GST UPDATE

Hon’ble Appellate Authority: GSTAT, Division Bench
Case Title: Hindalco Industries Limited v. Commissioner, State Tax, Chhattisgarh
Appeal No. & Citation: APL/15/RPR/2026

Hon’ble Judge(s)	Hon’ble Shri Pradeep Kumar Vyas & Shri Chandra Bhushan Singh
Date of Order	24 September 2026
Outcome	Appeal dismissed

Brief Facts of the Case

Hindalco Industries Limited, the appellant, accumulated Input Tax Credit on account of an inverted duty structure during July 2017 to March 2018. On 31 December 2018, Hindalco filed an application in FORM GST RFD-01A under Section 54(3) of the CGGST Act, read with Rule 89(5), claiming a refund under the State tax head. The refund application was scrutinised, and a show-cause notice in FORM GST RFD-08 in January 2019 proposed rejection of a substantial portion of the claim, principally on account of the exclusion of input-service and capital-goods credit from the prescribed inverted-duty refund computation. After considering the company's reply, the proper officer sanctioned part of the refund in February 2019. Aggrieved by the rejection of the major portion of its refund claim, Hindalco approached the Chhattisgarh High Court challenging the validity of the substituted Rule 89(5). The Department, however, did not challenge the sanction of refund granted to the appellant.
Subsequently, the Department took the view that even the amount sanctioned had been erroneously refunded. According to the Department, when the prescribed formula under Rule 89(5) was correctly applied, after restricting “Net ITC” to eligible input-goods credit and deducting the tax payable on inverted-rated supplies, the maximum admissible refund worked out to a negative figure. Consequently, no positive refund was admissible. The Department initiated proceedings under Section 73 and issued FORM GST DRC-01 in June 2021, proposing recovery of the sanctioned refund along with interest. After the Supreme Court's decision in Union of India v. VKC Footsteps India Pvt. Ltd., Hindalco repaid the entire principal amount through FORM GST DRC-03 under Protest. The company maintained that the repayment was made as an abundant caution and to buy peace of mind, and did not constitute an admission of liability to interest.
The adjudicating authority thereafter confined the surviving demand to interest calculated at 18% per annum for the period from February 2019 to November 2021. The Joint Commissioner (Appeals) upheld the interest demand. Hindalco thereafter approached the GST Appellate Tribunal under Section 112 of the CGGST Act, challenging the legality of the interest demand.

Question before Hon’ble Authority

(1) Whether a monetary refund originating from accumulated ITC is capable of being treated as 'tax erroneously refunded' for the purposes of Section 73(1).
(2) Whether proceedings under Section 73 were without jurisdiction merely because RFD-06 had not first been reversed in a departmental appeal under Section 107(2) or revision under Section 108.
(3) Whether, any dispute regarding the principal refund amount survive in the present appeal having regard to VKC Footsteps (Supra).
(4) Whether Section 73 read with Section 50 supplies substantive statutory authority to levy interest on an erroneous refund.
(5) Whether retrospective operation of the substituted Rule 89(5), or the subsequent decision in VKC Footsteps (Supra), renders the interest demand impermissibly retrospective.
(6) Whether the personal-hearing ground requires interference when remand is expressly not pressed and the matter has been fully argued on merits.
(7) Whether the rate, period and amount of interest call for interference.

Brief Arguments by Appellant

Finality of the Refund Sanction Order must be challenges through appeal

The appellant submitted that Refund, was a quasi-judicial order passed after examination of the refund claim, issuance of notice in FORM GST RFD-08 and consideration of the appellant’s reply in FORM GST RFD-09. No departmental appeal under Section 107(2) was filed, nor was revisional jurisdiction under Section 108 exercised. Consequently, the sanction of refund attained finality and could not be nullified by initiating proceedings under Section 73 by the same department.
Reliance was placed on numerous case laws like Patanjali Foods Ltd. v. Union of India, 2025 SCC OnLine Guj 1418; Auroglobal Comtrade Pvt. Ltd. v. Joint Commissioner, GST & Central Excise, 2026 (105) G.S.T.L. 116 (Ori.). The appellant also relied upon ITC Ltd. v. CCE, CCE, Kanpur v. Flock (India) Pvt. Ltd., 2000-VIL-12-SC-CE; Krishi Rasayan Exports Pvt. Ltd., 2023-VIL-438-J&K-CE; and Tripura Ispat v. Union of India, 2021 (1) TMI 753, to support the proposition that a subsisting adjudicatory order cannot be nullified in collateral proceedings without first following the prescribed appellate or revisional route.
The appellant further relied upon CBIC Instruction No. 03/2022-GST dated 14.06.2022, dealing with post-audit/review of refund orders and examination under Section 107(2), as well as CBEC Circular No. 423/56/98-CX dated 22.09.1998, to contend that the legality or propriety of a refund order must be tested through the statutory review and appellate mechanism.

Section 73 Does Not Expressly Cover Erroneous Refund of Input Tax Credit

The appellant contended that Section 73(1) separately refers to cases where tax has not been paid, has been short-paid, has been erroneously refunded, or where input tax credit has been wrongly availed or utilised. However, the provision does not expressly use the words “input tax credit erroneously refunded.” It was, therefore, submitted that a cash refund arising from accumulated ITC does not fall within the erroneous-refund limb of Section 73. Drawing a distinction between the erroneous refund of tax and the refund of accumulated input tax credit, the appellant argued that the Tribunal could not supply an omission in the statutory text or extend the provision beyond its express language.
Reliance was placed on the contrast with Rule 14 of the erstwhile CENVAT Credit Rules, 2004, and on Commissioner of Income Tax v. Kasturi Sons Ltd., (1999) 3 SCC 346, and State of West Bengal v. Kesoram Industries Ltd., (2004) 10 SCC 201, for the principle that taxing statutes must be construed in accordance with their language.

Absence of Substantive Statutory Authority to Levy Interest on Erroneous Refund

The learned counsel submitted that there is no substantive charging provision specifically authorising the levy of interest on an erroneous refund of accumulated ITC. Section 50(1), according to the appellant, deals with a person liable to pay tax who fails to pay such tax within the prescribed period, whereas Section 73 merely refers to interest payable under Section 50. It was contended that the reference to Section 50 cannot, by itself, create an independent liability to interest where the substantive statutory conditions are not satisfied.
Reliance was placed on Mahindra & Mahindra Ltd. v. Union of India, 2022 SCC OnLine Bom 3155; J.K. Synthetics Ltd. v. Commercial Taxes Officer, (1994) 4 SCC 276; Vikrant Tyres Ltd. v. First ITO, (2001) 3 SCC 76 ; and V.V.S. Sugars v. Government of A.P., (1999) 4 SCC 192, to submit that liability to interest must rest on clear substantive statutory authority and cannot be supplied merely by implication.
Further, as long as the refund sanction order remained valid and subsisting, the appellant could not be treated as being in default for retaining the sanctioned amount. Reliance was placed on Orion Steel Corporation v. CCE, 2008 (231) E.L.T. 332 (Tri.-Ahmd.), to contend that where a refund was held under an operative order and subsequently repaid after reversal, interest could not be charged from the original refund date.

Retrospective Operation of Rule 89(5) and the Judgment in VKC Footsteps Cannot Retrospectively Create Interest Liability

The appellant submitted that the retrospective amendment to Rule 89(5), or its subsequent authoritative interpretation in Union of India v. VKC Footsteps India Pvt. Ltd., (2022) 2 SCC 603, could not retrospectively create an interest burden for a period during which the underlying liability was said not to exist. The appellant further contended that Rule 88B, having been inserted subsequently, could not govern the disputed period or furnish a retrospective basis for charging interest. The appellant further contended that interest should not be charged for the period from 24.07.2020 to 13.09.2021, during which the Gujarat High Court’s decision in VKC Footsteps stood in the appellant’s favour. According to the appellant, the subsequent decision of the Hon’ble Supreme Court could not retrospectively fasten an interest liability for that intervening period.

Repayment Through DRC-03 Was Without Admission of Liability

The appellant submitted that repayment of principle amount through FORM GST DRC-03 was made after the decision in VKC Footsteps only by way of abundant caution and “to buy peace of mind.” The payment was not intended to constitute an admission that the refund sanction order was legally ineffective or that interest was payable from the date of sanction or credit of the refund. It was further contended that the repayment of the principal amount could not, by itself, establish liability to interest.

Brief Arguments by Respondent

Refund Governed by Substituted Rule 89(5) and the Judgment in VKC Footsteps

The respondent supported the orders passed by the authorities below and submitted that the refund claim was governed by the substituted Rule 89(5), which was made effective from 01.07.2017. It was contended that the Hon’ble Supreme Court in Union of India v. VKC Footsteps India Pvt. Ltd., (2022) 2 SCC 603, had conclusively upheld the statutory framework governing refund under the inverted-duty structure, under which the expression “Net ITC” is confined to input-goods credit. Consequently, the refund sanctioned to the appellant was not admissible under the applicable statutory formula. Further, the correct application of Rule 89(5) resulted in no positive refund entitlement for the appellant.

Section 73 Provides an Independent Mechanism for Recovery of Erroneous Refund

According to the department, Sections 107(2) and 108, which provide for departmental appeal and revision, do not contain any non obstante clause, exclusivity clause or other language making appeal or revision the sole method for recovering an erroneous refund. Therefore, the existence of the departmental review, appellate or revisional mechanism does not extinguish or restrict the independent power of recovery conferred under Section 73. The respondent further submitted that the CBIC Instruction concerning review of refund orders is merely an administrative safeguard and cannot curtail the express statutory power conferred by Section 73.

Cash Refund of Accumulated ITC Falls Within the Expression “Tax Erroneously Refunded”

It was argued that the separate reference in Section 73 to “input tax credit wrongly availed or utilised” addresses wrongful availment or utilisation of credit at the electronic credit ledger or utilisation stage. It does not exclude a cash refund sourced from accumulated ITC from the preceding limb dealing with tax that has been erroneously refunded. Accordingly, the department contended that Section 73 could be invoked for recovery of the amount erroneously refunded to the appellant. Further, the respondent submitted that the consequence of an erroneous refund cannot be neutralised merely because the refund had originally been sanctioned by the department on the taxpayer’s application. Once the refund is found to be erroneous under the applicable statutory provisions, the amount is recoverable with the interest contemplated under Sections 73 and 50.
Reliance was placed upon M/s Razack Trading Company v. Assistant Commissioner (ST), W.P. (MD) No. 15302 of 2022, decided on 30.04.2024 by the Hon’ble Madras High Court, in support of its submissions concerning recovery of erroneous refunds and the applicability of the statutory provisions governing such recovery.

Findings and Judgement

Issue 1: Whether refund of accumulated ITC can be treated as an “erroneous refund” under Section 73 of the CGST Act?
The Tribunal held that while the expression “input tax credit wrongly availed or utilised” addresses wrongful availment or utilisation of credit at the ledger stage, once accumulated ITC is converted into a monetary payment by the Government, the transaction assumes the character of a refund. The Tribunal observed that excluding cash refunds sourced from accumulated ITC would leave a substantial category of statutory refunds outside the erroneous-refund provision, despite Section 73 expressly covering a person to whom a refund has erroneously been made. It further held that Rule 86(4B) and Circular No. 174/06/2022-GST support this interpretation by expressly recognising erroneous refunds of unutilised ITC under the inverted-duty structure.
The tribunal rejected the appellant’s contention on the strict-construction principle and held that it was not adding words to the statute but giving effect to the already existing expressions.
Issue 2: Whether Section 73 can be invoked while the original refund sanction order in FORM GST RFD-06 remains unchallenged under Sections 107(2) and 108?
The Tribunal acknowledged that the refund sanction order was a statutory quasi-judicial order passed after examination of the refund claim, issuance of FORM GST RFD-08 and consideration of the appellant’s reply in FORM GST RFD-09. It also recognised the legal significance of the finality of such an adjudicatory order and the availability of departmental appeal and revision under Sections 107(2) and 108. However, the Tribunal held that the existence of these appellate and revisional remedies did not make them the exclusive means of recovering an erroneous refund. Section 73 independently provides for determination and recovery of amounts erroneously refunded, and neither Section 73 nor Sections 107(2) and 108 makes the exercise of one jurisdiction conditional upon prior exercise of the other.
Case Laws relied upon by the Appellant were distinguished
The Tribunal distinguished Patanjali Foods Ltd. v. Union of India, 2025 SCC OnLine Guj 1418, observing that the recovery proceedings in that case were founded upon paragraph 2(2) of Circular No. 181/13/2022-GST, which was struck down by the Gujarat High Court. In the present case, the substantive basis of recovery was the Rule 89(5) computation governing the appellant’s refund, whose validity had been upheld by the Hon’ble Supreme Court in VKC Footsteps. Similarly, Auroglobal Comtrade Pvt. Ltd. v. Joint Commissioner, GST & Central Excise, 2026 (105) G.S.T.L. 116 (Ori.), was distinguished because a departmental appeal under Section 107 had already been decided in favour of the taxpayer, and the subsequent Section 73 proceedings sought to reagitate the same issues.
Accordingly, the Tribunal held that non-invocation of Sections 107(2) and 108 did not, by itself, deprive the proper officer of jurisdiction under Section 73 in the facts of the present case.
Issue 3: Whether the refund was inadmissible under Rule 89(5) in view of VKC Footsteps, and whether the principal amount remained in dispute?
Relying on Union of India v. VKC Footsteps India Pvt. Ltd., (2022) 2 SCC 603, the Tribunal held that the Hon’ble Supreme Court had upheld the validity of the amended formula and declined to judicially rewrite it. The appellant had neither specifically challenged the mathematical conclusion recorded in the impugned order nor furnished an alternative computation demonstrating any positive refund entitlement. The Tribunal further observed that the appellant had repaid the entire principal amount though under protest. Consequently, the Tribunal held that no surviving claim for restoration of the principal amount remained before it. The controversy was confined to the legal and arithmetical sustainability of the interest demand.
Issue 4: Whether Sections 73 and 50 provide substantive statutory authority to levy interest on an erroneous refund?
The Tribunal noted that Section 73(1) expressly requires the person concerned to show cause why the amount specified in the notice should not be paid along with interest payable under Section 50. Similar references appear in Section 73(5), which contemplates payment before service of notice; Section 73(8), which provides for conclusion of proceedings upon payment of the amount together with interest within thirty days of the notice; and Section 73(9), which provides for determination of the amount of tax, interest and penalty due.
According to the Tribunal, these provisions form an integral statutory scheme for determination and recovery of an erroneous refund. Where accumulated ITC is converted into a monetary refund exceeding the entitlement under Section 54 read with Rule 89(5), Section 73 characterises the payment as an erroneous refund and expressly connects it with interest under Section 50. Further, it was held that the fact that the refund was originally sanctioned by the department, or that the appellant acted bona fide, did not by itself extinguish the statutory consequence of an erroneous refund.
Relying on Mahalaxmi Sugar Mills Co. v. CIT, (1980) 3 SCC 475, the Tribunal observed that statutory interest is compensatory in nature and cannot generally be treated as a penalty. It also relied on M/s Razack Trading Company v. Assistant Commissioner (ST), W.P. (MD) No. 15302 of 2022, decided on 30.04.2024, wherein the Madras High Court declined to interfere with an interest demand following repayment of an inadmissible refund.
Accordingly, the Tribunal held that Section 73 read with Section 50 provides the requisite statutory authority for levy of interest on an erroneous refund.
Issue 5: Whether interest could be imposed retrospectively, and whether the subsequent insertion of Rule 88B invalidated the demand?
The Tribunal rejected the appellant’s reliance on Star India (P) Ltd. v. CCE, (2005) 7 SCC 203, holding that the decision was distinguishable. In Star India, the underlying service-tax liability itself had been extended retrospectively, and the validating provision provided a statutory period for payment before interest could arise. In the present case, however, the substituted Rule 89(5) had already been made effective from 01.07.2017, before the appellant’s refund application dated 31.12.2018 and the sanction order dated 13.02.2019. The judgment in VKC Footsteps did not create a new liability retrospectively but upheld and authoritatively declared the operation of an existing rule.
The Tribunal also rejected the appellant’s alternative submission that interest should be excluded for the period from 24.07.2020 to 13.09.2021, when the Gujarat High Court’s decision in VKC Footsteps stood in the appellant’s favour. It held that the subsequent reversal of that decision by the Hon’ble Supreme Court did not create a statutory interest-free interval or suspend the operation of the substituted Rule 89(5). The appellant’s bona fide reliance on the earlier decision did not extinguish the statutory interest consequence.
Regarding Rule 88B, the Tribunal held that it was unnecessary to base the substantive liability on that provision. The liability arose under Sections 73 and 50, whereas Rule 88B concerned the manner of calculation of interest. Its subsequent insertion did not, by itself, invalidate a demand otherwise supported by the Act.
Issue 6: Whether the absence of a personal hearing at the original stage warranted remand?
At the final hearing before the Tribunal, the appellant expressly stated that adequate opportunity had been afforded and did not press its plea for remand, instead seeking adjudication on merits.
Issue 7: Whether repayment through DRC-03 concluded the proceedings, and whether the interest was correctly computed?
The Tribunal held that the appellant’s description of the DRC-03 payment as having been made “as an abundant caution and to buy peace of mind” did not determine its legal effect. Section 73(8) requires payment of the principal amount together with interest under Section 50 for statutory closure of proceedings after notice. Since the appellant had paid only the principal amount and not the interest, the proceedings did not conclude under Section 73(8), and the proper officer proceeded under Section 73(9), confining the surviving demand to interest.

CA Pradeep Jain_

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GST update /2026-27/0097

GST UPDATE

Brief Facts of the Case

Question before Hon’ble Authority

Brief Arguments by Appellant

Brief Arguments by Respondent

Findings and Judgement

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