The Supreme Court of India held that tax refunds are payable only when the burden has not been passed on, warning courts against creating mechanisms beyond statutory limits. Referring to Section 54, it directed amounts to the Consumer Fund.
NEW DELHI: The Supreme Court of India ruled that a tax refund can be granted to an applicant only when the burden of tax has not been transferred to another person, and courts cannot devise refund mechanisms that contradict the clear provisions of law.
The Court explained that Section 54 of the CGST Act forms a comprehensive legal framework for refunds. Under Section 54(5), refundable amounts are ordinarily credited to the Consumer Welfare Fund, while Section 54(8)(e) permits direct refunds only when the applicant has not passed on the tax incidence.
Factual Background of the Case
In this case, the respondent, Torrent Power Ltd., is involved in the generation and distribution of electricity in Gujarat, providing power to consumers in Ahmedabad and Surat. Following Notification No. 10/2017-Integrated Tax (Rate) issued on June 28, 2017, the respondent company collected Integrated GST (IGST) from its consumers on specific transactions.
However, the constitutional validity of this notification was contested in the Gujarat High Court in the case of Mohit Minerals Pvt. Ltd. v. Union of India, leading to the notification being declared unconstitutional. Consequently, the tax collected under this invalidated notification became subject to refund.
It was established that the respondent had passed the tax burden onto its consumers through electricity bills during the period from June 2017 to January 2020. According to Section 54(5) of the CGST Act, any refundable amounts are generally credited to the Consumer Welfare Fund. Section 54(8)(e) states an exception whereby a refund may be granted to the applicant only if they have not passed on the tax burden to any other party.
Despite this statutory framework, the Gujarat High Court accepted an affidavit submitted by the respondent proposing an alternative refund mechanism. The Court allowed the respondent to open a designated bank account to deposit the refund amount.
Issue:
1)Whether a refund of tax collected under an invalid notification, where the tax burden had been passed on to consumers, could be granted to the company rather than being credited to the Consumer Welfare Fund?
2)Whether the High Court was justified in formulating a refund mechanism not outlined in Section 54 of the CGST Act?
Observations of the Court:
The Court determined that Section 54 of the CGST Act forms a comprehensive statutory code regarding refunds. As stated in Section 54(5), any refund amount must be credited to the Consumer Welfare Fund unless it fits one of the exceptions identified in Section 54(8).
Specifically, Section 54(8)(e) indicates that a refund may only be issued to the applicant if they have not passed the tax burden to any other person.
In this instance, it was acknowledged that the respondent company had indeed transferred the tax liability to its consumers. Thus, the statutory exception under Section 54(8)(e) was not applicable. Accordingly, the refund amount had to be credited to the Consumer Welfare Fund.
The Court further noted that the High Court’s acceptance of the respondent’s proposal introduced a completely new refund modality that is not authorized under the CGST Act or its associated rules. Courts cannot establish procedures that contradict explicit statutory provisions.
Moreover, the proposed mechanism was deemed impractical and unfeasible, as it would require identifying and compensating over one crore consumers across two cities, without a reliable method to ensure that the actual burden bearers received the benefit.
Consequently, the respondent company was instructed to transfer Rs 19,28,86,868/- to the authorities for credit to the Consumer Welfare Fund within three months.
The Supreme Court allowed the appeal and overturned the High Court’s judgment.
Case Title: Union of India & Anr. Versus Torrent Power Ltd.
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