Circular limiting ITC refunds to claims filed before 18 July 2022 found arbitrary; Section 54 preserves two-year refund right

HC allowed the petition, holding that Circular No.181/13/2022-GST (10.11.2022) to the extent it confines refund of Input Tax Credit (ITC) to applications filed on or before 18.07.2022 is illegal and arbitrary and violative of Article 14. The court ruled that section 54 gives a two-year limitation to claim refunds, and ITC accrues on the date of purchase and cannot be extinguished by the post-facto clarification. The impugned portion of the circular was quashed; claimants may seek refunds within the statutory two-year period.

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ISSUES PRESENTED AND CONSIDERED

1. Whether manufacturers who purchased goods placed on the negative list by Notification dated 13.07.2022 (effective 18.07.2022) are entitled to claim refund of accumulated Input Tax Credit (ITC) for purchases made up to the date the notification became enforceable.

2. Whether the clarificatory Circular dated 10.11.2022 (Point No.2) which restricts refund entitlement to only those refund applications filed before 18.07.2022 is legally sustainable, having regard to Section 54 of the CGST Act, 2017, the text of the Notification dated 13.07.2022 and constitutional guarantees (Article 14, Article 19(1)(g), Article 300A).

3. Whether the respondents were obliged to decide pending refund applications filed after 18.07.2022 but within the statutory limitation period, and whether reliance on the Circular to deny or defer such claims was permissible.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Entitlement to refund of ITC for purchases up to date of enforceability of Notification

Legal framework: Section 54(3) (as explained by the Court) allows refund of unutilised ITC where inputs bear a higher tax rate than outputs (inverted duty structure). Notification dated 13.07.2022 specified certain goods (including those under HSN 1514) in respect of which no refund shall be allowed, made effective from 18.07.2022.

Interpretation and reasoning: The Court construed the Notification as operative from 18.07.2022 and held that rights to ITC accrue on the date goods are purchased; therefore, where purchases occurred prior to 18.07.2022, the statutory entitlement to seek refund under section 54 remained intact. The Notification did not expressly extinguish rights accrued before its effective date.

Precedent treatment: The Court relied on authoritative precedent of the highest court (as cited in the judgment) recognizing that tax/credit rights which have accrued cannot be retrospectively denied by executive action. That precedent was applied to support the proposition that accrued ITC is indefeasible.

Ratio vs. Obiter: Ratio - accrued ITC up to the effective date of a notification removing refund entitlement cannot be taken away by that notification; such accrued rights survive and remain claimable under section 54 subject to statutory conditions.

Conclusions: Manufacturers who purchased the specified goods up to 18.07.2022 retain the right to claim refund of ITC for those purchases under section 54, subject to fulfillment of other conditions and verification.

Issue 2 - Legality of Circular dated 10.11.2022 (Point No.2) restricting refunds to applications filed before 18.07.2022

Legal framework: The Circular is an executive clarification issued by the central tax administration addressing applicability of Notification dated 13.07.2022 to pending or future refund applications. Section 54 prescribes a two-year limitation period for refund claims.

Interpretation and reasoning: The Court examined the Circular and concluded that it introduced an additional embargo not present in the Notification or the statute by effectively denying refund claims for periods before 18.07.2022 unless the refund application was already filed before that date. The Court found this to be inconsistent with the Notification's text and the statutory two-year claim period. The Circular was held to curtail substantive rights accrued prior to the notification's effective date and to impose an irrational requirement (filing before the effective date) that could not reasonably be expected of assessees.

Precedent treatment: The Court noted that other High Courts have taken similar views in analogous matters and that a higher court's jurisprudence recognizing indefeasibility of accrued tax credits supported invalidation of retrospective curtailment. The judgment also records that leave petitions against some similar decisions were dismissed by the apex court, indicating judicial trend favorable to claimants (as reported in the judgment).

Constitutional analysis: The Court applied Article 14 and concluded that the Circular creates arbitrary classification between those who filed refund applications before 18.07.2022 and those who filed after, despite identical factual entitlement and identical statutory limitation; such classification lacks intelligible differentia and rationale. The Circular also infringed freedom to carry on business and property rights (Article 19(1)(g) and Article 300A) to the extent it extinguished accrued rights.

Ratio vs. Obiter: Ratio - the Circular (Point No.2) is illegal and arbitrary to the extent it denies refund eligibility for claims relating to purchases made up to the notification's effective date when refund applications were filed after that date but within the statutory limitation. Obiter - references to comparative decisions of other High Courts and comments on their subsequent treatment by higher courts were used as supporting reasoning rather than the sole basis of decision.

Conclusions: The Circular's relevant portion is quashed to the extent it confines refund entitlement to applications filed before 18.07.2022; it cannot be used to deny or defer refund claims arising from purchases made up to 18.07.2022 where the statutory limitation period for filing is otherwise met.

Issue 3 - Duty to decide pending refund applications and permissible reliance on the Circular

Legal framework: Administrative authorities must decide applications in accordance with law and may not rely on an unlawful or quashed executive clarification to deny statutory rights.

Interpretation and reasoning: Because the Circular (Point No.2) was held illegal to the extent described, respondents could not legitimately rely on it to refuse or indefinitely withhold decision on refund applications filed after 18.07.2022 but within the statutory period. The Court directed adjudicatory action on the petitioner's pending applications within a fixed time-frame and with instructions not to rely on the quashed portion of the Circular.

Ratio vs. Obiter: Ratio - administrative authorities must consider and decide refund applications in accordance with law and without reliance on invalid executive clarification; where applications fall within statutory entitlement, they must be adjudicated on merits within a reasonable/mandated period.

Conclusions: Respondents are directed to decide the pending refund applications (filed after 18.07.2022) within three months, without reliance on the quashed portion of the Circular, applying the statutory provisions and usual verification processes.

Cross-references and Final Determination

The Court linked Issues 1-3: the Notification's effective date preserves accrued ITC rights; the Circular illegally curtailed those rights; therefore, pending applications filed within the two-year limitation must be decided on merits without reference to the quashed clarification. The writ petition was allowed to that extent and the impugned part of the Circular declared illegal and quashed as specified.

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