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TaxTMI 
When a Refund Formula Changes, Pending Claims Cannot Be Frozen in the Past
The Gujarat High Court's decision in Pranav Overseas LLP Versus Union of India & Ors. - 2026 (7) TMI 633 - GUJARAT HIGH COURT, deals with an important refund issue under the GST regime. The question was whether a refund claim of unutilised Input Tax Credit under the inverted duty structure could be processed in light of the amended Rule 89(5) of the CGST Rules, 2017, even though the claim related to earlier financial years.
The petitioner had sought a refund of unutilised ITC attributable to input services for the financial years 2017-18 and 2018-19. The difficulty arose because the earlier formula under Rule 89(5) restricted refund by excluding input services while computing 'Net ITC'. A deficiency memo in Form GST RFD-03 had been issued. The petitioner therefore approached the High Court, challenged the obstruction in refund processing and relied upon later developments in law.
The judgment is short, but its practical value is considerable. It confirms that refund claims cannot be examined in isolation from subsequent legal developments in which the relevant rule has been amended and such amendment has been judicially treated as curative and clarificatory. The High Court has therefore directed the Department to process the refund claim in light of the Supreme Court decision in VKC Footsteps, the Gujarat High Court decision in Ascent Meditech, and Notification No. 14/2022-Central Tax dated 05.07.2022.
The Original Problem Was the Formula Under Rule 89(5)
Section 54(3) of the CGST Act permits refund of unutilised ITC in specified cases, including where credit accumulates on account of the rate of tax on inputs being higher than the rate of tax on output supplies. This is commonly referred to as a refund under an inverted duty structure. However, the manner of computing such a refund is prescribed under Rule 89(5) of the CGST Rules.
The dispute around Rule 89(5) arose because the earlier formula restricted the meaning of 'Net ITC' in a manner that excluded input services. This created a practical difficulty for taxpayers whose accumulated credit included tax paid on input services. They argued that Section 54(3) refers to 'any unutilised input tax credit', and that the rule could not restrict the refund only to ITC on inputs while excluding input services.
This issue led to conflicting High Court views. The Gujarat High Court in VKC Footsteps India Pvt. Ltd. Versus Union of India & 2 Other (s) - 2020 (7) TMI 726 - GUJARAT HIGH COURT, had accepted the taxpayer's argument and held Rule 89(5) to be ultra vires to the extent it denied refund of ITC on input services. On the other hand, the Madras High Court in Tvl. Transtonnelstroy Afcons Joint venture, Tvl. Essa Garments Private Limited, India Dyeing Mills (P) Limited, M/s. Veekesy Footcare (India) Pvt. Ltd., Kaleesuwari Refinery Pvt Ltd., Victur Dyeings Versus Union of India, The Goods and Services Tax Council, Assistant Commissioner ST And Others - 2020 (9) TMI 931 - MADRAS HIGH COURT, took a different view and upheld the validity of Rule 89(5). The controversy eventually reached the Supreme Court in Union of India & Ors. Versus VKC Footsteps India Pvt Ltd. - 2021 (9) TMI 626 - Supreme Court.
VKC Footsteps Preserved the Formula but Exposed the Anomaly
In VKC Footsteps, the Supreme Court considered the validity of Rule 89(5). The Supreme Court disapproved the earlier Gujarat High Court view and affirmed the Madras High Court's approach. It held that the Court could not recast the statutory formula merely because the formula created practical inequities.
The underlying principle in VKC Footsteps is important. In tax matters, formulae prescribed by the legislature or delegated legislation are not lightly rewritten by courts. Unless a formula is absurd, unworkable or contrary to the statute, courts ordinarily do not replace legislative or executive wisdom with their own. The Supreme Court therefore did not read down Rule 89(5) as suggested by the taxpayers.
However, the Supreme Court also recognised the existence of anomalies. It urged the GST Council to reconsider the formula and take a policy decision. This part of the judgment is significant because it did not leave the issue as a purely adversarial contest. It acknowledged that the formula might create inequities and left it to the policy-making body to correct them.
Notification No.14/2022 Reworked the Refund Mechanism
After the Supreme Court's observations, Rule 89(5) was amended through Notification No.14/2022-Central Tax dated 05.07.2022. The amendment modified the formula by substituting the relevant expression with a formula that took into account tax payable on inverted rated supply of goods and services multiplied by the ratio of Net ITC to ITC availed on inputs and input services.
The amendment was not merely cosmetic. It responded to the anomaly identified in the earlier refund formula. It changed the manner in which refund was to be computed under the inverted duty structure. This naturally raised a further question: would the amended formula apply only prospectively, or would it apply to pending or live refund claims relating to earlier periods?
This question became important in cases like Pranav Overseas LLP. The refund period was 2017-18 and 2018-19, but the legal position had changed later. The petitioner argued that the refund claim should be processed according to the amended formula because the amendment was curative and clarificatory in nature.
Ascent Meditech Gave the Amendment Retrospective Reach
The key support for the petitioner came from Ascent Meditech Ltd Versus Union of India & Ors. - 2024 (12) TMI 511 - GUJARAT HIGH COURT. In that case, a Coordinate Bench of the Gujarat High Court held that the amendment made to Rule 89(5) by Notification No.14/2022-Central Tax dated 05.07.2022 was curative and clarificatory in nature. Therefore, it could apply retrospectively in appropriate cases.
This principle is crucial. A curative amendment is one that corrects an anomaly, removes hardship or clarifies the true working of the law. When an amendment is treated as curative and clarificatory, it may apply to pending matters, subject, of course, to limitations and other statutory conditions. It is not treated as creating a completely new right, only from the date of the amendment.
The Union of India challenged Ascent Meditech before the Supreme Court by filing Special Leave Petition No.8134 of 2025. The SLP was dismissed by order dated 28.03.2025 [Union of India & Ors. Versus Ascent Meditech Ltd. & Ors. - 2025 (5) TMI 149 - SC Order]. A review petition was also dismissed on 02.12.2025 [Union of India & Ors. Versus Ascent Meditech Ltd. & Ors. - 2025 (12) TMI 642 - SC Order]. This gave substantial strength to the position that the amended Rule 89(5) could be applied retrospectively to live claims.
A Deficiency Memo Cannot Survive a Changed Legal Position
In Pranav Overseas LLP, the petitioner had challenged the deficiency memo in Form GST RFD-03 for the years 2017-18 and 2018-19. The High Court noted the subsequent legal developments. The Department did not controvert the proposition that the issue was covered by VKC Footsteps, Ascent Meditech and the amended Rule 89(5).
Once the legal position had changed and the amendment had been treated as curative and clarificatory, the deficiency memo could not remain standing in the way of refund processing. The High Court therefore quashed the deficiency memo and directed the Department to process the refund claim in accordance with the law, as clarified by subsequent decisions and notifications.
This is an important practical point. A refund file is not frozen in the legal position that existed on the date of the original objection if the matter is still live and the relevant rule has been clarified or cured. The authority must apply the law that governs the claim at the time of processing, particularly when the amendment has been judicially held to be retrospective.
Retrospectivity Does Not Mean Automatic Refund
It is equally important to understand what the judgment does not say. The High Court has not directed automatic payment of a refund without scrutiny. It has directed the respondent to process the refund claim in light of VKC Footsteps, Ascent Meditech and Notification No.14/2022-Central Tax dated 05.07.2022. This means that the claim must still satisfy the statutory conditions.
Refund under Section 54 is subject to limitation, documentation, eligibility, computation and other procedural requirements. The retrospective application of the amended formula helps the taxpayer overcome the earlier formula-based objection, but it does not exempt the taxpayer from compliance with the rest of the refund framework.
This balance is important for officers and professionals. The taxpayer cannot be denied refund merely by relying on the old formula if the amended formula applies retrospectively. At the same time, the Department can still verify the claim in accordance with law. The proper result is lawful processing, not mechanical rejection or mechanical sanction.
The Two-Year Limitation Still Matters
Ascent Meditech had recognised that the amended formula would apply to rectification applications filed within two years as per the time period prescribed under Section 54(1) of the CGST Act. This limitation aspect should not be overlooked. Retrospective or curative application does not erase the statutory limitation.
Therefore, taxpayers seeking benefit of amended Rule 89(5) must examine whether the claim, rectification request or proceeding is still alive within the statutory framework. If the matter is pending, live or capable of being processed within limitation, the amended rule may provide substantial relief. If the matter is closed and time-barred, the analysis may be different.
For professionals, the practical advice is to preserve the procedural record. The dates of the refund application, deficiency memo, rectification request, correspondence, and litigation history may become decisive. The benefit of a curative amendment is strongest where the claim has not attained final closure.
Refund Administration Must Follow the Current Legal Position
The judgment gives a useful signal to refund authorities. Where a taxpayer relies on VKC Footsteps, Ascent Meditech and Notification No.14/2022-Central Tax dated 05.07.2022, the refund claim should not be rejected mechanically on the basis of the earlier formula. The authority must examine whether the amended formula applies and then process the claim accordingly.
This approach reduces avoidable litigation. It also aligns administrative action with the current legal position. Refund administration under GST must remain responsive to amendments, clarifications and binding judicial decisions. A deficiency memo or earlier objection should not become a permanent barrier if the law itself has moved forward.
At the same time, officers remain entitled to verify the claim. The judgment does not prevent examination of documents, figures, eligibility and limitation. It only prevents denial of processing on a legal basis that has been overtaken by subsequent curative amendment and judicial recognition.
Refund Law Must Move With Curative Amendments
Pranav Overseas LLP confirms that live inverted-duty refund claims must be examined in light of the amended Rule 89(5), where the amendment has been treated as curative and clarificatory. The earlier formula-based objection cannot continue to block refund processing now that the legal position has advanced.
The legal path is now settled. VKC Footsteps upheld the earlier formula but recognised the anomaly. Notification No. 14/2022-Central Tax, dated 05.07.2022, corrected the formula. Ascent Meditech treated the correction as retrospective, and the Supreme Court declined to interfere. Pranav Overseas applies that position and directs the processing of the refund claim within 12 weeks. For senior officers and professionals, the message is clear: curative amendments are meant to cure, and refund administration must give them practical effect.
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