HC upholds Rule 89(5) on refund of unutilized input tax credit, directing release within three months

The HC upheld the validity of Rule 89(5) regarding the refund of unutilized input tax credit, aligning with the SC's ruling in Union of India v. VKC Footsteps. The Court found the formula neither ambiguous nor unworkable, despite potential inequities. The respondents failed to justify a different interpretation. Consequently, the HC directed the release of the specified refund amounts to the petitioners within three months from receipt of the order. The petitions were allowed.

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ISSUES:

Whether the amended formula in Rule 89(5) of the GST Rules, 2017, as notified by Notification No. 14/2022 dated 05.07.2022, applies prospectively or retrospectively to refund claims filed before that date.Whether the refund of unutilized input tax credit (ITC) attributable to input services is admissible under Section 54(3) of the GST Act read with Rule 89(5) of the GST Rules.Whether the formula prescribed under Rule 89(5) of the GST Rules is ultra vires Section 54(3) of the GST Act or otherwise defective.Whether a second or rectification refund application filed within the two-year period prescribed under Section 54(1) of the GST Act is maintainable.Whether the Circular dated 10.11.2022 clarifying the amendment as not clarificatory and applicable prospectively is valid.

RULINGS / HOLDINGS:

The amended formula under Rule 89(5) of the GST Rules is applicable retrospectively to refund or rectification applications filed within the two-year period as prescribed under Section 54(1) of the GST Act; the amendment is "curative and clarificatory in nature."Refund of unutilized input tax credit attributable to input services is admissible under Section 54(3) of the GST Act and must be calculated as per the amended formula incorporating ITC on both inputs and input services.The formula prescribed under Rule 89(5) is not ultra vires the GST Act; it gives effect to Section 54(3)(ii) by distinguishing between input goods and input services for grant of refund, and judicial intervention to recraft the formula is impermissible.A second or rectification refund application filed within the prescribed two-year period is maintainable and there is no embargo on such applications where the petitioner is entitled to the refund.The Circular dated 10.11.2022, to the extent it states that the amendment is not clarificatory and applies only prospectively, is quashed and set aside as contrary to the provisions of the GST Act and judicial precedent.

RATIONALE:

The Court applied the legal framework under Section 54 of the GST Act, which governs refund claims, particularly subsection (3) dealing with refund of unutilized input tax credit due to inverted duty structure, and the two-year limitation period under Section 54(1).The Court relied on the authoritative interpretation by the Supreme Court affirming the validity of Rule 89(5) and recognizing the distinction between input goods and input services in refund calculations, while urging the GST Council to address anomalies in the formula.The GST Council's amendment to Rule 89(5) was held to be a "curative and clarificatory" measure implementing the Supreme Court's directions, thus entitling taxpayers to refunds calculated under the amended formula even for claims filed before 05.07.2022, provided they are within the statutory limitation period.The Court rejected the revenue's contention that the amendment applies only prospectively, emphasizing that such a view would cause discrimination and inequality among similarly situated taxpayers, contrary to the legislative intent and principles of natural justice.The Court referenced binding precedent on the retrospective effect of clarificatory notifications and the maintainability of subsequent refund applications within the limitation period, thereby reinforcing the legality of rectification applications for differential refunds.

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