2025 (5) TMI 256 - HC - GST

Inclusion of ITC on input services within the scope of Net ITC for the purpose of computing refund under Rule 89 (5) of the CGST Rules 2017 - 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? - HELD THAT - The sum and substance of the aforesaid ratio in Ascent 2025 (5) TMI 149 - SC ORDER 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. 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. Conclusion - i) 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. ii) 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. Petition allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the Input Tax Credit (ITC) on input services can be included along with ITC on inputs for computing the refundable amount under the inverted duty structure refund mechanism prescribed under Rule 89(5) of the CGST Rules, 2017;

(b) Whether the amended formula under Rule 89(5) of the CGST Rules, 2017, as notified by Notification No. 14/2022 dated 05.07.2022, which modifies the computation of refund under the inverted duty structure, applies retrospectively to refund claims filed prior to the date of such amendment;

(c) Whether the authorities below erred in rejecting the petitioner's refund claims by excluding ITC on input services and applying the pre-amendment formula, despite the amendment and judicial pronouncements favoring a broader inclusion;

(d) Whether the petitioner is entitled to statutory interest under Section 56 of the CGST Act, 2017, on delayed refund payments;

(e) Whether the petitioner's remedy lies before the GST Tribunal or the High Court, given the Tribunal's non-constitution at the relevant time.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Inclusion of ITC on Input Services in Refund Computation under Rule 89(5)

The legal framework revolves around Section 16 of the CGST Act, which permits availing ITC on inputs and input services, and Rule 89(5) of the CGST Rules, which prescribes the formula for refund of accumulated ITC due to inverted duty structure (where input tax rates exceed output tax rates).

Earlier, the formula under Rule 89(5) was interpreted to exclude ITC on input services from the computation of "Net ITC" for refund purposes, as upheld by the Assistant Commissioner relying on the judgment of the Gujarat High Court in VKC Footsteps India Pvt. Ltd., which was subsequently set aside by the Supreme Court.

The petitioner contended that ITC on input services must be included in the refund computation, as per the original judgment of the High Court in VKC Footsteps and the amended Rule 89(5) formula. The Assistant Commissioner and the Additional Commissioner (Appeals) rejected this claim, relying on the Supreme Court's overruling of the High Court's decision and limiting refund to ITC on inputs alone.

The Court noted the conflict between the earlier High Court decision and the Supreme Court's ruling, and the petitioner's reliance on the amended Rule 89(5) formula which includes ITC on input services.

Issue (b): Retrospective Application of the Amended Rule 89(5) Formula

The amendment to Rule 89(5) by Notification No. 14/2022 dated 05.07.2022 was introduced following recommendations by the GST Council and directions from the Supreme Court to remove anomalies in the refund computation formula.

The respondents argued that the amendment applies only prospectively to refund claims filed on or after 05.07.2022, and not to claims already decided or finalized before that date.

The petitioner relied on the High Court's decisions in Ascent Meditech and Tirth Agro, which struck down the Circular No. 181/2022 that restricted the amended formula's application to post-05.07.2022 claims. The Court in Ascent Meditech held that the amendment is clarificatory and curative in nature, thus retrospective, and applies to all refund claims filed within the statutory limitation period of two years under Section 54(1) of the CGST Act.

The Court extensively quoted the Ascent Meditech judgment, emphasizing the principle that clarificatory amendments are to be given retrospective effect to remove anomalies and ensure uniformity, thereby preventing discrimination between taxpayers who filed claims before or after the amendment.

The Court also relied on precedents from the Supreme Court and various High Courts holding that curative and clarificatory amendments have retrospective effect, including the case of Collector of Central Excise, Shillong vs. Wood Craft Products Ltd.

Issue (c): Legality of the Authorities' Rejection of Refund Claims

The Assistant Commissioner excluded ITC on input services from the refund computation relying on the Supreme Court's decision in Union of India v. VKC Footsteps India Pvt. Ltd., which set aside the High Court's earlier judgment.

The Additional Commissioner (Appeals) upheld this approach, dismissing the petitioner's appeals.

However, the Court found that the authorities failed to consider the subsequent amendment to Rule 89(5) and the clarificatory judicial pronouncements that the amended formula applies retrospectively to refund claims filed within two years.

The Court held that failure to re-adjudicate the refund claims in light of the amended formula and clarificatory judgments results in denial of legitimate refunds and causes unjust enrichment to the Government.

Issue (d): Entitlement to Statutory Interest under Section 56 of the CGST Act

The petitioner sought statutory interest on delayed refunds as per Section 56 of the CGST Act, which mandates interest payment if refunds are not paid within 60 days of the application.

The Court directed the authorities to consider the petitioner's entitlement to statutory interest while re-adjudicating the refund claims, in accordance with law.

Issue (e): Availability of Alternative Remedy Before the GST Tribunal

The respondents contended that the petitioner's remedy lies before the GST Tribunal, which was not constituted at the relevant time.

The Court acknowledged this fact and accepted the petitioner's approach to seek relief before the High Court under Article 226 of the Constitution, given the absence of the Tribunal.

3. SIGNIFICANT HOLDINGS

The Court held:

"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."

"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."

"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."

"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."

"Failure to re-adjudicate the refund claim of the Petitioners in light of the amended Rule 89 (5) would result in denial of the Petitioners legitimate refund and would cause unjust enrichment to the Government."

Consequently, the Court quashed and set aside the Orders-in-Original dated 31.03.2022 and 30.11.2022, directing the Respondent to re-adjudicate the refund claims for the period February 2021 to February 2022 in accordance with the amended Rule 89(5) within twelve weeks, including consideration of statutory interest under Section 56.

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