Refund of accumulated ITC petition allowed, Section 73 demand order quashed following Patanjali Foods precedent

The Gujarat HC allowed the petition challenging refund of accumulated ITC. The court relied on Patanjali Foods Ltd. v. Union of India, striking down para 2(2) of Circular No. 181/13/2022-GST dated 10.11.2022. Despite respondents initially granting refund via sanction order dated 12.01.2024, they subsequently issued show cause notice under Section 73 CGST Act in Form GSTDRC-01, resulting in demand confirmation of Rs.1,70,07,091/- plus penalty of Rs.17,00,709/- through Order-in-Original dated 10.09.2024. The HC quashed and set-aside both the impugned refund application order dated 31.3.2023 and appellate order dated 29.2.2024, declaring them illegal and unsustainable. The petition was allowed in petitioner's favor.

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ISSUES:

Whether refund applications filed under Section 54 of the Central Goods & Services Tax Act, 2017 (CGST Act) within the statutory period of limitation are liable to be rejected on the ground that the refund application was filed after the effective date of Notification No. 9/2022 dated 13.07.2022, which restricts refund of unutilized input tax credit (ITC) for certain goods.Whether Notification No. 9/2022 dated 13.07.2022, effective from 18.07.2022, applies retrospectively to refund claims relating to periods prior to 18.07.2022.Whether Circular No. 181/13/2022 dated 10.11.2022, which clarifies the applicability of Notification No. 9/2022 and restricts refund applications filed on or after 18.07.2022, is valid and consistent with Section 54 of the CGST Act and principles of equality under Article 14 of the Constitution of India.Whether a show-cause notice and demand under Section 73 of the CGST Act issued after a refund sanction order has become final, without appeal or revision by the department, is sustainable.

RULINGS / HOLDINGS:

The refund applications filed within the statutory period prescribed under Section 54(1) of the CGST Act for periods prior to 18.07.2022 cannot be rejected solely because the applications were filed after the effective date of Notification No. 9/2022; the notification applies prospectively only.Notification No. 9/2022 dated 13.07.2022 expressly states that it "shall come into force on the 18th day of July, 2022" and therefore does not apply retrospectively to refund claims for periods prior to that date.Paragraph 2(2) of Circular No. 181/13/2022 dated 10.11.2022, which restricts refund applications filed on or after 18.07.2022 even if pertaining to periods before that date, is "wholly arbitrary, discriminatory and ultra-vires Section 54 of the GST Act as well as violating Article 14 of the Constitution of India" and is accordingly struck down.The grant of refund by sanction order dated 12.01.2024 became final in the absence of any appeal or revision by the department; consequently, the subsequent show-cause notice and demand order dated 10.09.2024 under Section 73 of the CGST Act are illegal and unsustainable and are quashed and set aside.

RATIONALE:

The Court applied the statutory framework of the CGST Act, particularly Section 54(1) which prescribes a two-year limitation period for filing refund applications, and Section 54(3)(ii) concerning refund restrictions.Notification No. 9/2022 was examined in light of its express effective date (18.07.2022), and the Court held that restrictions therein apply prospectively, consistent with the principle that tax notifications imposing restrictions are not retrospective unless expressly stated.The Court relied on precedent, notably the decision in Patanjali Foods Ltd. v. Union of India & Ors, which held that artificial classification of assessees based on the date of filing refund applications, despite applications being within the limitation period, is discriminatory and violates Article 14 of the Constitution.The Court also referred to the decision in Ascent Meditech, which quashed similar clarificatory circular provisions for being arbitrary and ultra vires, reinforcing the principle that amendments or restrictions in refund provisions must not create unreasonable classifications or retrospective disqualifications.The principle of finality of quasi-judicial orders was applied to hold that once a refund sanction order becomes final without departmental challenge, subsequent demands or show-cause notices on the same issue are impermissible.

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