Facts of the Case:

In this case, the petitioner was engaged in renting and leasing pre-fabricated warehouse buildings, had availed ITC on works contract services used for construction of warehouses. During DGGI investigation, the Department alleged that such ITC was blocked under Section 17(5) of the CGST Act. Under protest, the petitioner reversed/paid the entire amount of ₹19.33 crore through DRC-03. Subsequently, a demand was confirmed under Section 74 of the CGST Act vide Order-in-Original dated 13.09.2024, which also appropriated the amount already paid/reversed.

The petitioner challenged the order before the first appellate authority, which thereafter was allowed and set aside the entire demand. The appellate authority, relying upon the Supreme Court judgment in Safari Retreats Pvt. Ltd., held that construction intended for leasing could not be regarded as construction undertaken on the taxpayer’s “own account” for purposes of Section 17(5)(d). The petitioner thereafter filed a refund application under Section 54 for ₹19.33 crore.

The refund authority, however, rejected the refund claim on 12.01.2026, inter alia, on the ground that the Order-in-Appeal had not attained finality as the Department had reviewed the order and proposed to challenge it before GSTAT. The Department subsequently filed its GSTAT appeal only on 25.03.2026, i.e. after the refund rejection order. The petitioner therefore approached the High Court challenging the rejection.

Issue: Whether the refund authority could reject a consequential refund claim on the ground that the appellate order setting aside the demand had not attained finality because the Department proposed to challenge it, and could the refund authority independently re-examine the substantive ITC issue already decided by the appellate authority?

Held That:

The Telangana High Court quashed the refund rejection order and held that the Order-in-Appeal dated 16.09.2025 was operative and binding upon the Department when the refund was rejected on 12.01.2026. Under Section 107(16) of the CGST Act, an order passed by the appellate authority is final and binding, subject to the remedies specifically contemplated under Sections 108, 113, 117 and 118. Merely because the Department proposes to challenge an appellate order, or subsequently files an appeal, does not suspend or nullify its operation. As on 12.01.2026, there was no order staying, modifying or setting aside the Order-in-Appeal; in fact, the Department’s GSTAT appeal was filed only on 25.03.2026. Therefore, the refund authority was required to give effect to the operative appellate order.

The Court further held that the refund authority could not indirectly reopen or question the substantive findings of the appellate authority while processing the refund application under Section 54. Importantly, the Court held that if the Department intended to withhold the refund because of further proceedings, it was required to comply with the specific mechanism under Section 54(11). The provision requires, inter alia, an appeal or further proceeding concerning the order giving rise to the refund, an opinion of the Commissioner that grant of refund is likely to adversely affect revenue on account of malfeasance or fraud, and an opportunity of hearing to the taxable person. None of these statutory requirements was satisfied when the refund was rejected on 12.01.2026. There was no pending GSTAT appeal on that date, no requisite finding/opinion of the Commissioner regarding malfeasance or fraud, and no opportunity of hearing in accordance with Section 54(11).

The High Court consequently held that the refund authority could not circumvent Section 54(11) by rejecting the refund under Section 54(8) merely because the appellate order was under departmental review or was proposed to be challenged. The subsequent filing of the GSTAT appeal on 25.03.2026 could not retrospectively validate the refund rejection order dated 12.01.2026.

The Court also declined to relegate the petitioner to the alternative appellate remedy, observing that the case involved jurisdictional error, non-application of mind and failure to follow the statutory mechanism under Section 54(11). Further, the proposed appellate remedy was considered ineffective in the circumstances since the appeal would lie before an authority subordinate to the very authority that had already expressed its view against grant of refund.

Accordingly, the High Court quashed and set aside the Refund Rejection Order dated 12.01.2026, remanded the refund application for fresh consideration, and directed the authorities to act strictly in accordance with Section 54(11) if they intended to withhold the refund on account of further proceedings.

Key Takeaway

A departmental decision to challenge an appellate order does not suspend its operation. An order of the first appellate authority remains binding under Section 107(16) until it is stayed, modified or set aside by a competent forum. A refund authority cannot use Section 54 proceedings to reopen issues already decided in favour of the taxpayer by the appellate authority.

Case Name: M/s. ADV Industrial Services Private Limited AND The Union of India dated 08.09.2026