GST refund can be granted under IDS as per the modified formula

[Bimal jain]

The Hon’ble Gujarat High Court in the case of M/S. TIRTH AGRO TECHNOLOGY PVT. LTD. & ANR. VERSUS UNION OF INDIA & ORS. - 2025 (1) TMI 719 - GUJARAT HIGH COURT allowed the writ petitions seeking GST refund under Inverted Duty Structure (“IDS”) based on Section 54(3) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) read with Rule 89(5) of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”). The Assessee filed a rectification application for differential refund as per the amended formula which was rejected by issuance of Show Cause Notice (“SCN”) on the ground that refund as per the old formula was already granted to the Assessee; Assessee were granted partial refund under IDS on the ground that prior to July 05, 2022, in terms of unamended formula, assessee were not entitled to include input services as part of the formula and so they were not entitled to refund as per the Notification No. 14/2022 dated July 05, 2022 (“the Notification”) read with Circular 181/13/2022-GST dated November 10, 2022 (“the Circular”). The Court held that the Notification cannot be applied prospectively for the refund claim which were made within two years as prescribed in Section 54(1) of the CGST Act. The Court thus, directed to release differential refund amounts as per rectification application.

Facts:

M/s Tirth Agro Technology Pvt. Ltd. & Ors. (“the Petitioner”) filed common issue of rejection of refund applications based on Section 54(3) of the CGST Act read with Rule 89(5) of the CGST Rules is involved.

The Petitioners were granted partial refund computed as per the formula under the ISD for all the applications made prior to July 05, 2022 on the ground that prior to July 05, 2022, by unamended formula, the Petitioners were not entitled to include the input services as part of the formula and as the Petitioners made the refund application prior to July 05, 2022, as per the Notification read with the Circular, the Petitioners were not entitled to the refund as per the amended formula.

The formula for calculating the refund under Rule 89(5) of the CGST Rules was challenged before different High Courts on the ground that it was ultra vires to Section 54(3) of the CGST Act and as the refund in respect of unutilized Input Tax Credit (“ITC”) attributable to input services was not being granted and, in the alternative, it was urged that the formula was defective as the entire ITC pertaining to inputs was first adjusted towards output tax liability for computing refund under Rule 89(5) of the CGST Rules. Accordingly, in many of these petitions, suitable amendments were moved to challenge the Notification read with the Circular.

• Hon’ble Apex Court, in its judgment in the case of UNION OF INDIA & ORS. VERSUS VKC FOOTSTEPS INDIA PVT LTD. - 2021 (9) TMI 626 - SUPREME COURT, while upholding the validity of Rule 89(5) of the CGST Rules, directed the GST Council to remove the anomalies in the formula. Pursuant to the above directions issued by the Apex Court, the GST Council in its 47th Meeting held on June 28/29, 2022 considered the agenda item 3(ii) with regard to amendment in formula prescribed in Rule 89(5) of the CGST Rules for calculation of the refund of unutilized ITC on account of ISD. The CBIC pursuant to the aforesaid decision of the GST Council issued the Notification being the Central Goods and Service Tax (Amendment) Rules, 2022. In Rule 8 of the CGST Rules, amendment is made in Rule 89 of the CGST Rules. Rule 8(d) of the CGST Rules of the Amended Rules, 2022 provides that the words “tax payable on such inverted rated supply of goods and services”, the brackets, words and letters “{tax payable on such inverted rated supply of goods and services, x (Net ITC ÷ ITC availed on inputs and input services)} has been substituted.

Thereafter, the CBIC has issued the Circular for clarification that vide the Notification, amendment has been made in Rule 89(5) of CGST Rules modifying the formula. The said amendment is not clarificatory in nature and is applicable prospectively with effect from July 05, 2022. Accordingly, it is clarified that the said amended formula rule 89(5) of the CGST Rules for calculation of refund of ITC on account of IDS would be applicable in respect of refund applications filed on or after July 05, 2022. The refund applications filed before July 05, 2022 will be dealt as per the formula as it existed before the amendment made vide the Notification. After the amendment to the formula in Rule 89(5) of the CGST Rules was notified, the Petitioners filed a rectification application for differential refund as per the new amended formula. SCN were issued proposing to reject the refund on the ground that the refund was not admissible since the refund as per the old formula was already granted to the Petitioners.

Issue:

Whether GST refund can be granted under IDS as per the modified formula?

Held:

The Hon’ble Gujarat High Court in M/S. TIRTH AGRO TECHNOLOGY PVT. LTD. & ANR. VERSUS UNION OF INDIA & ORS. - 2025 (1) TMI 719 - GUJARAT HIGH COURT held as under:

• Relied on, in case of COLLECTOR OF CENTRAL EXCISE, SHILLONG VERSUS WOOD CRAFT PRODUCTS LTD. - 1995 (3) TMI 93 - SUPREME COURT 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 cannot be applied prospectively for the refund claim which were made within two years as prescribed under section 54(1) of the CGST Act. It is not in dispute that the Petitioner has filed refund claims within two years as stipulated in Section 54(1) of the CGST Act.
• Noted that, the Petitioner cannot be denied the refund as per the Section 54(3) of the CGST Act only because the Petitioner has been granted the refund prior to July 05, 2022 as it would create a discrimination resulting into inequality. The Circular is therefore contrary to the provisions of the CGST Act as it cannot be said that the refund applications filed after July 05, 2022 would only be entitled to the benefit of the amended Rule 89(5) of the CGST Rules. As per the Section 54(1) read with Section 54(3) of the CGST 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. July 05, 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 the Courts that there is no embargo on preferring second refund application if the petitioner is entitled to the same within the period of two years.
• Held that, the aforesaid decision of the Court is squarely applicable to the facts of the present group of petitions. In that view of the matter, these petitions succeed and the Authorities are directed to release the respective amounts to the petitioners within a period of three months from the date of receipt of copy of this order. Rule is made absolute to the aforesaid extent.

Our Comments:

The Hon’ble Gujarat High Court in the case of M/S. KASHI EXPORTS VERSUS UNION OF INDIA & ORS. - 2024 (12) TMI 1183 - GUJARAT HIGH COURT disposed of the petition where the Assessee was exporting goods under Letter of Undertaking (“LUT”) was paid refund of unutilized accumulated Input Tax Credit (“ITC”) as per the Rules 89(4) of the CGST Rules, during pendency of petition, clarification issued on manner of calculation of Adjusted Total Turnover consequent to Explanation (c) inserted in Rule 89(4) of the CGST Rules. Hence, the refund application was to be reconsidered.

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