Facts of the Case:

In this case, the appellant engaged in the manufacture of garments, claimed refund of accumulated unutilized ITC under the inverted duty structure for July 2019 to September 2019 under Section 54(3) read with Rule 89(5) of the CGST/KGST Rules. Against the refund claim of ₹18,41,280, the adjudicating authority rejected ₹9,72,027 and sanctioned the balance ₹8,69,253. On appeal, the First Appellate Authority granted partial relief of ₹2,64,860 but sustained rejection of ₹7,07,173. The taxpayer approached the GSTAT challenging the remaining rejection.

The original refund SCN merely stated that the refund was inadmissible on account of “wrong ITC claim” for ₹9,72,027, without providing invoice-wise particulars, identifying the nature of ineligibility or explaining the basis of rejection. Further, the First Appellate Authority introduced a new ground that certain goods/services were not used “in the course or furtherance of business”, although this ground was not contained in the SCN or the original adjudication order.

Issue:

Whether a refund of accumulated ITC under Section 54(3) can be rejected on the ground that the underlying ITC is ineligible when the Department has not initiated proceedings under Section 73 or 74 to determine that such ITC was wrongly availed or utilised; and whether an appellate authority can sustain refund rejection on grounds not contained in the original SCN.

Held That:

The GSTAT, Ernakulam Bench, allowed the appeal and set aside the rejection of refund of ₹7,07,173. The Tribunal first held that the refund SCN was fundamentally defective as it merely alleged “wrong ITC claim” and mentioned a consolidated amount without specifying the invoices, nature of ineligibility or basis for disallowance. Relying on the Supreme Court’s decision in CCE v. Brindavan Beverages (P) Ltd., the Tribunal held that a vague SCN deprives the taxpayer of a proper opportunity to defend itself and therefore fails the requirements of natural justice.

The Tribunal further held that the First Appellate Authority had travelled beyond the scope of the SCN by introducing the ground that the relevant goods/services were not used in the course or furtherance of business. Since this ground was neither alleged in the SCN nor considered in the original order, sustaining the rejection on such an extraneous ground was contrary to natural justice.

On the substantive issue, the Tribunal laid down that eligibility of ITC has to be determined through the statutory mechanism under Sections 73/74. Where ITC has been availed in the statutory returns and its eligibility has not been challenged through proceedings under Sections 73/74, the refund proceedings under Section 54(3) cannot be converted into collateral proceedings for determining the underlying ITC eligibility for the first time. The Tribunal relied particularly on paragraphs 20 and 21 of Circular No. 125/44/2019-GST dated 18.11.2019, which contemplate that where refund is sought to be rejected because of ineligible ITC, the proper officer should issue notice under Section 54 read with Section 73 or 74 and also initiate the prescribed mechanism for recovery of the wrongly availed ITC.

The Tribunal also relied upon the principle emerging from decisions such as Convergys India, Morgan Stanley Advantage Services, ADP Pvt. Ltd. and Qualcomm India Pvt. Ltd. under the erstwhile CENVAT regime, holding that the fundamental distinction between ITC eligibility proceedings and refund proceedings continues under GST. Accordingly, since the Revenue had not initiated proceedings under Sections 73/74 to disallow the disputed ITC, it could not deny the refund merely by declaring that the ITC was ineligible at the refund stage. The appeal was therefore allowed with consequential relief.

KeyTakeaway: If the Department considers ITC wrongly availed, the statutory mechanism under Sections 73/74 must be followed. Appellate authorities cannot introduce entirely new grounds of rejection that were absent from the SCN and original adjudication, particularly where the taxpayer had no opportunity to defend against those grounds.

Case name: AUGUSTAN TEXTILE COLOURS (UNIT OF AUGUSTAN KNITWEAR PVT LTD) Versus THE COMMISSIONER OF STATE TAX, KERALAM STATE, THIRUVANANTHAPURM dated 08.09.2026