DRC-03 Payments Made During GST Search Not Voluntary; Refund Cannot Be Rejected Through Deficiency Memos: Karnataka High Court

A Bench comprising of Justice M. Nagaprasanna, quashed deficiency memos issued by the Deputy Commissioner of Central Tax (Revenue) on two different dates rejecting refund sought by assessee. On this score, it was observed that “the petitioner is entitled for refund of the payments made in form DRC-03” as a deficiency memo cannot be issued when a refund application is complete in terms of Section 54 of the CGST Act, 2017 read with Rule 89 of the CGST Rules, 2017.

Assessee, a private limited infrastructure company was subjected to simultaneous inspection by officers from the Director General of GST Intelligence and the Anti-Evasion Unit at the registered office premises under Section 67(1) of the CGST Act, 2017. Assessee made immediate payment of Rs.2,42,00,000 vide DRC-03 challans purportedly under Section 74(5), without any adjudication or quantified liability. After inspection, summons was issued directing the authorized representative of assessee to appear in person for conduct of an enquiry. Once again payments were made by it. Between November 05, 2024 to February 06, 2025 four more summons are issued to assessee which it complied to by making four payments in DRC-03 totalling to Rs.3,11,59,298.

Thereafter, when assessee applied for refund of the payments made, same were sought to be rejected by issuing deficiency memos stating that relevant supporting documents were not appended to the application seeking refund.

The High Court examined whether payments made under Section 74(5) of the CGST Act at the time of search may be considered 'voluntary' and can become the subject matter of refund under Section 54 of the CGST Act, while tracing through the Scheme of Section 74 of the CGST Act, 2017 relating to 'Demand and Recovery' provisions read with Rules 89 and 142 of the CGST Rules, 2017. Further, High Court refers to Supreme Court rationale in case of Radhika Agarwal and a bevy of decisions of High Court including Vallabh Textiles, J. Ramesh Chand, Kesar Colour Chem Industries, Bundl Technologies, Bhumi Associates which have dealt with self-ascertainment, voluntariness of amounts deposited during search or investigation

As for what constitutes a valid refund application, the High Court cited procedure noted by Delhi High Court in case of AB Enterprises. As opposed to the reason cited for rejection of refund i.e. lack of supporting documents, High Court clarified that “The aforesaid are the applications under Section 54 of the CGST Act submitted by the petitioner seeking refund. They are in tune with what is necessary. All the documents as is considered by the High Court of Delhi are placed on record by the petitioner. Therefore, the applications ought to have merited appropriate consideration at the hands of the respondents”

Case Name: Gunnam Infra Projects Private Limited

Case No. : WP(C) No.611 of 2025

Date of Decision: 07.11.2025

Citation No: 2025 LiveLaw (Kar) 385

Appearance: Advocates Lochana S. Babu appeared on behalf of the assessee, whereas Revenue was represented by CGSPC M.N. Kumar with Advocates M. Unnikrishnan, Madhu N. Rao.

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