Tax Vista Your weekly tax recap Edn. 264 - 1st December 2025 Kasi Viswanathan V

 

 

Time limit to claim refund is directory

The petitioner, an intermediary, had paid IGST and subsequently, on realising that the place of supply for an intermediary is the location of the supplier, paid CGST and SGST in March 2018. A refund of the wrongly paid IGST was claimed on 30.03.2024. The claim was rejected as time-barred and the petitioner challenged the rejection in Writ proceedings before the Hon'ble Karnataka High Court. There was no dispute on the payment of tax, and the issue solely concerned limitation.

 

The High Court followed the views expressed by the Madras High Court in Lenovo (India) 2023-VIL-799-MAD and by the Andhra Pradesh High Court in Louis Dreyfus 2025-VIL-852-AP and Nspira Management Services 2025-VIL-1009-AP to hold that the time limit for claiming refund is directory. Relying on Article 265 of the Constitution, the Court in present case noted that the department was not entitled to collect IGST from the petitioner who was not liable to pay it, and upon payment of CGST and SGST, the department could not retain the IGST. By application of restitution and unjust enrichment principles, the department was obligated to refund the IGST.

 

The Court also took note of rule 89(1A) [which also uses 'may'] and Circular No. 162, clarifying that in respect of past cases (prior to 24.09.2021) the time limit is two years from the date of notification i.e. 23.09.2023 and held that timelines are directory.

 

As regards the precedents followed: In Lenovo (India), the original claim was filed within the prescribed two-year period and the Court observed that, in appropriate cases, refund claims may be permitted even beyond the statutory limit. Further the claim was within limitation in the said case considering the periods excluded due to COVID-related extensions. In Louis Dreyfus, issues involved relates to refund of tax on ocean freight, wherein the notifications were struck down by Hon'ble Apex Court as ultra vires, the Hon'ble AP Court in para 18 of the said decision expressly left open the question of whether the time limit is directory, to be decided in a suitable case. The decision in Nspira Management Services was discussed earlier in Taxvista Edition No. 256.

 

The continuing debate on interpretation of "shall" versus "may" remains relevant. While the Central Excise and Customs provisions also used the expression "may", there is no conclusive decision holding that such usage should invariably be construed as directory in the context of refund limitation. Most of the decisions in that regime revolve around questions such as whether section 11B of the Central Excise Act or section 27 of the Customs Act applied to particular refund claims, or whether the amount sought was a "deposit", and therefore did not directly address whether the expression "may" renders the time limit directory or mandatory. Even the landmark judgment in Mafatlal Industries 1996-VIL-01-SC-CE, only decided whether claims are governed by statutory provisions or governed by section 72 of Contract Act and did not have occasion to determine the nature of timelines prescribed therein. In fiscal statutes, "may" is read as "shall" when a provision confers power on authorities and even otherwise, there is an expectation to provide reasons for non-exercise of such powers. However, refund claims involve an act initiated by the taxpayer.

 

In the present context, reliance on Article 265 may not carry the matter further because the majority in Mafatlal held that non-refund in accordance with the special enactment (here, the GST law) would still be under authority of law. The more pertinent test is whether the refusal to refund is in accordance with section 54 and Court took the view that the timeline therein are directory and accordingly, the denial of refund is not in accordance with the law.

 

There are two additional aspects relevant to present case. First, Section 77 of the CGST Act and Section 19 of the IGST Act use the expression "shall", indicating the mandatory nature of refund in cases of tax wrongly collected and paid to the Government. Second, the provision does not authorize prescription of any time limit through delegated legislation, it lacks the phrase "within such time" [2025-VIL-1175-KAR].

 

Cross-LoC trade treated as intra-state supply

A batch of petitioners before the High Court of Jammu & Kashmir and Ladakh challenged show-cause notices and orders issued under section 74 of the CGST/J&K GST Act treating Cross-LoC trade as intra-state supply. This trade relates to sales and movement of goods across the Line of Control between the divided parts of Jammu & Kashmir, permitted as part of confidence-building measures introduced in 2008 between India and Pakistan. The trade operated on a barter basis and such transactions were previously treated as zero-rated supplies under section 55 of the J&K VAT Act, 2005.

 

The demands in dispute included outward supplies for FY 2017-18 and 2018-19 and inward supplies under reverse charge for the period from 08.07.2017 to 12.10.2017 when inward supplies from unregistered suppliers were subject to RCM. The petitioners argued that Cross-LoC trade cannot be treated as an intra-state supply, section 74 was not applicable, the notices were barred by limitation, clubbing of multiple financial years was not permissible, and barter itself was not taxable.

 

The Court referred to various definitions under the CGST Act, IGST Act, the J&K GST Act and Article 1 of the Constitution. The Court noted that learned counsel appearing for both sides are not disputing that the territory under the de-facto control of Pakistan continues to be constitutionally part of the (then) State of Jammu & Kashmir (now Union Territory), the Court held that the location of supplier and place of supply fall within the same State/UT and therefore the transaction must be treated as an intra-state supply. The matter was remanded with direction to file reply to SCNs or file appeal against orders. The issue of whether barter is liable or not was left open.

 

A similar dispute had arisen under the erstwhile J&K VAT regime. Clarification No. 19 of 2010 dated 26.03.2010 treated Cross-LoC sales as local sales on the ground that PoK is part of the State of J&K in terms of section 4 of the Constitution of J&K. However, amendments to section 55 of the J&K VAT Act subsequently extended zero-rating to such Cross-LoC sales, with the result that the High Court in Pir Panchal Traders and Others v. State of J&K (30.03.2015) did not decide the issue of local sales. Considering the requirement of transaction between registered traders, the Petitioners in said case argued that PoK dealers are not registered with Commercial taxes department and they cannot be so registered. Whether they can be registered under GST law?

 

Coming to the present case, under GST, the definition of supply expressly includes barter, making it difficult to contend that such transactions are not taxable. The prior zero-rated status under VAT itself does not establish absence of intention to evade tax under GST [2025-VIL-1227-J&K].

 

Tribunal grants interest for refund of deposit despite no statutory provision

The appellant had deposited certain amounts during investigation on 18.09.2014. Demand proceedings were subsequently initiated through a show cause notice dated 17.05.2016 and were ultimately concluded in the appellant's favour by the Tribunal on 25.03.2019. The deposit was refunded on 08.11.2019. Thereafter, a separate application seeking interest was filed on 21.01.2020. The lower authorities rejected the request and the appellant approached the Tribunal.

 

The issue before the Tribunal was whether, in the absence of a specific statutory provision granting interest on refund of such deposits and in the absence of a prescribed rate of interest, relief could nevertheless be granted based on decisions of Courts rendered in Writ jurisdiction applying equitable principles.  The Appellant argued that need to grant interest as well as quantum has become established at the level of Hon'ble Supreme Court as well as various High Court and same deserves to be followed without reservations or getting into the question as to whether same was initially granted in equity jurisdiction or on the basis of statutory provisions.  The Tribunal concurred and held that when a decision has been consistently followed even if it was initially delivered in Writ jurisdiction or was embedded to a legal principle of doctrine of compensation for deposits retained. Accordingly, interest at 12% per annum was allowed from the date of deposit till the date of refund. The Tribunal also held that there is no bar under the law to file a separate application to claim interest on deposit relying on General Commodities Pvt Ltd., 2021-VIL-269-CESTAT-BLR-CE.

 

While there have been earlier Tribunal decisions granting interest by relying on Court rulings, the present decision is noteworthy as it not only follows those precedents but also sets out clear reasoning for doing so. As the Tribunal is a creature of statute, there are always doubts on whether relief not expressly contemplated in law can be granted, and this decision provides a clear basis for such relief [2025-VIL-1995-CESTAT-AHM-CU].

 

(The views expressed are personal. The author can be reached for feedback or queries on v.k.vishwa@gmail.com)