In a significant win for exporters and a reminder for tax authorities to follow due process, the Bombay High Court recently struck down a ₹6.88 crore recovery order issued against Power Engineering (India) Pvt Ltd. The decision emphasizes the critical importance of issuing a proper show-cause notice (SCN) before raising any GST demands.
Let’s break down the case, its implications, and what businesses should take away from this landmark ruling.
The Case at a Glance
- Company Involved: Power Engineering (India) Pvt Ltd, a 100% Export-Oriented Unit (EOU)
- Allegation: Wrongful IGST refunds between FY 2017–18 to 2021–22, allegedly violating Rule 96(10) of the CGST Rules
- Amount in Question: ₹6.88 crore (including interest and penalties)
- Court Decision: Recovery quashed due to procedural violation—no valid show-cause notice was served
Background: What Triggered the Dispute?
Power Engineering is engaged in manufacturing electronic goods and exports them globally. The company imported raw materials duty-free under a customs notification and later paid IGST on the exports to claim refunds.
However, Rule 96(10) of the CGST Rules (amended in 2018 and omitted in 2024) restricted such refunds if duty-free inputs were used in exports. Citing this rule, the GST department initiated a refund verification process, suspecting ineligible claims over several financial years.
What Did the GST Department Do?
Instead of issuing a formal show-cause notice, the GST officer issued document requisitions and then passed a recovery order demanding the entire ₹6.88 crore back, along with interest and penalties. The recovery was done under Section 74 of the CGST Act, which typically deals with cases involving fraud or willful misstatements.
However, this approach missed one critical step: a properly drafted and served show-cause notice as required by law.
What Did the High Court Say?
The Bombay High Court quashed the recovery order, highlighting that:
- Legal Process Must Be Followed: Tax demands cannot be raised without first serving a valid show-cause notice.
- Section 73/74 Compliance is Mandatory: A demand under GST must follow the framework laid out in Sections 73 or 74, including giving the taxpayer a chance to explain or rebut the claim.
- No Shortcut is Allowed: Requests for documents or verification notices cannot be treated as substitutes for a formal SCN.
The court emphasized that where the law prescribes a procedure, it must be followed strictly—no exceptions.
Key Learnings for Exporters and EOUs
✅ 1. Ensure Documentation is Airtight
Maintain complete records of import and export transactions, especially if you’re claiming IGST refunds. Document the source of inputs and applicable notifications to defend your claims if questioned.
✅ 2. Watch Out for Rule 96(10)
Even though Rule 96(10) was omitted in October 2024, the department may still apply it retrospectively. Be prepared to counter such claims with legal support and evidence.
✅ 3. Don’t Ignore Informal Notices
Even if the department sends you “verification” notices, take them seriously. Respond promptly but also demand formal due process.
✅ 4. Know Your Rights Under Section 73
You’re entitled to receive a clear show-cause notice that specifies the demand amount and reasons. No recovery can legally happen without it.
Compliance Checklist for Businesses
Here’s a quick compliance guide to help you avoid future disputes:
- 🔲 Confirm that your IGST refund claims align with rules in force at the time of filing
- 🔲 Retain all import/export documentation for at least 6–7 years
- 🔲 Respond in writing to all GST notices, even informal ones
- 🔲 Seek legal advice if the department references Rule 96(10) for older refunds
- 🔲 If you receive an SCN, ensure it mentions the exact demand and allows you to present your case
Conclusion
The Bombay High Court’s ruling is a powerful reminder that legal safeguards cannot be bypassed. For tax officers, it reinforces that shortcuts in adjudication—however well-intentioned—can backfire. For exporters and EOUs, it highlights the importance of being well-prepared, maintaining proper documentation, and knowing your rights under the GST framework.
In GST matters, following the rulebook isn’t just a formality—it’s the foundation of fairness and justice.
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Published on: May 23, 2025