Supreme Court settles timeline for refund under Delhi Value Added Tax Act in tax recovery cases: Commissioner of Trade and Taxes vs. FEMC Pratibha Joint Venture (2024) INSC 364 (01 May 2024)

Date of the Judgment: 01 May 2024
Citation: 2024 INSC 364
Judges: Pamidighantam Sri Narasimha, J. and Prasanna Bhalachandra Varale, J.
Can tax authorities adjust a refund amount against outstanding dues even after the statutory deadline for processing the refund has passed? The Supreme Court of India recently addressed this question, clarifying the mandatory nature of refund timelines under the Delhi Value Added Tax Act, 2004. The Court held that tax authorities cannot withhold refunds beyond the stipulated period to adjust against future dues.

Case Background

The respondent, FEMC Pratibha Joint Venture, is a company involved in executing works contracts for the Delhi Metro Rail Corporation. They made purchases for this purpose and claimed refunds for excess tax credit. Specifically, they claimed ₹17,10,15,285 for the 4th quarter of 2015-16 through a revised return filed on 31.03.2017 and ₹5,44,39,148 for the 1st quarter of 2017-18 through a return filed on 29.03.2019. The tax department did not process these refunds until 2022. The respondent sent a letter on 09.11.2022 to expedite the refunds. Subsequently, on 18.11.2022, the Value Added Tax Officer issued an adjustment order to offset these refund claims against dues arising from default notices dated 30.03.2020, 23.03.2021, 30.03.2021, and 26.03.2022. Aggrieved by this, the respondent filed a writ petition before the Delhi High Court to challenge the adjustment order and default notices.

Timeline

Course of Proceedings

The Delhi High Court quashed the adjustment order, relying on its previous judgment in Flipkart India Private Limited v. Value Added Tax Officer, Ward 3003. The High Court emphasized that the tax department must strictly adhere to the timelines for processing and issuing refunds under Section 38 of the Delhi Value Added Tax Act, 2004. It also stated that refunds can only be adjusted against existing enforceable tax demands and that the department cannot retain amounts beyond the prescribed time limit. The High Court allowed the respondent to avail the statutory appeal under Section 74 of the Act for the default notices. The present appeal before the Supreme Court is limited to the quashing of the adjustment order.

Legal Framework

The core legal provision in this case is Section 38 of the Delhi Value Added Tax Act, 2004, which deals with refunds. The relevant parts of the section are:

“38. Refunds
(1) Subject to the other provisions of this section and the rules, the Commissioner shall refund to a person the amount of tax, penalty and interest, if any, paid by such person in excess of the amount due from him.
(2) Before making any refund, the Commissioner shall first apply such excess towards the recovery of any other amount due under this Act, or under the CST Act, 1956 (74 of 1956).
(3) Subject to sub-section (4) and sub-section (5) of this section, any amount remaining after the application referred to in sub-section (2) of this section shall be at the election of the dealer, either –
(a) refunded to the person, –
(i) within one month after the date on which the return was furnished or claim for the refund was made, if the tax period for the person claiming refund is one month;
(ii) within two months after the date on which the return was furnished or claim for the refund was made, if the tax period for the person claiming refund is a quarter; or
(b) carried forward to the next tax period as a tax credit in that period.”

This section mandates that excess tax paid must be refunded. It also allows the tax department to adjust refunds against existing dues. Crucially, it sets a timeline for refunds: one month for monthly tax periods and two months for quarterly tax periods. The Act also provides for interest on delayed refunds under Section 42.

Arguments

Appellant’s (Tax Department) Arguments:

• The timelines in Section 38(3) of the Delhi Value Added Tax Act, 2004 are only for calculating interest on delayed refunds, not for restricting the power to adjust refunds against outstanding dues under Section 38(2).
• The department can adjust refund amounts against outstanding dues as long as such dues exist at the time of processing the refund, even if the refund is processed beyond the stipulated timeline.

Respondent’s (Assessee) Arguments:

• The High Court’s view is correct, and the tax department must adhere to the timelines for processing and issuing refunds under Section 38 of the Delhi Value Added Tax Act, 2004.
• The department cannot retain refund amounts beyond the prescribed period, and the refund amount can be adjusted only when an enforceable demand in the nature of tax or duty is pending against the assessee.
• The respondent relied on several judgments of the Delhi High Court that affirm this position of law.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether the timeline for refund under Section 38(3) of the Delhi Value Added Tax Act, 2004, must be mandatorily followed while recovering dues under the Act by adjusting them against the refund amount.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Swarn Darsan Impex v. Commissioner, Value Added Tax, 2010 SCC OnLine Del 4697 – Delhi High Court: This case was cited to support the view that the refund timelines must be adhered to.
• Nucleus Marketing and Communication v. Commissioner of Delhi Value Added Tax, 2016 SCC OnLine Del 3941 – Delhi High Court: This case was cited to support the view that the refund timelines must be adhered to.
• Rockwell Industries v. Commissioner of Trade and Taxes, 2019 SCC OnLine Del 8432 – Delhi High Court: This case was cited to support the view that the refund timelines must be adhered to.
• ITD-ITD CEM JV v. Commissioner of Trade and Taxes, 2019 SCC OnLine Del 9568 – Delhi High Court: This case was cited to support the view that the refund timelines must be adhered to.
• Ramky Infrastructure Ltd v. Commissioner of Trade and Taxes, 2023 SCC OnLine Del 4236 – Delhi High Court: This case was cited to support the view that the refund timelines must be adhered to.
• Commissioner of Trade and Taxes v. Corsan Corviam Construction S.A. Sadbhav Engineering Ltd JV, 2023 SCC OnLine Del 1900 – Delhi High Court: This case was cited to support the view that the refund timelines must be adhered to.
• Flipkart India Private Limited v. Value Added Tax Officer, Ward 3003, 2023 SCC OnLine Del 5201 – Delhi High Court: This case was the basis of the High Court’s decision, emphasizing the mandatory nature of refund timelines.

Statutes:

• Section 38 of the Delhi Value Added Tax Act, 2004: This section deals with refunds and sets the timelines for processing them.
• Section 42 of the Delhi Value Added Tax Act, 2004: This section deals with the interest on delayed refunds.
• Central Sales Tax Act, 1956: This Act is mentioned in Section 38(2) as another Act under which dues can be adjusted against refunds.

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to ensure timely refunds and to prevent the tax department from indefinitely holding onto refundable amounts. The Court emphasized the mandatory nature of the timelines in Section 38(3) of the Delhi Value Added Tax Act, 2004. The Court reasoned that allowing the department to adjust refunds against future dues, even after the refund timeline has expired, would defeat the purpose of the provision. The Court also rejected the argument that the timeline was only for interest calculation, stating that such an interpretation would render the provision meaningless.

Logical Reasoning

The Court rejected the tax department’s argument that the timeline under Section 38(3) of the Delhi Value Added Tax Act, 2004, is only for calculating interest under Section 42. The Court stated that “Such an interpretation would effectively enable the department to retain refundable amounts for long durations for the purpose of adjusting them on a future date. This would go against the object and purpose of the provision.” The Court emphasized that “The language of Section 38(3) is mandatory and the department must adhere to the timeline stipulated therein to fulfil the object of the provision, which is to ensure that refunds are processed and issued in a timely manner.”. The Court further observed that “By the time when the refund should have been processed as per the provisions of the Act, the dues under the default notices had not crystallised and the respondent was not liable to pay the same at the time.”

Key Takeaways

• The timelines for processing refunds under Section 38(3) of the Delhi Value Added Tax Act, 2004, are mandatory.
• Tax authorities cannot withhold refunds beyond the stipulated period to adjust against future dues.
• Refunds can only be adjusted against existing enforceable tax demands.
• This judgment reinforces the importance of timely processing of refunds by tax authorities.

Directions

The Supreme Court dismissed the appeal and affirmed the High Court’s judgment directing the refund of amounts along with interest as provided under Section 42 of the Delhi Value Added Tax Act, 2004.

Development of Law

The ratio decidendi of this case is that the timelines for processing refunds under Section 38(3) of the Delhi Value Added Tax Act, 2004, are mandatory, and the tax department cannot withhold refunds beyond the stipulated period to adjust against future dues. This judgment reinforces the existing legal position as upheld by the Delhi High Court and clarifies the interpretation of Section 38(3) of the Delhi Value Added Tax Act, 2004.

Conclusion

The Supreme Court’s decision in Commissioner of Trade and Taxes v. FEMC Pratibha Joint Venture clarifies that the timelines for processing tax refunds under the Delhi Value Added Tax Act, 2004, are mandatory. The tax department cannot withhold refunds beyond the statutory period to adjust against future dues. This ruling ensures that taxpayers receive timely refunds and prevents the tax department from indefinitely holding onto refundable amounts.