Beyond Mafatlal: A Shift in GST Refund Jurisprudence

[Krishna and Avani are students at Institute of Law, Nirma University.]

The ‘refund claim’ has its own distinct and vibrant jurisprudence under the broader rubric of tax law. It arises when a taxpayer attempts to retrieve an amount that was paid either in excess of the accrued liability, or in the misapprehension of an absent one. In its earliest decision on the issue, Sales Tax Officer v. Kanhaiya Lal Mukund Lal Saraf, the Supreme Court held that such claims were governed by Section 72 of the Indian Contract Act 1872 (Contract Act), since the Revenue is bound to repay an amount received under a mistake of law, irrespective of any consideration, subject only to estoppel, waiver and limitation. Consequently, for such ‘mistake’ the Court operationalised Section 17 of the Limitation Act 1963, (extending limitation to three years from when the mistake was identified), thereby allowing the petition. By granting relief, the Court demonstrated a ‘restitution-first’ vision of the taxpayer’s right to recover. This vision was challenged by the strict and narrow stance taken by the Supreme Court in Mafatlal Industries v. Union of India (Mafatlal) where, in light of Section 11B of the Central Excise and Salts Act 1944 (Central Excise Act), the court redirected focus on statutory compliance in respect of refund claimed. The 9-judge bench authoritatively laid down the law on refund claims en masse and were not shackled by the peculiarities of the Central Excise Act. 

Section 54 of the Central Goods and Service Tax Act 2017 (CGST Act) governs refund claims in terms largely analogous to Section 11B of the Central Excise Act. Ideally, therefore, the Mafatlal Principles should have applied mutatis mutandis to refund claims made under the CGST Act. However, High Court rulings indicate a discernible shift from the position taken in Mafatlal. We analyse these decisions and argue that the shift represents a concerning aberration. We conclude by positing the need for functional clarity to ensure predictability in the application of refund provisions under the CGST Act.

The Classification of Refund Claims

In Mafatlal, Justice Reddy writing for the majority, crucially held that the right to refund is not an unconditional, unqualified right arising out of Article 265 of the Constitution. It can be legitimately restricted through statutory instruments. Reddy J further classified refund claims into three registers—(i) refund for duties paid under an “illegal levy”, (ii) under an “unconstitutional levy” and (iii) under “mistake of law” and prescribed a distinct treatment for each category (Mafatlal Principles).

Category I: Illegal levies

An “illegal levy” refers to sums paid on account of misinterpretation or misapplication of the law. The court directed such claims to be strictly decided in accordance with Section 11B, such that even writ petitions filed under Article 226 would have to be determined in consonance with the statutory provisions and prescribed timeline. 

Category II: Unconstitutional levies

An “unconstitutional levy” refers to sums paid under a provision which to the mind of the assessee is ultra vires the Constitution. Since the determination of constitutionality is not within the scope of statutory bodies, the claim can no longer be governed by the scope of the CGST Act. The assessee in such cases, can claim a refund either through a suit or a writ petition. Accordingly, it is also possible to take recourse to Section 72 of the Contract Act, or/and Article 265 of the Constitution. 

Category III: Amounts paid under mistake of law

Finally, the “mistake of law” category covers sums paid under a mistake of which the taxpayer is only later cognisant. The court observed that where such a mistake involves question of misinterpretation or misapplication of the statute, no remedy beyond the scheme of the statute is available to the claimant. However, where the underlying levy was later declared unconstitutional, a writ or suit may be maintainable as aforementioned. It is pertinent to note that “mistake” herein refers to a situation where illegality or unconstitutionality is established in separate proceedings relying on which the present assessee aims to relitigate his case. 

The Deviation

The introduction of the CGST Act was intended to simplify and consolidate indirect taxation. While the CGST Act repeals pre-existing statutes like the Central Excise Act, foundational principles crystallised through decades of legislation, executive action and judicial interpretation were consciously maintained. The law on refunds is one such area, where Section 54 of the CGST Act is enacted in pari materia with Section 11B of the Central Excise Act, with the only notable difference being an extension to the limitation period for filing refund claim. 

Though today it is becoming increasingly clear that statutory and administrative continuity do not imply a corresponding continuance in judicial approach. As will be shown, the following decisions represent not so much a departure from Mafatlal, as they are an undue expansion of the exceptions it preserved.

A key development is the distinction being drawn between “tax” and amounts merely deposited with the State. In Aalidhra Texcraft Engineers v. Union of India, the assessee had deposited INR 40 lakhs through Form DRC-03 due to a mismatch in the GST portal, which created a misapprehension that excess ITC had been claimed. Although it was later found that such amount had been deposited against an absent liability, the refund application was rejected for being time-barred. The Gujarat High Court, allowing the petition, declined to treat the amount as “tax.”  It was held that since the amount was a ‘voluntary contribution’ it was not covered under the provisions of Section 54. Accordingly, under Article 265 the State could not retain any sums received without authority of law. Similarly, in Varshan Enterprises v. Office of the GST Council, the assessee had paid tax while keying in incorrect particulars. The Andhra Pradesh High Court held that since the levy was legally unsustainable, the amount paid could not be treated as tax in the strict sense. Consequently, any limitation set out under Section 54 would be inapplicable. Further, in Nspira Management Services, the Andhra Pradesh High Court opined that amounts paid as “tax” on rent (which is exempted from GST) amounts to a levy “without authority of law” and thus fell outside the statutory scheme, attracting remedy under Article 265. While none of the cited decisions offer a formal definition of ‘tax’, they treat the presence of a determined liability as its necessary precondition, therefore any deposit made in the absence of such determination is thus characterised as falling outside its scope.

It is submitted that this distinction between ‘tax’ and ‘other deposits’ does not conform to the language of Section 54, which refers to any ‘tax,’ ‘interest,’ or ‘any other amount’. The relevant portion of Section 54 reads as follows:

“Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed.”

Section 54 in this case, is distinct from Section 11B, which only governs “duty of excise, and interest if any paid on such duty”; it does include a residuary phrase like ‘any other amount’. Accordingly, if each word of the statute is given full force, even if a deposit or sum is not collected as ‘tax’ or ‘interest’, its refund must be in accordance with Section 54 since it qualifies as ‘any other amount.’ In such cases, amounts erroneously deposited, or voluntarily deposited would still continue to be governed by Section 54. Circling back to the Mafatlal Principles, since, in none of the aforementioned cases have the assessees challenged the constitutionality of the underlying levy, the carve out for an unconstitutional levy in Mafatlal is not applicable. These claims would fall under Category-I (illegal levy) and would thus require strict compliance with the statutory regime. To that extent, these High Court decisions, being rendered by courts of coordinate or lower jurisdiction, could not have overridden the authoritative prescription of a nine-judge bench in Mafatlal, and consequently the Mafatlal Principles continue to hold ground. 

The court appears to have conflated an amount paid mistakenly on misapplying the provisions of the CGST Act, as a levy without “authority of law”, which Mafatlal cautions against. Treating a routine miscalculation as equivalent to an unconstitutional levy collapses the distinction between an illegal levy and an unconstitutional levy entirely. In treating a voluntary erroneous deposit as a levy without authority of law, these courts expand Mafatlal’s unconstitutional levy exception beyond recognition. Accordingly, it is submitted that the cited decisions require a serious reconsideration on these grounds.

Another important development concerns the interpretation of the limitation period under Section 54. In Lenovo (India) Private Limited v. Joint Commissioner, the Madras High Court held that the use of the term “may” indicates that the two-year limitation period is not necessarily mandatory in every case. The court emphasised that procedural rules should not defeat substantive entitlements, particularly where the claim relates to input tax credit. A similar line of reasoning was followed in Merck Life Science Private Limited, where the Karnataka High Court held that the limitation period under Section 54 was discretionary, and legitimate refund claims could not be denied merely because they were filed beyond two years. 

In these aforecited cases, the court proceeds on the assumption that the phrase ‘may make an application before the expiry of two years’ as it is found in Section 54 implies that the limitation is discretionary, not mandatory. Further, Rule 89(1) of the Central Goods and Services Tax Rules 2017, which governs the filing of Form RFD-01 (refund application), similarly uses the phrase “may file an application electronically in Form RFD-01.”  

However, it is submitted that in certain contexts, the Legislature may use the word “may” as a matter of pure conventional courtesy and yet intend a mandatory force. The objective of the phrase “may file” is merely to indicate that filing for refund is the assessee’s sole discretion and thus he ‘may’ or ‘may not’ file for such refund. However, if such application must be made, it must comply with the limitation period in a strict sense. Reading “may” to mean the time limit is optional renders the specific inclusion of the phrase ‘two years’ redundant. If an application can be made at any time, why prescribe a statutory timeline? It is submitted that such a reading ignores the legislative object manifest in the timeline prescribed under Section 54 and Rule 89. Recharacterizing the timeline as discretionary, may render the provision otiose. 

Conclusion

The Mafatlal principles were articulated generally in respect of refund claims, not merely those arising under the Central Excise Act. Their application to Section 54 is thus not a matter of analogy but of authority. Admittedly, the self-assessment scheme creates conditions where tax could be paid without a clear determination of liability. However, an unambiguous provision must be read strictly since it is for the legislature to step in and cure the absurdity. The law must clarify the difference between sums paid against a known liability and those deposited mistakenly or during proceedings. An internal mechanism embedded into the GST portal would serve taxpayers well. The court cannot take up the task of remedying an unworkable proposition of law. While these judicial decisions address a legitimate legislative vacuum, we question the means, even as we recognise the equitable value of their ends. Ultimately, without clarification, GST refund jurisprudence will remain caught between certainty and fairness.