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 years were arbitrary and invalid. The court ruled that exporters cannot be denied refunds of accumulated Input Tax Credit merely because exports occurred in a different financial year than when the credit was earned. The restriction blocked the petitioner's capital of Rs. 30 crores in unutilized ITC, contrary to the fundamental spirit of GST law. The court directed authorities to process the refund claim in accordance with law, emphasizing that businesses cannot be constrained by arbitrary executive restrictions on when to export. Petition allowed by way of remand.

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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.

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