such certificates carry significant evidentiary value in demonstrating absence of unjust enrichment. Additionally, the undertakings furnished by the Petitioner under Section 16(2)(c) read with Section 42 reinforced statutory compliance and the Petitioner’s willingness to return refunds with interest if required.
The Court found that deficiency memos cannot be used as a tool to indefinitely delay refunds or avoid verification. Instead, the officer must allow the Petitioner the opportunity to clarify alleged deficiencies with specificity.
Precedent analysis
The Court relied on established principles governing GST refunds which require authorities to interpret refund provisions liberally to prevent blockage of working capital. Precedent underscores that deficiency memos must state reasons with clarity, allowing assessees to respond effectively. The Court did not rely on any single specific judgment but drew from jurisprudence that condemns mechanical rejection of refund claims and encourages reasoned decision-making consistent with Articles 14 and 265 of the Constitution.
Court’s reasoning
The Court held that the impugned deficiency memos lacked substantive reasoning and failed to identify genuine statutory defects. It observed that the documents furnished by the Petitioner—including undertakings, ARN receipts, CA certificates, and details of ledger payments—were neither examined nor commented upon. This indicated non-application of mind. The Court reiterated that refund claims cannot be rejected merely because the authority prefers additional procedural compliance when all essential components had been submitted. It held that the Respondent’s approach defeated the statutory purpose of ensuring timely refund and undermined revenue neutrality principles inherent in GST. Accordingly, the Court quashed the memos and directed reconsideration on merits.
Conclusion
The High Court quashed all RFD-03 deficiency memos dated 20.05.2025 and 21.05.2025 and issued a mandamus directing the Respondent authority to process the refund claims afresh. The authority must verify documents, consider CA certificates, and pass a reasoned order in accordance with law. The Court reaffirmed that GST refunds cannot be denied on mere procedural grounds when complete documentation has been furnished. It further directed timely disposal of claims to prevent undue hardship to the taxpayer.
Implications
The decision reinforces the principle that GST refund authorities must apply their mind and cannot mechanically issue deficiency memos. It strengthens taxpayer rights by emphasising proper scrutiny, reasoned orders, and adherence to statutory provisions. For businesses, the ruling confirms that payments made under duress through DRC-03 can be validly claimed as refund if supported by documentation. For authorities, it establishes accountability and procedural discipline, ensuring that revenue neutrality and fairness under GST law are preserved.
