GST Refund Orders Quashed as AO Ignored Clarificatory Amendment to Rule 89(5)

Messrs Filatex India Ltd. & Anr. Vs Union of India & Ors. (Gujarat High Court)

The Gujarat High Court allowed the writ petition filed by the petitioner company challenging orders denying full refund of accumulated Input Tax Credit (ITC) arising from an inverted duty structure under Rule 89(5) of the CGST Rules. The petitioner, engaged in manufacturing and supplying yarn, procured inputs such as Purified Terephthalic Acid (PTA) and Mono Ethylene Glycol (MEG), which attracted GST at 18%, while the final product, yarn, was taxed at 12%, resulting in accumulation of unutilized ITC. Refund claims for the period from February 2021 to February 2022 were filed under Rule 89(5), including ITC on both inputs and input services in the computation of “Net ITC.”

The Assistant Commissioner partly sanctioned the refunds but excluded ITC on input services while computing the refund amount. The authority justified the exclusion by stating that the judgment of the Gujarat High Court in VKC Footsteps India Pvt. Ltd., which had allowed inclusion of input services, was under challenge before the Supreme Court. Appeals filed before the Additional Commissioner were dismissed after the Supreme Court set aside the Gujarat High Court decision in VKC Footsteps.

Before the High Court, the petitioner argued that after the Supreme Court decision in VKC Footsteps, the GST Council recommended amendment of Rule 89(5) to remove anomalies in the refund formula. Consequently, Notification No. 14/2022 dated 05.07.2022 amended Rule 89(5), and subsequent judgments of the Gujarat High Court in Ascent Meditech and Tirth Agro held that the amendment was clarificatory and retrospective in nature. The petitioner contended that the amended formula should apply to all refund claims filed within the statutory limitation period, irrespective of whether they were filed before or after 05.07.2022.

The respondents argued that the petitioner’s case had already attained finality before the later judgments in Ascent Meditech and Tirth Agro and therefore could not be reopened merely because subsequent decisions favoured the petitioner.

The High Court considered the issue of whether the benefit of the amended Rule 89(5), introduced through Notification No. 14/2022, could be extended to refund claims decided under the earlier formula. Relying on the judgment in Ascent Meditech, the Court held that the amendment was clarificatory and curative in nature as it harmonized the refund formula and removed the anomaly identified by the Supreme Court. The Court observed that limiting the amended formula only to refund claims filed after 05.07.2022 would create discrimination between assessees whose refund claims were processed before and after that date.

The Court noted that the Supreme Court had dismissed the Special Leave Petition against the Ascent Meditech decision on 28.03.2025. It held that the amended Rule 89(5) applied to all refund claims filed within the limitation period of two years prescribed under Section 54 of the CGST Act, irrespective of the date of filing.

Accordingly, the High Court quashed the appellate orders dated 31.03.2022 and 30.11.2022 and directed the authorities to re-adjudicate the petitioner’s refund claims for the period from February 2021 to February 2022 in accordance with the amended Rule 89(5) within twelve weeks. The Court also directed consideration of the petitioner’s entitlement to statutory interest under Section 56 of the CGST Act while re-adjudicating the refund applications.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. Heard learned advocate Mr. Paresh M. Dave with learned advocate Mr. Amal Paresh Dave appearing on behalf of the Petitioner, and learned advocate Mr. Neel P. Lakhani with learned advocate Mr. Pradip D. Bhate for the Respondents.

2. Rule returnable forthwith. Learned advocate Mr.Neel P. Lakhani with learned advocate Mr. Pradip D. Bhate waives service of notice of rule for the Respondents. Having regard to the controversy arising in the petition, which is in narrow compass, with the consent of the learned advocates for the respective parties, the matter is taken up for hearing.

3. The brief facts of the case are as follows:

3.1 The Petitioner is a company engaged, inter alia, in the business of manufacturing and supplying various categories of yarns. The Petitioner is a registered Assessee under the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “the CGST Act”) and falls under the jurisdiction of the GST authorities of Bharuch Division, Vadodara-II Commissionerate.

3.2 The Petitioner avers that in the course of its manufacturing activity, it procures various inputs and raw materials, including Purified Terephthalic Acid (PTA) and Mono Ethylene Glycol (MEG), both of which are essential for the production of textile yarns. The Petitioner has also availed various input services. It is stated that all such inputs and input services were subjected to GST at the time of procurement, and hence, in accordance with the scheme laid down under Section 16 of the CGST Act, the Petitioner has been availing Input Tax Credit (ITC) on the tax paid.

3.3 The record indicates that while the inputs procured, such as PTA and MEG, are taxed at the rate of 18%, the final product i.e. Yarn, manufactured and supplied by the Petitioner attracts GST at the rate of 12% ad valorem. This results in an inverted duty structure wherein the rate of tax on inputs is higher than the rate applicable on output supplies.

3.4 It is the case of the Petitioner that such inverted duty structure leads to accumulation of unutilized ITC, and therefore, the Petitioner has been claiming refund of the accumulated credit under the mechanism provided in Rule 89(5) of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as “the CGST Rules”). The present dispute pertains to refund claims filed for the periods covering February and March 2021, and from April 2021 to February 2022.

3.5 For the aforementioned periods, the Petitioner filed refund claims on the ground of inverted duty structure under Rule 89(5), computing the refundable amount based on “Net ITC,” which, according to the Petitioner, includes credit of tax paid on both inputs and input services. A summary of the refund claims filed by the petitioners, as detailed in Annexure “B” are as under:-

3.6 Upon verification of the claims, the Jurisdictional Assistant Commissioner passed two refund orders in respect of February and March 2021, and eight additional refund orders pertaining to the months within Financial Year 2021–22. The Petitioner contends that while the refund claims were partly sanctioned, the Assistant Commissioner excluded the credit of tax paid on input services from the computation of “Net ITC,” thereby restricting the quantum of refund sanctioned.

3.7. The Assistant Commissioner justified the said exclusion on the ground that the judgment rendered by this Hon’ble Court in VKC Footsteps India Pvt. Ltd. v. Union of India had not been accepted by the Union of India and was under challenge before the Hon’ble Supreme Court. Accordingly, in the exercise of quasi-judicial discretion and in view of the pendency of the appeal, the authority restricted “Net ITC” to ITC availed on inputs alone, thereby excluding input services for purposes of the formula under Rule 89(5).

3.8 Aggrieved by the reduction of refund amounts, the Petitioner preferred the appeals before the Additional Commissioner (Respondent No. 2), who is the designated Appellate Authority under Section 107 of the CGST Act.

3.9. The appeals concerning refund orders for February and March 2021 were registered as Appeal Nos. APL/01/146-147/2021-22, both instituted on 07.06.2021. Further appeals against eight refund orders for Financial Year 2021–22 were registered as Appeal Nos. APL-01/57 to 64/2022-23. In all these appeals, the Petitioner raised several grounds and reiterated its claim for inclusion of ITC on input services within the scope of “Net ITC” for the purpose of computing refund under Rule 89(5).

3.10. The Additional Commissioner (Appeals) heard the two sets of appeals on 21.03.2022 and 30.11.2022 respectively. Relying upon the pronouncement of the Hon’ble Supreme Court in Union of India v. VKC Footsteps India Pvt. Ltd., whereby the decision of this Hon’ble Court dated 24.07.2020 was set aside, the appellate authority dismissed the appeals. It was held that in light of the binding precedent set by the Hon’ble Apex Court under the doctrine of stare decisis, the refund orders passed by the Assistant Commissioner were legally sustainable and warranted no interference.

3.11 The Petitioner has filed a letter on 09.11.2022 and informed the Assistant Commissioner, Bharuch that appeals before the Tribunal would be filed when the Tribunal would be constituted.

3.12 It is the case of the Petitioner that the situation in the present case is that the legal principle laid down by this Hon’ble Court by virtue of the judgment rendered on 24.07.2020 was in force when the Assistant Commissioner decided the refund claims, but still the refund claims were decided de-hors the legal principle laid down by this Hon’ble Court in the case of VKC Footsteps India Pvt. Ltd. (supra) by judgment dated 24.07.2020. When the appeals filed by the Petitioner were decided by the Respondent No. 2, the judgment of this Hon’ble Court was set aside by the Hon’ble Supreme Court by virtue of the judgment rendered on 13.09.2021, and therefore the 2nd Respondent has upheld the order passed by the Assistant Commissioner.

3.13 Aggrieved by the impugned Order-in-Original dated 30.11.2022, passed by the Respondent No.2, the Petitioners have filed this petition under Article 226 of the Constitution of India with the following prayers:

“(A) That Your Lordships may be pleased to issue a Writ of Certiorari or any other appropriate writ, order or direction, quashing and setting aside OIA No.VAD-CGST-002-APP-ADC-252-253-2021-22 dated 31.3.2022 and OIA No.VAD-CGST-002-APP-ADC-177 to 184-2022-23 dated 30.11.2022 (Annexure-”D”) passed by the Additional Commissioner, Appeals, (Respondent No.2 herein) with consequential reliefs and benefits including a direction to the Assistant Commissioner of CGST, Bharuch (Respondent No.3 herein) to pay refund of accumulated input tax credit in accordance with the modified formula of Rule 89(5) of the CGST Rules for which refund applications detailed at Annexure-”B” to this petition have been lodged by the Petitioner;

(B) That Your Lordships may be pleased to issue a Writ of Mandamus, or any other appropriate writ, order or direction, directing the Assistant Commissioner of CGST, Bharuch (Respondent No.3 herein) to pay in the Petitioner’s favour statutory interest under Section 56 of the CGST Act. 2017 for the refund claims referred to in Annexure-”B” to this petition for the period commencing 60 days after date of each of the refund applications till actual payment of the amount of refund pursuant to such refund applications;

(C) Pending hearing and final disposal of the present petition, Your Lordships may be pleased to direct the Assistant Commissioner of CGST, Bharuch (Respondent No.3 herein) to determine and quantify refund amount in accordance with the modified formula of Rule 89(5) of the CGST Rules, for which refund applications detailed at Annexure-”B” to the petition have been lodged, and to pay such refund in favour of the Petitioner on terms and conditions that may be deemed fit by this Hon’ble Court;

(D) An ex-parte ad-interim relief in terms of Para 22(C) above may kindly be granted;

(E) Any other further relief that may be deemed fit in the facts and circumstances of the case may also please be granted.”

4. Mr. Paresh Dave, learned Counsel for the Petitioners submitted that the Appellate Orders dated 21.03.2022 and 30.11.2022 passed by the Respondent No.2 could have been challenged before the GST Tribunal. However, since the same is yet to be constituted, the Petitioners have no effective remedy except to approach this Court besides the Hon’ble Apex Court while rendering the judgment in the case of V.K.C Footsteps (Supra) also observed that the formula given by the Central Government under Rule 89(5) was anomalous and thereafter the GST Council had recommended a change in the formula in Rule 89(5) of the CGST Rules 2017 and accordingly appropriate modifications to Rule 89(5) of the CGST Rules, 2017 were undertaken by the Central Government by the virtue of Notification No.14/2022 dated 05.07.2022. Thereafter a Circular bearing No.18113/2022-GST dated 10.11.2022 had clarified that, for the purpose of refund of ITC on account of inherited duty structure in respect of refund applications filed on or after 05.07.2022 alone would be decided as per the amended formula under Rule 89(5) of the CGST Rules, 2017

4.1 Mr. Dave, submitted that this Court in the case of Ascent Meditech (Special Civil Application No. 17298 of 2024) and Tirth Agro (Special Civil Application No. 11630 of 2023 & allied matters) had struck down the said clarification and therefore, the refund would not be restricted as per the formula that was in force prior to 05.07.2022. According to Mr. Dave, the formula of Rule 89(5) of the CGST Rules, 2017 as modified by the Notification No.14/2022 would be applicable to all refund claims irrespective of whether the refund claim was filed before or after 05.07.2022. Therefore, the Petitioners were squarely entitled to the refund as per their refund applications which were lodged for the period from February, 2021 to February 2022 as per the Chart below paragraph No.3.5 hereinabove.

5. On the other-hand, Mr. Neel P.Lakhani, learned advocate for the Respondent Nos. 2 and 3 submitted that the decision of this Court in the case of Ascent Meditech and Tirth Agro (supra) would not be applicable to the Petitioners case, inasmuch as, the case of the Petitioners has been finalized prior to the aforesaid decisions of this Court and therefore, attained finality. For this reason, the Petitioners cannot reopen an issue which has been closed in the case of the Petitioners merely because a subsequent decision of this Court has expounded a principle of law which benefits them.

6. DISCUSSION & FINDINGS :-

6.1 In view of the submissions of the respective parties, the issue which calls for determination by this Court is whether the benefit of the Notification No. 05.07.2022 vide Circular No. 14/2022 can be extended to refund claims which were decided on the basis of the old formula of inverted duty structure in Rule 89(5) of the CGST Rules, 2017?

6.2 As held in Ascent and Tirth Agro (Supra) the Notification No. 14/2022 has been held to be clarificatory. This Court, in Ascent (Supra) has held as under :-

“41. Having heard learned advocates for the respective parties and having considered the facts of the case and comparing the amendment with the unamended Rule 89 (5), it is clear that for the inverted rated supply of goods and service instead of “the adjusted total turnover” the words “ITC availed on inputs and input services” has been substituted. Thus, the “adjusted total turnover” which is defined in sub-clause (b) as per the sub-rule (4) has been given a go-by. Therefore, numerator and denominator are made in harmony which was not there prior to the amendment which had resulted anomaly in the formula.

42. Thus, it is apparent that the amendment made by the Notification No. 14/2022 is clarificatory only as per the decision of the GST Council pursuant to the direction issued by the Hon’ble Apex Court.

43. Therefore, impugned Circular No. 181/2022 dated 10.01.2022 which provides the clarification is contrary to the purport of the amendment brought on statute pursuant to the recommendation of the GST Council as per the direction issued by the Hon’ble Apex Court to remove the anomaly in the formula in Rule 89 (5).

44. Reliance placed by the petitioner on the decision in case of Allied Motors (P.) Ltd (supra) would be squarely applicable in the facts of the case wherein the Hon’ble Apex Court has held as under:

“9. Looking to the curative nature of the amendment made by the Finance Act of 1987 it has been submitted before us that the proviso which is inserted by the amending Finance Act of 1987 should be given retrospective effect and be read as forming a part of Section 43B from its inception. This submission has taken support from decisions of a number of High Courts before whom this question came up for consideration. The High Courts of Calcutta, Gujarat, Karnataka, Orissa, Gauhati, Rajasthan, Andhara Pradesh, Patna and Kerala appear to have taken the view that the proviso must be given retrospective effect. Some of these High courts have held that “sum payable” under Section 43B(a) refers only to the sum payable in the same accounting year thus excluding sales tax payable in the next accounting year from the ambit of Section 43B(a). The Delhi High Court has taken a contrary view holding that the first proviso to Section 43B operates only prospectively. We will refer only to some of these judgments.

13. Therefore, in the well known words of Judge learned Hand, one cannot make a fortress out of the dictionary, and should remember that statutes have some purpose and object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning. In the case of B. Jodha Mal Kuthiala v. Commissioner of Income-tax, Punjab, jammu & Kashmir and Himachal Pradesh (82 ITR 570), this Court said that one should apply the rule of reasonable interpretation. A proviso which is inserted to remedy unintended consequences and to made the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole.

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14. This view has been accepted by a number of High Court. In the case of Commissioner of Income-Tax v. Chandulal Venichand ([1994] 209 ITR 7), the Gujarat High Court has held that he first proviso to section 43B is retrospective and sales-tax for the last quarter paid before the filing of the return for the assessment year is deductable. This decision deals with assessment year 1984-85. The Calcutta High Court in the case of Commissioner of Income-tax v. Sri Jagannath Steel Corporation ([1991] 191 ITR 676), has taken a similar view holding that the statutory liability for sales-tax actually discharge after the expiry of accounting year in compliance with the relevant stature is entitled to deduction under Section 43B. The High Court has held the amendment to be clarificatory and, therefore, retrospective. The Gujarat High Court in the above case held the amendment to be curative and explanatory and hence retrospective. The Patna High Court has also held the amendment inserting the first proviso to be explanatory in the case of Jamshedpur Motor Accessories Stores v. union of India and Ors. ([1991] 189 ITR 70.), It was held that amendment inserting first proviso to be retrospective. The special leave petition from this decision of the Patna High Court was dismissed. The view of the Delhi High Court, therefore, that the first proviso to section 43B will be available only prospectively does not appear to be correct. As observed by G.P. Singh in his Principles of statutory Interpretation, 4th Edn. Page 291, “It is well settled that if a statute curative or merely declaratory of the previous law retrospective operation is generally intended.” In fact the amendment would not serve its object in such a situation unless it is construed as retrospective. The view, therefore, taken by the Delhi High Court cannot be sustained.”

45. In case of Collector of Central Excise, Shilong vs. Wood Craft Products Ltd reported in (1995) 3 SCC 454, the Hon’ble Apex Court has held that a clarificatory notification would take effect retrospectively and such a notification merely clarifies the position. Clarificatory notifications have been issued to end the disputes between the parties. Therefore, Notification No. 14/2022 dated 05.07.2022 cannot be applied prospectively for the refund claim which were made within two years as prescribed under section 54 (1) of the GST Act. It is not in dispute that the petitioner has filed refund claims within two years as stipulated in section 54 (1) of the Act.

46. It is also not disputed by the respondent that the petitioner is entitled to the refund as per sub-section 3(ii) of section 54 of the Act being difference in the GST rates due to inverted rated structure and accordingly, the petitioner was granted refund though petitioner has filed refund applications pursuant to the deficiency memo issued repeatedly.

47. Considering the above provisions of the GST Act, the same would be applicable in the facts of the case irrespective of the notification issued by the CBIC pursuant to the decision taken by the GST council as per the direction issued by the Hon’ble Supreme Court. The petitioner cannot be denied the refund as per the provision of 54 (3) of the Act only because the petitioner has been granted the refund prior to 05.07.2022 as it would create a discrimination resulting into inequality between the assesses who have been granted refund prior to 05.07.2022 and the assesses who have applied for refund after 05.07.2022. The impugned circular is therefore contrary to the provisions of the Act as it cannot be said that the refund applications filed after 05.07.2022 would only be entitled to the benefit of the amended Rule 89 (5) of the Act. As per the provisions of section 54 (1) read with section 54 (3) of the Act if the assessee has made refund application within the prescribed period of two years, then the assessee would be entitled to the refund as per the amended formula which has been notified w.e.f. 05.07.2022. In the facts of the case the petitioner has made rectification applications for refund as per new amended formula within two years. Moreover, as held by this Court in the decisions in case of Shree Renuka Sugars Ltd (supra) and in case of Pee Gee Fabrics Ltd (supra), there is no embargo on preferring second refund application if the petitioner is entitled to the same within the period of two years. “,

6.3 The sum and substance of the aforesaid ratio in Ascent (Supra), which has been approved by the Hon’ble Supreme Court by rejecting the Special Leave Petition No.8134/2025 by the order dated 28.03.2025 is to the clear effect that the benefit of the amended Rule 89(5) as per the Notification No.14/2022 dated 05.07.2022 would be applicable to all refund claims filed before or after 05.07.2022. Thus, the only aspect to be checked by the authority granting the refund is whether the said refund application had been filed before the prescribed limitation of two years. In such view of the matter, we find that the authorities below must be directed to re-adjudicate the refund claim of the Petitioners in light of the amended Rule 89(5). The failure, to do so, would result in denial of the Petitioners legitimate refund and would cause unjust enrichment to the Government.

7. Accordingly, the Orders-in-Original dated 31.03.2022 and 30.11.2022 are hereby quashed and set aside. The Respondent No.2 is directed to re-adjudicate the refund applications filed by the petitioners herein for the period of February, 2021 to February, 2022 as per the Chart below paragraph No.3.5 hereinabove within a period of Twelve (12) weeks from the date of receipt of a copy of this Order in accordance with law. The entitlement of the petitioner to statutory interest in terms of Section 56 of the Act in respect of the each of the refund applications is also to be considered in accordance with law by the respondent while adjudicating the said refund applications. The present petition succeeds and is accordingly allowed. Rule is made absolute to the aforesaid extent. No order as to costs.