Bombay High Court Holds Amended Rule 89(5) of CGST Rules on Inverted Duty Refunds Applies Retrospectively to Claims Filed Within Two Years

Background and Context
The petitioner, an unincorporated joint venture between China Harbour Engineering Company and Tata Projects Limited, engaged in metro rail construction for the Mumbai Metropolitan Region Development Authority, challenged the rejection of its refund claims for accumulated input tax credit (ITC) arising from an inverted duty structure under the Goods and Services Tax (GST) regime. The claims were rejected by both the original and appellate authorities.

The petitioner had filed refund applications for the period between August 2018 and March 2021, contending that it paid GST at 12% on outward supplies while procuring inputs and input services taxed at higher rates (18% and 28%), resulting in accumulation of ITC. The claims were made under Section 54(3)(ii) of the CGST Act.

Legal Developments and Submissions
The petitioner relied on the Gujarat High Court’s decision in Ascent Meditech Ltd. v. Union of India, which held that the amendment to Rule 89(5) of the CGST Rules—introduced by Notification No.14/2022 dated 5 July 2022—was clarificatory and thus retrospective, applicable to refund claims filed within two years as prescribed under Section 54 of the CGST Act. The petitioner argued that the appellate authority failed to consider this legal position and the clarifications issued by the Central Board of Indirect Taxes and Customs (CBIC) in Circular No.181/13/2022-GST.

The respondents, however, relied on the CBIC circular, which stated that the amended formula would apply only prospectively to refund applications filed on or after 5 July 2022.

Court’s Analysis and Reasoning
The Bombay High Court examined the legislative and judicial developments, including the Supreme Court’s decision in Union of India v. VKC Footsteps India Pvt. Ltd., which upheld the validity of Rule 89(5) but urged the GST Council to reconsider the formula due to anomalies. The GST Council subsequently recommended, and the CBIC notified, an amended formula for refund calculation.

The Court noted that the Gujarat High Court in Ascent Meditech Ltd. had held the amendment to be clarificatory and curative, intended to remove anomalies and harmonize the formula for refund calculation. The Gujarat High Court further held that the CBIC circular, to the extent it limited the amendment’s applicability to prospective claims, was contrary to the statutory amendment and the Supreme Court’s directions. The Supreme Court dismissed the Union of India’s challenge to this view, thereby affirming the retrospective application of the amendment.

The Bombay High Court found that the appellate authority had failed to consider this settled legal position and had erroneously rejected the petitioner’s refund claims. The Court emphasized that denying the benefit of the amended formula to claims filed within the statutory period would result in discrimination and inequality among taxpayers.

Decision and Legal Principle
The Court quashed the orders of the original and appellate authorities, holding that the petitioner is entitled to a refund under Section 54(3) of the CGST Act, applying the amended Rule 89(5) retrospectively to claims filed within two years. The Court expressly aligned itself with the Gujarat High Court’s interpretation, now final in view of the Supreme Court’s dismissal of the Union’s appeals.

Conclusion
This judgment clarifies that the amendment to Rule 89(5) of the CGST Rules, as notified by Notification No.14/2022, is to be applied retrospectively to all refund applications filed within the statutory two-year period, regardless of whether they were filed before or after 5 July 2022. The decision ensures uniformity and fairness in the treatment of refund claims arising from the inverted duty structure under GST.