Refund of unutilized input tax credit allowed despite non-compliance with circular procedure under Section 54

Gujarat HC allowed the petition for refund of unutilized input tax credit on zero-rated supplies. The court held that despite non-compliance with Circular dated 04.09.2018 procedure requiring debiting of IGST amount, the petitioner had complied with statutory provisions under Section 54 of the Act and Rule 89(4) of CGST Rules by debiting the refund amount from electronic credit ledger. The respondent failed to issue deficiency memo within prescribed 15 days, and the appellate authority had accepted the refund claim on merits. The court ruled that statutory provisions prevail over circular procedures, and non-compliance with circular constitutes irregularity, not illegality, when substantive statutory rights exist.

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Issues Involved:

1. Validity of the order dated 30.06.2020 by the appellate authority allowing refund after debiting IGST.
2. Validity of the communication dated 14.07.2020 issued by respondent no.3.
3. Validity of paragraph 3.2 of the Circular dated 04.09.2018.
4. Entitlement of the petitioner to refund of unutilised input tax credit without IGST debit.
5. Claim for interest on the refund amount beyond 60 days from the date of filing the refund application.

Detailed Analysis:

1. Validity of the order dated 30.06.2020 by the appellate authority allowing refund after debiting IGST:

The petitioner filed a Special Civil Application under Article 226 of the Constitution of India to set aside the order dated 30.06.2020 passed by the respondent no.3 appellate authority. The order allowed refund to the petitioner after debiting the Integrated Goods and Services Tax (IGST) standing in the credit ledger account of the petitioner. The petitioner contended that the appellate authority's condition to debit IGST was not justified as the petitioner had already debited the required amount from the CGST and SGST balances as per Rule 89(3) of the CGST Rules. The court held that the petitioner's entitlement to the refund was not in dispute and the appellate authority had accepted the refund claim on merits.

2. Validity of the communication dated 14.07.2020 issued by respondent no.3:

The petitioner also sought to set aside the communication dated 14.07.2020 issued by respondent no.3, which reiterated the need to debit the IGST amount before processing the refund. The court found that the petitioner had complied with the provisions of Section 54(3) of the CGST Act and Rule 89(4) of the CGST Rules by debiting the total amount equal to the refund claim from the electronic credit ledger. The court declared that the communication dated 14.07.2020 was not valid as the petitioner had met the statutory requirements for claiming the refund.

3. Validity of paragraph 3.2 of the Circular dated 04.09.2018:

The petitioner challenged paragraph 3.2 of the Circular dated 04.09.2018, which required the refund amount to be debited in a specific sequence from the electronic credit ledger. The court observed that the circular was an administrative instruction issued under Section 168(1) of the CGST Act and could not override the statutory provisions of the Act and the Rules. The court held that the circular could not substitute, amend, or curtail the ambit or operation of Rule 89(3) of the CGST Rules, which the petitioner had duly observed. The court concluded that non-compliance with the sequence mentioned in the circular was an irregularity and not an illegality.

4. Entitlement of the petitioner to refund of unutilised input tax credit without IGST debit:

The petitioner claimed a refund of unutilised input tax credit on account of zero-rated supplies made without payment of tax. The court noted that the petitioner had debited the total amount of the refund claim from the electronic credit ledger as required by Rule 89(3) of the CGST Rules. The court held that the petitioner was entitled to the refund as the conditions of Section 54(3) of the CGST Act and Rule 89(4) of the CGST Rules were complied with. The court declared that non-compliance with the procedure in paragraph 3.2 of the circular would not dis-entitle the petitioner from claiming the refund amount.

5. Claim for interest on the refund amount beyond 60 days from the date of filing the refund application:

The petitioner claimed interest on the amount of Rs. 14,94,881/- for the period beyond 60 days from 17.04.2019, the date of filing the refund application, till actual payment. The court directed the respondent to make the payment of the refund amount of Rs. 21,71,74,611/- with statutory interest within eight weeks from the date of receipt of the order.

Conclusion:

The petition was allowed, and the court set aside the order dated 30.06.2020, the communication dated 14.07.2020, and the order in original dated 14.07.2020. The court declared that non-compliance with the procedure in paragraph 3.2 of the circular dated 04.09.2018 would not dis-entitle the petitioner from claiming the refund amount. The respondent was directed to make the payment of the refund with statutory interest within eight weeks.

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