Recently, a landmark judgment was delivered by Bombay High Court on GST refund claims on inverted duty structure. Bombay High Court Says Rule 89(5) Amendment Applies Retrospectively to Old Refund Claims The Update Bombay High Court held notification 14/2022 amended CGST Rules rule 89(5) is retrospective.
Recently, a landmark judgment was delivered by Bombay High Court on GST refund claims on inverted duty structure. The Court held that the amended notification no. 14/2022 CGST Rules No. 89 (5) is clarificatory and retrospective & the effect of which is that if the applications are filed before 05.07.2022, refund benefits cannot be denied to the taxpayer. This is expected to be a huge relief to the businesses in credit of input tax as input GST rates exceeds the output GST rates.
Key Takeaways
- Recently, a landmark judgment was delivered by Bombay High Court on GST refund claims on inverted duty structure.
- Bombay High Court Says Rule 89(5) Amendment Applies Retrospectively to Old Refund Claims The Update Bombay High Court held notification 14/2022 amended CGST Rules rule 89(5) is retrospective.
- The main issue before the Bombay High Court was as to whether Notification 14/2022 was either prospective only or if it applied retrospectively to older refund claims (filed after collection) within the limitation period under Section 54 of the CGST Act.
- How the Bombay High Court Interpreted the Amendment?
- In that also, the Gujarat High Court had held Notification 14/2022 was retrospective and wrongly sought to apply the said amendment prospectively through Circular 181/2022.
Bombay High Court Says Rule 89(5) Amendment Applies Retrospectively to Old Refund Claims
The Update
Bombay High Court held notification 14/2022 amended CGST Rules rule 89(5) is retrospective. Inverted duty Refund applications filed before 05.07.2022.
The Impact
The decision is in favor of taxpayers' refund claims of accumulated ITC under inverted duty structures and nullifies the restrictive approach taken by the government in Circular 181/2022.
The Action
Businesses with inverted duty refund claims rejected or in pending status that were lodged before July 2022, can now check their refund protection eligibility.
Background of the Dispute
The matter was between CHEC-TPL Line 4 Joint Venture, an unincorporated joint venture for Mumbai metro rail work for MMRDA involved in the construction of 4 line, which provided works contract services seeking to be taxed at GST of 12% as a recipient of input and input services which attracted GST rates of 18% and 28%.
Due to higher rate of input tax compared to rate of output tax, lots of input tax credit was accumulated with the Petitioner, creating an inverted duty structure situation under Section 54(3) of the CGST Act.
Why the Taxpayer Claimed Refund?
The petitioner had filed several refund applications in the period 2018 to 2021 for refund of accumulated ITC because of inverted tax structure. The refund claims were for various periods over Aug 2018 to Mar 2021 and cumulatively Rs.12 crore. The petitioner argued that it was entitled by law to refund of unavailed ITC as the GST paid on inputs and input services was greater than GST payable on outward supplies.
How the Refund Claims Were Rejected?
The refund claims were spurned back again and again from the GST authorities. First the rejection was based on the finding by the Supreme Court in VKC Footsteps wherein the Court upheld the validity of Rule 89(5) and refused to bring input services under the definition of 'Net ITC' for calculating refund.
Later, after petitioner had re-filed refunds claims using the updated formula, which was later brought in through Notification 14/2022, the authorities rejected the claims stating that the amended formula was applicable prospectively from 05.07.2022 only.
What Changed Through Notification 14/2022?
Notification No. 14/2022 has made changes to Rule 89(5) of the CGST Rules%20Rules%202017&searchradio=rules) on the recommendations of the GST Council. The expenditure was intended to "correct anomalies in the refund formula" identified by the Supreme Court in VKC Footsteps. The new formula provided adopted the "moved closer to bringing the numerator and denominator into line with one another". But during a Circular 181/2022 Widen to a public that Explain, it mentions, that the revised formula shall apply only to refund applications filed on or after 05.07.2022.
Why the Retrospective Issue Became Important?
The main issue before the Bombay High Court was as to whether Notification 14/2022 was either prospective only or if it applied retrospectively to older refund claims (filed after collection) within the limitation period under Section 54 of the CGST Act. The petitioner stated that the amendment being clarificatory and curative, was necessitated to do away with anomalies which by the time of the amendment had been identified by the Supreme Court. As a result, the petitioner argues that the change in the law must apply to refund applications filed before July 2022.
How the Bombay High Court Interpreted the Amendment?
The Bombay High Court agreed with the taxpayer and held that Notification 14/2022 was only clarificatory. The Court noticed that the change was made to eliminate anomalies in the refund formula and as well as bringing it in compliance with the recommendations of GST Council following observations made by Supreme Court in VKC Footsteps. Having determined that the amendment was curative and explanatory, the Court decided that it should not be limited solely to those applications for future refunds.
Why the Court Relied on Ascent Meditech?
The Hon'ble Bombay High Court was attracted to the Gujarat High Court ruling in case of Ascent Meditech Ltd. v. Union of India. In that also, the Gujarat High Court had held Notification 14/2022 was retrospective and wrongly sought to apply the said amendment prospectively through Circular 181/2022. Crucially, the Supreme Court had earlier rejected the appeals filed challenging the Gujarat High Court verdict, putting the position of law to rest.
Court’s Observations on GST Council Recommendations
The Court observed that the GST Council also had re looked into the refund formula after the anomalies in VKC Footsteps were pointed out by the Supreme Court.
The Council also accepted that the previous calculation unfairly presumed that the output tax liability was paid in full solely by the ITC on inputs, neglecting the utilisation of the ITC on input services.
The intent behind the amendment provided through Notification 14/2022 was so to address this imbalance and to make the refund formula workable and fair.
Why Circular 181/2022 Was Rejected?
The Court concluded, that Circular 181/2022 could not prevail against the real purpose of the amendement. Reading Bench, on finding the amendment can be clarificatory and curative, then it would lead to an artificial discrimination between the taxpayers who after that had filed refund applications before and after 05.07.2022 were sought to be created by a circular. The Court After that ruled that refund claims which fell within the statutory period of limitation were entitled to the benefit of the amended formula.
Conclusion
The decision of the Bombay High Court, is a significant step in GST jurisprudence related to refund. By allowing Notification 14/2022 to be made retrospective, the Court thereby facilitated that taxpayers' valid rights of refund are not delayed due to filing of refund claim before the amendment date. The conclusion also confirms that no administrative circulars can prevent the scope of statutory amendments directed towards correcting unfair tax consequences.
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Bombay High Court Allows Retrospective Benefit of Rule 89(5) Amendment for Inverted Duty Refunds+
Recently, a landmark judgment was delivered by Bombay High Court on GST refund claims on inverted duty structure. Bombay High Court Says Rule 89(5) Amendment Applies Retrospectively to Old Refund Claims The Update Bombay High Court held notification 14/2022 amended CGST Rules rule 89(5) is retrospective.