No Hearing, No Valid SCN: Bombay High Court Cancels GST Refund Recovery

In the absence of a valid show cause notice and the denial of an opportunity to be heard, the Bombay High Court has quashed the Goods and Services Tax (GST) refund recovery.

Under the GST regime, Power Engineering (India) Pvt. Ltd. is a registered EOU and is in the business of production and export of electronic goods. The company for promoting export-led manufacturing avails itself of customs and IGST exemptions on imported raw materials under several customs notifications, including one on March 31, 2003.

IGST is due on the business export and avails refunds under section 16 of the IGST Act for completed goods that are exported after being developed with both domestic and imported inputs.

Rule 96(10) of the CGST Rules, 2017 restricts IGST refunds on exports for the firms that obtain the inputs under tax waiver, which raises controversy. It is the foundation for the refund recovery measure of the department. On October 9, 2018, it was introduced with a notification and was repealed w.e.f. October 8, 2024.

Tax authorities, the applicant breaches Rule 96(10) by claiming ₹6.88 crore inaccurately in IGST refunds between FY 2017–18 and 2021–22. Consequently, on July 10, 2024, under section 74 of the CGST Act, a recovery order was issued that manages cases of fraud.

The counsel of the applicant, Mr. Bharat Raichandani, opposed the legitimacy of the recovery order and the procedure. He kept the order breached both statutory provisions and natural justice principles as it was furnished without furnishing a SCN as per Sections 73 or 74 and without providing the parties an opportunity to be represented.

In the issuance of the opposed order, the applicant has focused on the procedural error instead of pressing the legitimacy and retroactive application of rule 96(10), even after raising more general concerns about such problems.

A Show Cause Notice (SCN) issued by the department on October 19, 2022, and November 7, 2023, is been examined by the division bench consisting of Justice Bharati Dangre and Justice Nivedita P. Mehta, which sought information on the refund claims. SCNs were determined to be the informative queries and not formal SCNs.

Court, SCN citing claimed obligation and furnishing the taxpayer opportunity to answer is mandated by section 73(1) of the CGST Act. Rule 142 of the CGST Rules regulates the format and procedural flow for these notices and adjudications.

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The court mentioned that the recovery order avoids these needed steps, which proceeds against the rule that when a law cites a measure, it should be complied with without exception.

The recovery decision has been struck down due to a procedural error by the Bombay High Court on July 10, 2024, though it did not address the statutory problems raised by Rule 96(10). When the revenue required to initiate a new process then the court allows it, though only under stringent compliance with sections 73 and 74 of the CGST Act, ensuring due process.