The Punjab and Haryana High Court has held that the GST Department cannot use a circular to restrict a registered taxpayer’s statutory right to claim a refund of accumulated Input Tax Credit (ITC) arising from an inverted duty structure.

The Bench of Acting Chief Justice Ashwani Kumar Mishra and Justice Rohit Kapoor has observed that Section 54(3) of the Central Goods and Services Tax Act, 2017 expressly permits a registered person to claim a refund of unutilised ITC accumulated because the tax rate on inputs is higher than the tax rate applicable to outward supplies. A departmental circular cannot impose a restriction that is unsupported by the statutory provision.

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The petitioner had sought a refund of accumulated ITC on account of an inverted duty structure. The adjudicating authority initially accepted the claim and sanctioned the refund through an order dated September 28, 2022.

The favourable order was subsequently reversed by the appellate authority. While denying the refund, the appellate authority relied upon a departmental circular dated November 10, 2022.

The circular provided that refund applications filed after July 18, 2022 would not be admissible in respect of the goods subsequently excluded from the inverted duty refund mechanism.

Appearing for the petitioner, Senior Advocate Sandeep Goyal, assisted by Advocate Aditya Gupta, argued that the right to claim the refund originated directly from Section 54(3) of the CGST Act.

It was contended that the departmental circular could not curtail or override this statutory entitlement by making the date of filing the refund application decisive.

The petitioner maintained that the restriction introduced through the circular was arbitrary and contrary to the mandate of Section 54(3).

Reliance was placed on the Gujarat High Court’s decision in Patanjali Foods Limited v. Union of India and the Andhra Pradesh High Court’s ruling in Priyanka Refineries (P.) Ltd. v. Deputy Commissioner ST.

The Revenue opposed the petition and defended the rejection of the refund claim on the basis of the circular dated November 10, 2022.

Examining the statutory framework, the High Court noted that Section 54(3) permits a registered person to claim a refund of unutilised ITC at the end of a tax period where the credit has accumulated because the tax rate on inputs is higher than the tax rate on output supplies.

The provision also empowers the government to exclude specified goods or classes of goods from the benefit of the inverted duty refund through a notification.

The Court noted that the notifications issued during 2017 and 2018 excluding certain goods from the refund mechanism did not cover the goods supplied by the petitioner.

The petitioner’s goods were brought within the excluded category only through a notification dated July 13, 2022, which came into effect on July 18, 2022.

Consequently, until the notification became effective, the goods remained eligible for the refund contemplated under Section 54(3).

The High Court held that the circular did not provide any valid basis for limiting the refund benefit only to applications filed before July 18, 2022.

The Bench explained that until the goods were excluded through the notification, a registered taxpayer was entitled to claim a refund of unutilised ITC accumulated under the inverted duty structure.

The statutory provision permits the refund claim to be made until the end of the relevant tax period. Therefore, the Department could not insist, through an administrative circular, that even refund claims relating to an eligible period must necessarily have been filed before July 18, 2022.

“The circular, which has been relied upon by the respondents, does not furnish any basis to restrict the entitlement of refund only to applications made prior to 18.07.2022,” the Court observed.

It further held that since Section 54(3) permitted such a claim to be made until the end of the tax period, the restriction introduced by the circular could not receive judicial approval.

The Bench noted that the Gujarat and Andhra Pradesh High Courts had already disapproved the Department’s attempt to restrict refund claims through the November 10, 2022 circular.

It also referred to the Supreme Court’s decision in Assistant Commissioner of Central Taxes v. Gemini Edibles and Fats India Ltd., recording that the Special Leave Petition filed by the Department in the matter had failed.

Following these precedents and the language of Section 54(3), the High Court concluded that the petitioner’s statutory refund entitlement could not be defeated solely on the ground that the application had been submitted after July 18, 2022.

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