Refund claim allowed for accumulated ITC despite filing after notification date under Section 54(1) CGST Act

Gujarat HC allowed petitioner's refund claim for accumulated ITC, quashing rejection orders dated 24.02.2023 and 30.01.2023. Revenue authorities wrongly rejected refund applications filed after 18.07.2022 despite being within statutory two-year limitation period under Section 54(1) CGST Act. Following Patanjali precedent, HC held that mere filing after notification date cannot deny refund when application is within statutory limitation period. The circular creating artificial classification based on filing date was deemed invalid for refund claims pertaining to same period.

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The core legal questions considered by the Court are:

1. Whether the restriction on refund of unutilized Input Tax Credit (ITC) arising from an inverted duty structure, as imposed by Notification No. 09/2022-Central Tax (Rate) dated 13.07.2022 and Circular No. 181/13/2022-GST dated 10.11.2022, applies prospectively only or also retrospectively to refund claims filed after 18.07.2022 but pertaining to periods prior to that date.

2. Whether Circular No. 181/13/2022-GST, particularly paragraph 2(2) which restricts refund claims filed after 18.07.2022 regardless of the period to which the refund pertains, is ultra vires Section 54 of the Central Goods and Services Tax Act, 2017 ("CGST Act") and violative of Article 14 of the Constitution of India.

3. Whether the petitioner is entitled to claim refund of accumulated ITC for periods prior to 18.07.2022 despite the issuance of Notification No. 09/2022 and Circular No. 181/13/2022-GST.

4. Whether the refund application filed for the period September to November 2018 is barred by limitation under Section 54(1) of the CGST Act.

Issue-wise Detailed Analysis

Issue 1 & 2: Prospective vs Retrospective Application of Notification No. 09/2022 and Circular No. 181/13/2022-GST

The legal framework revolves around Section 54 of the CGST Act, which governs refund of tax, including unutilized ITC under an inverted duty structure. Section 54(1) provides a two-year limitation period for filing refund claims from the relevant date. Notification No. 09/2022 amended the earlier Notification No. 5/2017, restricting refunds for specified goods, including those under Chapter 15, effective from 18.07.2022. Circular No. 181/13/2022-GST issued clarifications on the applicability of this restriction.

The Circular stated that the restriction would apply prospectively, i.e., only to refund applications filed on or after 18.07.2022. However, paragraph 2(2) of the Circular controversially extended the restriction to all refund applications filed after 18.07.2022, even if they pertained to periods prior to that date.

The Court examined the petitioner's submissions that such retrospective application is contrary to the express language of the Notification, which clearly states prospective effect, and violates the statutory scheme under Section 54(1) that allows refund claims within two years. The petitioner relied on precedents including the judgment in Patanjali Foods Limited, where this Court struck down paragraph 2(2) of Circular No. 181/13/2022-GST as ultra vires and violative of Article 14 (right to equality), holding that the Circular created an artificial and arbitrary classification based on the date of filing rather than the period of refund claim.

The Court noted that the restriction imposed by Notification No. 09/2022 was introduced for the first time on 13.07.2022 with explicit prospective effect from 18.07.2022. Therefore, refund claims relating to periods before this date and filed within the statutory limitation period cannot be denied merely because the filing date is after 18.07.2022. The Circular's attempt to deny such claims was held to be discriminatory and beyond the powers conferred by Section 54.

Further, the Court relied on the principle that circulars issued under Section 168 of the CGST Act are only clarificatory and cannot override the express provisions of the statute. The petitioner's reliance on judgments such as Jenefa India and Pitambra Books Pvt. Ltd. was accepted, affirming that refund claims under the statute constitute a vested right once the conditions are met.

Issue 3: Entitlement to Refund of Accumulated ITC for Periods Prior to 18.07.2022

The petitioner's case was that the accumulated ITC until 17.07.2022 remained eligible for refund under Section 54(3) of the CGST Act, notwithstanding the amendment by Notification No. 09/2022. The petitioner had filed refund applications for various periods from 2018 to 2020, all rejected on the basis of Circular No. 181/13/2022-GST.

The Court, following the precedent in Patanjali Foods Limited, held that the petitioner is entitled to refunds for periods prior to the effective date of the restriction notification, provided the refund applications were filed within the statutory two-year limitation period. The rejection orders relying on the Circular's retrospective application were quashed and set aside.

The Court directed the respondents to process the petitioner's refund applications (except the one barred by limitation) in accordance with law within twelve weeks from the date of receipt of the judgment.

Issue 4: Limitation Bar on Refund Application for September to November 2018

The petitioner's refund application for the period September to November 2018 was filed on 20.01.2023. The Court observed that under Section 54(1), the refund claim must be filed within two years from the relevant date. The last date for filing the refund claim for the said period was 25.10.2022 (accounting for extensions). Therefore, this refund claim was barred by limitation.

Consequently, the Court upheld the rejection of this particular refund application on limitation grounds, independent of the Circular or Notification issues.

Treatment of Competing Arguments

The respondents relied on Circular No. 181/13/2022-GST to justify rejection of refund claims filed after 18.07.2022, irrespective of the refund period. The Court rejected this argument, holding that the Circular's paragraph 2(2) was ultra vires and discriminatory. The respondents did not contest the limitation argument for the September-November 2018 claim, which the Court accepted.

Significant Holdings

The Court held:

"The restriction contained in Notification No. 09/2022-Central Tax (Rate) dated 13.07.2022 has prospective effect only and cannot be applied retrospectively to deny refund claims filed within the statutory period for periods prior to 18.07.2022."

"Paragraph 2(2) of Circular No. 181/13/2022-GST dated 10.11.2022, which restricts refund claims filed after 18.07.2022 even if pertaining to periods before that date, is ultra vires Section 54 of the CGST Act and violative of Article 14 of the Constitution of India."

"Refund claims filed within the two-year limitation period under Section 54(1) for periods prior to the effective date of the restriction notification cannot be denied on the basis of the date of filing alone."

"Refund application for the period September to November 2018 filed on 20.01.2023 is barred by limitation and rightly rejected."

Accordingly, the Court quashed and set aside the refund rejection orders for all claims except the one barred by limitation and directed the respondents to process the eligible refund claims in accordance with law within twelve weeks.

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