GST refund can be withheld during an ongoing fraud investigation without a separate court stay, Delhi High Court rules

The petitioner exported goods on payment of IGST and filed five refund applications totalling approximately ₹3.15 crore. The refund claims were rejected by the proper officer for want of supporting documents; on appeal, the Appellate Authority allowed all five appeals by order dated 19 June 2024.

The Department decided to challenge that order before the GSTAT. Meanwhile, the Commissioner withheld the refund under Section 54(11) of the CGST Act, 2017, relying on an ongoing Anti-Evasion investigation and material suggesting that suppliers were non-existent, goods had not moved, and the petitioner’s claimed purchases might involve fraudulent ITC.

The petitioner challenged the withholding order under Article 226, arguing, among other things, that no appeal was pending when the order was made and that the investigation or later-issued show-cause notice could not satisfy Section 54(11). An appeal against the withholding order was subsequently filed before the GSTAT.

Whether the Commissioner could withhold the refund under Section 54(11) when no appeal against the refund-granting order was pending on the date of the withholding order.

Whether an ongoing investigation under the CGST Act, together with the Commissioner’s opinion that payment of the refund was likely to adversely affect revenue because of fraud or malfeasance, could satisfy Section 54(11).

Whether the Commissioner’s withholding order was amenable to challenge under Article 226 notwithstanding the petitioner’s contention that Section 107 did not provide an appellate remedy against it.

Section 54(11) of the CGST Act permits the Commissioner, after giving the taxable person an opportunity of hearing, to withhold a refund where an order giving rise to the refund is the subject of an appeal or further proceedings, or where other proceedings under the Act are pending, provided the Commissioner forms the opinion that granting the refund is likely to adversely affect revenue in those proceedings on account of fraud or malfeasance.

The Court treated these as cumulative requirements and construed “any other proceedings under this Act” to extend beyond a formally instituted appeal to proceedings bearing on the correctness or finality of the refund order.

Section 16(2)(b), requiring receipt of the goods or services for ITC entitlement, was relevant to the investigation’s concerns about the underlying supplies.

The Court distinguished Mandy Enterprises, Alex Tour & Travel and Truth Fashion: those decisions concerned a proposed or contemplated appeal without independent material supporting the fraud-or-malfeasance requirement under Section 54(11).

The Court also noted that the absence of a Section 107 appeal did not exclude judicial review under Article 226.

The Court held that the withholding order did not rest solely on the Department’s decision to appeal the refund-granting order. It found that an Anti-Evasion investigation concerning the petitioner had begun before the Appellate Authority’s order and was still underway when the Commissioner acted.

The investigation material cited by the Commissioner—including supplier-verification reports, transporter statements disputing movement of goods, and information concerning the supply chain—provided a contemporaneous basis for forming an opinion that releasing the refund could adversely affect revenue because of alleged fraud or malfeasance.

The later show-cause notice was treated as crystallising allegations arising from an investigation already in progress, not as the sole basis for establishing pendency on the relevant date.

Because the appeal against the withholding order was before the GSTAT, the Court declined to determine disputed questions about the genuineness of suppliers, movement of goods, or the correctness of the underlying allegations, leaving those issues for the Tribunal.

The writ petition was dismissed, with liberty to the petitioner to raise all issues, including those concerning Section 54(11), before the GSTAT.