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Inverted Duty refund Application-Can refund application be rejected by holding that tax rate on outward supplies is incorrect and thereby if higher tax rate would have been applied no refund would have become payable; Can Refund Proceedings take shape of completion of entire assessment proceedings?

It is very common that while processing refund application in case of inverted duty refund, refund applications are being rejected by providing that tax rate on outward supplies is not correct and had the higher tax rate would have been applied, therefore no refund would have become payable. The article analyses whether a refund application can be rejected by holding that since the tax rate on the output supplies is improper therefore no refund is payable.
Rule 90(2) of the CGST Rules-Scope of issuing RFD-02
Rule 90(2) of CGST Rules, 2017 is being reproduced hereunder for ready reference and for the purpose of reliance on the said provisions-
(2) The application for refund, other than claim for refund from electronic cash ledger, shall be forwarded to the proper officer who shall, within a period of fifteen days of filing of the said application, scrutinize the application for its completeness and where the application is found to be complete in terms of sub-rule (2), (3) and (4)of rule 89, an acknowledgement in FORM GST RFD-02 shall be made available to the applicant through the common portal electronically, clearly indicating the date of filing of the claim for refund and the time period specified in sub-section (7) of section 54 shall be counted from such date of filing.
That it is pretty evident from provisions as mentioned herein above that while issuing RFD-02, an assessing officer has to verify whether the application is found to be complete in terms of sub-rule (2), (3) and (4) of Rule 89 of CGST Rules, 2017. The assessing officer can issue RFD-02 once the application is found correct in terms of Rule sub-rule (2), (3) and (4) of Rule 89 of CGST Rules, 2017.
Relevant Extract of Rule 89(2) and (3)-Documents to  be annexed with Refund Application
That the relevant extract of sub-rule (2) and (3) of Rule 89 relating to refund in case of inverted duty structure are being reproduced for your ready reference-
Rule 89(2)(h)
The application under sub-rule (1) shall be accompanied by any of the following documentary evidences in Annexure 1 in FORM GST RFD-01, as applicable, to establish that a refund is due to the applicant, namely: –
(h) a statement containing the number and the date of the invoices received and issued during a tax period in a case where the claim pertains to refund of any unutilized input tax credit under sub-section (3) of section 54 where the credit has accumulated on account of the rate of tax on the inputs being higher than the rate of tax on output supplies, other than nil-rated or fully exempt supplies;
Rule 89(3)
(3) Where the application relates to refund of input tax credit, the electronic credit ledger shall be debited by the applicant by an amount equal to the refund so claimed.
That the list of Documents as prescribed by the Circular No. 125/44/2019 Dated 18th November 2019 in case of Refund of ITC unutilized on account of accumulation due to inverted tax structure-
1.                   Declaration under second and third proviso to section 54(3)
2.                   Declaration under section 54(3)(ii)
3.                   Undertaking in relation to sections 16(2)(c) and section 42(2)
4.                   Statement 1 under rule 89(5)
5.                   Statement 1A under rule 89(2)(h)
6.                   Self-declaration under rule 89(2)(l) if amount claimed does not exceed two lakh rupees, certification under rule 89(2)(m) otherwise
7.                   Copy of GSTR-2A of the relevant period
8.                   Statement of invoices (Annexure-B)
That it is pretty evident that lawmakers have deemed it fit that the refund application filed in case of refund of ITC unutilized on account of accumulation due to inverted tax structure have to be decided on the basis of documents as specified above. Had they intended that rate classification should also be decided while deciding the refund application, then in such case they would have required the copy of all the invoices along with the application?
Every Proceedings under the Statute has its own relevance and scope and assessing the Refund application is quite different from the scope of making rate classification
That the enquiry to be conducted if any cannot go beyond the documents as specified above. That every proceeding under the provisions has different scope and scope of two proceedings cannot be allowed to be encroached into each other territory. That it has been very clearly established in GST Regime as well as in pre-GST Regime.
This principle can be arrived from the principle which has been laid down in case of E-way bill by various high courts wherein it has been very clearly held that issue relating classification of rate on the goods cannot be raised in case of checking of goods during movement of goods as the scope of checking at that time is very different rather than in case of normal assessment proceedings.
In the matter of N.V.K. Mohammed Sulthan Rawther and Sons and Willson [2019] 101 24 (Kerala) wherein it was held that the petitioner has declared the HSN Code he has felt his product would attract and paid the tax accordingly. The returns are very much on record before the assessing officer. Therefore, to that extent the first petitioner’s conduct cannot be faulted, nor can he be accused of evading the tax. If the inspecting authority entertains any suspicion that there is an attempt to evade tax, they can at best alert assessing authority to initiate the proceedings “for assessment of any alleged sale, at which the petitioner will have all his opportunities to put forward his pleas on law and on fact.” The process of detention of the goods cannot be resorted to when the dispute is bonafide, especially, concerning the eligibility of tax and, more particularly, the rate of that tax.
Hon’ble Madras High Court in the matter of M/s. Jeyyam Global Foods (P) Ltd. Vs Union of India (Madras High Court) held that a bonafide dispute with regard to the classification has arisen between the transporter of goods and the squad officer and the squad officer can intercept the goods, detain them for the purpose of preparing the relevant papers for effective transmission to jurisdictional assessing officer. It is not open to the squad officer to detain the goods beyond a reasonable period. The process can at best take a few hours. Of course, the person who is in-charge of transportation-will have to necessarily cooperate with the squad officer for preparing the relevant papers. The final call will have to be taken only by the jurisdictional assessing officer. Commissioner of Commercial Taxes, Chennai was directed to issue a circular to all the inspecting squad officers in Tamil Nadu not to detain goods or vehicles where there is a bonafide dispute as regards the eligibility of tax or rate of tax.
Hon’ble CESTAT, HYDERABAD   BENCH in the matter of Sentini Technologies (P.) Ltd. v. Commissioner of Central Excise & Service Tax, Appeal-II wherein the question before the Hon’ble bench was whether input tax credit which has not been questioned by the officer in separate proceedings can be questioned during the course of refund proceedings. It was held by the Hon’ble bench that
We have carefully considered the arguments on both sides and perused the records. In the current round of litigation what is before us is the impugned order of the First Appellate Authority upholding the de-novo adjudication order of the original authority. From the documents presented before us including the agreement which the appellant had with M/s Softential Inc USA, the invoices , the FIRCs, the statement by the banker and the set off letter issued by the RBI we were convinced that what the appellant had imported is a software which they used to produce their export services. In fact, the service tax on the imported input service was paid by the appellant themselves under reverse charge mechanism under section 66A of the Finance Act, 1994. They have reflected this payment of service tax in their ST-3 returns. There is nothing on record or in the submissions made by both parties before us to show that the Department has objected to they paying service tax. After paying the service tax the appellant has taken Cenvat Credit of the service tax paid treating the same as input service and showed it in their ST-3 returns. The Department has not objected to the appellant’s taking Cenvat Credit. No proceedings were initiated to deny and recover the Cenvat Credit so taken under rule 14 of Cenvat Credit Rules, 2004 which is the provision for recovery of Cenvat Credit wrongly taken. Therefore, it is evident that the Department has accepted that the Cenvat Credit has been taken on the “input service” by the appellant. It is now a well-established principle that once Cenvat Credit is allowed on any goods or services as inputs or input service they do not cease to be so while processing a refund claim under Rule 5 of Cenvat Credit Rules, 2004.
It is pretty clear from the above decision that it is a settled position of law that once a service has been treated as “input service” under Cenvat Credit Rules and credit has been taken and the department has not disputed the taking of credit, refund of such credit under Rule 5 of Cenvat Credit Rules, 2004 cannot be denied on the ground that it is not an input service. If Revenue was of the opinion that the credit has been taken wrongly on ineligible inputs or input services then the credit should be denied after following the procedure under Rule 14 of Cenvat Credit Rules, 2004. Therefore although the credit has been allowed but at the same time refund has been rejected which is no sustainable.
The above decision is although in relation to input tax credit but still lays down the principle which is squarely applicable in the instant matter that If particular outward supplies have been reflected in the return by the taxpayer and the refund application for the same has been filed, the classification cannot be challenged in refund proceedings and if at all it can be challenged it has to be by way of separate proceedings. Similar decisions of pre-GST Regime for input tax credit are as follows:-
1.                   Virtusa India (P) Ltd., v. CST [2020] (4) TMI – CESTAT, Hyd]
2.                   3D PLM Software Solutions v. CST [Order No. A/85578-85581/17/SMB, dated 30-1-2020]
3.                   Microsoft Global Services Center (India) (P.) Ltd., v. Commr. of Cas. C.EX. & S.T. [Final order No. A/30923-30925/2020, dated 24-9-2020]
4.                   Mckinsey Global Services India (P.) Ltd. v. Commr. of GST & C.EX [Final order Nos. 40249-40250/2019, dated 7-2-2019
Therefore applying the same rationale in relation to output supplies, it can be culled out that if at all assessing officer wants to decide the matter regarding classification of rate on outward supplies, it would have been separately commenced under Section 73/74 of CGST Act, 2017 and assessing officer cannot decide the issue of classification of in RFD-08 issued and hold that rate applied by the taxpayer is incorrect and therefore no refund is payable to the taxpayer.
That the assessing officer while processing the refund application cannot go beyond the scope as provided for the refund proceedings and proceedings initiated through notice issued in RFD-08 cannot be used to determine classification proceedings as there is a separate procedure given under Section 73/74 for decide the same.
Separate remedy provided in the statute to withhold the refund in certain circumstances
The above assertion also gains further strength when it is observed that statute does provide an alternative remedy in such cases under the provision of Section 54(11) of CGST Act, 2017 by providing that where an order giving rise to a refund is the subject matter of an appeal or further proceedings or where any other proceedings under this Act is pending and the Commissioner is of the opinion that grant of such refund is likely to adversely affect the revenue in the said appeal or other proceedings on account of malfeasance or fraud committed, he may, after giving the taxable person an opportunity of being heard, withhold the refund till such time as he may determine.
Further Rule 92(2) of CGST Rules, 2017 also provides that where proper officer or the Commissioner is of the opinion that the amount of refund is liable to be withheld under the provisions of sub-section (10) or, as the case may be, sub-section (11) of section 54, he shall pass an order in Part B of FORM GST RFD-07 informing him the reasons for withholding of such refund.
That if no such process as given under Section 54(11) read with Rule 92(2) is followed by the proper office, assessing officer cannot move ahead and decided the issue regarding classification of tax rate on outward supplies in case of refund proceedings without invoking Section 73/74 of CGST Act, 2017 read with Section 54 of CGST Act, 2017.
Deciding the issue relating to classification of rate on outward supplies in refund proceedings and rejecting refund applied would tantamount in a way to indirectly recover the entire tax amount whereas had similar proceedings been initiated under Section 73/74 of CGST Act, 2017, taxpayer would have filed an appeal against the order and would have obtained stay against the same by paying 10% of the disputed tax amount.
Supposedly issue regarding classification of rate on outward supplies is decided against the taxpayer however since the refund amount has been debited and by virtue of explanation to Rule 93 the same would not be credited back to the taxpayer in the credit ledger unless the taxpayer gives an undertaking in writing to the assessing officer that he shall not file an appeal. If the taxpayer wants to go ahead and file appeal in such case, then he would be forced to pay entire amount for filing of appeal which he would have otherwise paid if he would have filed an appeal against rate classification proceedings order under section 73/74 of CGST Act, 2017. It would tantamount to recovery of the entire amount of the disputed amount whereas the statute allows filing of appeal by paying 10% of the disputed amount in other cases.
In the humble but firm view on the basis of above discussion and intention of the law makers as is evident from the above, issue relating to tax rate classification on outward supplies cannot form part of refund proceedings and refund proceedings would have to be decided within the limited scope of section 54 read with rule 89. That refund proceedings are not assessment proceedings but proceedings wherein taxpayer has invoked a specific provision under the statute and there are separate procedures provided for assessment of tax rate on outward supplies under section 73 and simultaneous withholding the refund amount. Assessment of a taxpayer cannot be done in the garb of refund of tax amount.