2025 (11) TMI 1265 - HC - GST

Clause 2 of Circular 181/13/2022-GST on Section 54(3) refund held invalid for retrospective restrictions

HC examined the constitutional validity of Clause 2 of Circular No. 181/13/2022-GST dated 10.11.2022, concerning refund of unutilised ITC under inverted ... Constitutional validity of Clause 2 of Circular No. 181/13/2022-GST dated 10th November, 2022 issued by Principal Commissioner (GST) under Section 54 (3) of the Central GST Act, 2017 - refund of unutilised input tax credit on account of inverted duty structure - HELD THAT:- In Priyanka Refineries [2025 (2) TMI 302 - ANDHRA PRADESH HIGH COURT], the Andhra Pradesh High Court has held that 'Circular No.181/13/2022-GST, dated 10.11.2022, would have to be struck down, to the extent of the clarification that the restriction imposed by the Notification, dated 13.07.2022, would be applicable in respect of all refund applications filed on or after 18.07.2022.' It is completely agreed with the view expressed by Andhra Pradesh High Court in Priyanka Refineries. No point of distinction has been drawn or established by the revenue as may commend a different view taken with respect to interpretation of an administrative Circular issued in the context of the central statute which has pan India application. The writ petitions are allowed in terms of the order passed in Priyanka Refineries. Consequently, the proceeding initiated vide notice dated 04.06.2024 (Annexure-9) is quashed. ISSUES PRESENTED AND CONSIDERED 1. Whether Clause 2 of Circular No.181/13/2022-GST (10.11.2022) clarifying that Notification No.09/2022-Central Tax (Rate) dated 13.07.2022 applies to refund applications filed on or after 18.07.2022 is ultra vires Section 54(3) of the Central GST Act, 2017. 2. Whether the restriction on refund of unutilised input tax credit (on account of inverted duty structure) specified by Notification No.09/2022-Central Tax (Rate) operates prospectively only (i.e., affects only credits arising on or after 18.07.2022) or also bars refunds for claims filed after 18.07.2022 in respect of periods prior to 18.07.2022. 3. Whether an administrative circular can create a classification based on date of filing of refund application (post-notification) that results in denial of refunds pertaining to pre-notification periods and whether such classification is arbitrary, discriminatory or violative of Article 14 and Section 54. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Validity and Interpretation of the Circular's Clarification vis-à-vis the Notification and Section 54 Legal framework: Section 54 of the CGST Act provides the statutory scheme for refunds of tax, including time limits for filing; Clause (ii) of the first proviso to subsection (3) empowers specification of classes where refund of unutilised input tax credit shall not be allowed. Notification No.09/2022 specified certain goods for which no refund of unutilised input tax credit shall be allowed and expressly came into force from 18.07.2022. Circular No.181/13/2022-GST issued a clarification interpreting temporal scope of the Notification and stated the restriction would apply to refund applications filed on or after 18.07.2022. Precedent treatment: The Andhra Pradesh High Court in Priyanka Refineries held that the Notification's prospective effective date (18.07.2022) means credits accumulated prior to that date remain recoverable by application under Section 54, and struck down the Circular insofar as it treated all applications filed on or after 18.07.2022 as barred. The Gujarat High Court reached similar conclusions, holding that the circular created an artificial class based on filing date and was arbitrary and ultra vires Section 54 and Article 14. The Andhra Pradesh decision attained finality upon dismissal of Special Leave to Appeal. Interpretation and reasoning: The Court adopts the reasoning that an express prospective effective date for the Notification confines the substantive restriction to credits arising after that date. A clarification which extends the restriction to refund applications filed after the effective date even where the credit accrued before the effective date effectively retroacts the Notification's temporal scope and frustrates the statutory right to seek refunds for pre-notification accruals within the time allowed by Section 54. The Circular's statement that applications cannot be made after 18.07.2022 is illogical and inconsistent with the prospectivity explicitly declared in the Notification and with the statutory refund regime (including the statutory limitation period and extensions made for filing). Ratio vs. Obiter: Ratio - An administrative circular cannot construe a notification with an express prospective date so as to bar refund claims for credits accrued prior to the prospective date merely because the refund application is filed after that date; such a clarification is inconsistent with Section 54 and is ultra vires to the extent it denies recovery of pre-notification credits. Obiter - Ancillary observations regarding leave to challenge the Notification itself being left open by prior Courts are non-decisive for the present ruling. Conclusions: The Court holds the Circular's Clause 2 (clarifying that the Notification's restriction applies to all refund applications filed on or after 18.07.2022) is ultra vires and must be struck down to the extent it denies refund claims for input tax credit accumulated prior to 18.07.2022. Refund applications filed before 18.07.2022 or refund claims pertaining to tax periods prior to 18.07.2022 cannot be denied solely because the application was presented after 18.07.2022, provided the underlying credit arose before the Notification's effective date and the claim is within the statutory time limit under Section 54. Issue 3: Legality of Classification Based on Date of Filing and Article 14 Considerations Legal framework: Article 14 prohibits arbitrary or discriminatory classification; Section 54 prescribes rights and limitations for refund claims. Administrative classifications must have intelligible differentia and rational nexus to statutory objectives. Precedent treatment: The Gujarat High Court applied Article 14 and prior High Court reasoning (Ascent Meditech) in concluding that creating an artificial class of assessees based solely on filing date, when claims relate to identical pre-notification periods and were filed within statutory time, is arbitrary and discriminatory. Interpretation and reasoning: The Court concurs that treating two claimants differently where both seek refunds for identical pre-notification tax periods and both filed within the statutory period, merely because one filed after the Notification's effective date, lacks rational nexus to the governmental objective announced by the Notification (which was expressly prospective). The circular's classification produces unequal treatment without legitimate justification and undermines the statutory refund scheme. Ratio vs. Obiter: Ratio - The Circular's creation of a filing-date-based class to deny refunds for pre-notification accruals is arbitrary and violates principles of equal treatment implicit in the statutory refund mechanism and Article 14. Obiter - Specific proportionality or alternative remedial formulations for administrative practice beyond quashing the impugned paragraph are not decided. Conclusions: The impugned paragraph of the Circular that discriminates on the basis of date of filing is ultra vires and unsustainable; refunds in respect of periods prior to the Notification's effective date cannot be denied on the sole ground that the application was filed after that date. Application of Precedent and Relief Legal framework & reasoning: Where prior High Court decisions interpreting the same central statute reached the conclusion that the Circular's clarification was unlawful and where such view has been rendered final in a connected matter, the Court concurs with that interpretation and applies the same principle nationally in adjudicating pending refund proceedings before it. Ratio vs. Obiter: Ratio - Reliance upon consistent High Court reasoning affirming the Circular's invalidity is operative in deciding the present petitions; the dismissal of Special Leave to Appeal in a connected matter reinforces finality of that view for purposes of present adjudication. Obiter - The Court does not adjudicate on the substantive validity of Notification No.09/2022-Central Tax (Rate) itself, leaving that question open for future proceedings. Conclusions: The petitions are allowed in terms of the reasoning adopted from the prior High Court decision; the notice dated 04.06.2024 initiating the concerned proceeding is quashed and pending refund applications are to be decided without relying upon the impugned clarification in Circular No.181/13/2022-GST. Proceedings and orders rejecting refunds solely on the basis of the Circular's Clause 2 are set aside and require reconsideration in accordance with Section 54 and the temporal effect of the Notification.