2020 (2) TMI 169 - HC - GST

GST Circulars restricting refund claims for unutilized CENVAT credit across different financial years ruled arbitrary and invalid

The Delhi HC held that GST Circulars No.37/11/2018 and No.125/44/19 restricting refund claims for unutilized CENVAT credit across different financial ... Refund of unutilised input tax credit - zero rated supply - restriction on refund claims spreading across different financial years - administrative circulars cannot impose conditions inconsistent with statutory rights - power to prescribe conditions and safeguards for refundRefund of unutilised input tax credit - restriction on refund claims spreading across different financial years - administrative circulars cannot impose conditions inconsistent with statutory rights - Validity of paragraph 8 of Circular No.125/44/2019-GST dated 18.11.2019 insofar as it prohibits filing refund claims for periods that spread across different financial years - HELD THAT: - The Court, on a prima facie appraisal, held that paragraph 8's prohibition on refund claims spreading across different financial years lacks rationale and arbitrarily curtails the statutory right conferred by Section 16(3) of the IGST Act read with Section 54(3) of the CGST Act and the refund mechanism under Rule 89. The court noted that exporters may incur input tax credit in one financial year while exports crystallise in another, and that such business realities justify allowing refund claims not artificially confined by financial year boundaries. Relying on the principle that circulars represent the executive's understanding but cannot override or introduce conditions inconsistent with statute, the Court observed that the impugned restriction effectively deprives the petitioner of the vested right to claim refund of unutilised ITC and undermines the object of zero rated supply provisions and incentives to exporters.Prima facie, paragraph 8 of Circular No.125/44/2019-GST insofar as it prohibits refund claims that spread across different financial years is arbitrary; the Court stayed its operation till the next date of hearing.Refund of unutilised input tax credit - power to prescribe conditions and safeguards for refund - Interim directions to enable filing and processing of the petitioner's refund claim during the pendency of proceedings - HELD THAT: - In exercise of its supervisory jurisdiction and having regard to the petitioner's asserted accumulation of unutilised ITC and the prima facie conclusion on the illegitimacy of the circularal restriction, the Court directed respondents to enable the petitioner to file the refund electronically by re opening the online portal or to accept the refund claim manually within four weeks. The respondents were further directed to process the claim in accordance with law once filed. The direction is interim, preserving respondents' ability to answer merits on affidavit.Respondents directed to enable electronic filing or accept manual filing of the petitioner's refund claim within four weeks and to process the claim in accordance with law; stay of paragraph 8 to operate until next date.Final Conclusion: On a prima facie basis the Court concluded that the impugned restriction in paragraph 8 is arbitrary and stayed its operation; respondents were directed to permit the petitioner to file its refund claim (electronically or manually within four weeks) and to process the claim in accordance with law pending further adjudication. Issues Involved:1. Validity of Circular No. 37/11/2018-GST and Circular No. 125/44/19-GST.2. Entitlement to refund of unutilised input tax credit (ITC) for zero-rated supplies.3. Interpretation of relevant provisions under the IGST Act and CGST Act.4. Restriction on refund claims across different financial years.Detailed Analysis:Validity of Circular No. 37/11/2018-GST and Circular No. 125/44/19-GST:The petitioner challenged Circular No. 37/11/2018-GST dated 15.03.2018 and Circular No. 125/44/19-GST dated 18.11.2019, arguing that these circulars impose restrictions that prevent the petitioner from claiming refunds of unutilised input tax credit (ITC) for the period from April 2018 to June 2018. The petitioner contended that paragraph 8 of Circular No. 125/44/2019-GST, which inhibits refund claims for periods spanning different financial years, contravenes Section 44 and Rule 89 of the IGST rules.Entitlement to Refund of Unutilised Input Tax Credit (ITC) for Zero-Rated Supplies:The petitioner, engaged in exporting books, argued that under Section 16(1)(a) of the IGST Act, their export activity is classified as zero-rated supplies. Consequently, they are entitled to claim a refund of unutilised ITC. Section 16(3) of the IGST Act allows a registered person making zero-rated supplies to claim a refund of unutilised ITC by supplying goods under bond or Letter of Undertaking without payment of integrated tax, and then claiming a refund of unutilised ITC as per Section 54 of the CGST Act.Interpretation of Relevant Provisions under the IGST Act and CGST Act:The petitioner relied on several provisions, including Article 286(1) of the Constitution of India, Section 2(5) of the IGST Act defining 'export of goods,' and Section 16(1)(a) of the IGST Act, which deals with zero-rated supply. They also referenced Section 54(1) and Section 54(3) of the CGST Act, which provide the framework for claiming refunds of unutilised ITC. The petitioner argued that the impugned circulars, by restricting refund claims to a single financial year, are ultra vires the Act.Restriction on Refund Claims Across Different Financial Years:The petitioner highlighted that the restriction imposed by the circulars, which prevents refund claims from spanning different financial years, is arbitrary and lacks justification. They argued that this restriction blocks significant amounts of unutilised ITC, causing financial hardship. The court observed that the restriction is indeed arbitrary and that businesses cannot be dictated by the executive authorities regarding the timing of exports and related activities. The court emphasized that the restriction contradicts the fundamental spirit and object of the law, which aims to facilitate refunds for zero-rated supplies.Interim Relief and Directions:The court, recognizing the prima facie case of the petitioner, stayed the operation of paragraph 8 of Circular No. 125/44/2019-GST and directed the respondents to either open the online portal for filing tax refunds electronically or accept manual filings within four weeks. The respondents were also instructed to process the petitioner’s refund claims in accordance with the law once filed.Conclusion:The court found the restrictions imposed by the impugned circulars to be arbitrary and contrary to the provisions of the IGST and CGST Acts. The interim order provided relief to the petitioner, allowing them to file refund claims spanning different financial years, and directed the respondents to process these claims in accordance with the law.