The amendment to Rule 89(5) of the GST Rules is curative and clarificatory, applicable retrospectively to refund applications filed within two years under Section 54(1) of the GST Act.

JUDGMENT :

BHARGAV D. KARIA, J.

1. Heard learned advocate Mr. Uchit Sheth for the petitioner and learned advocate Mr. Hirak Shah and C.B. Gupta for the respondents in the respective petitions.

2. Rule returnable forthwith. Learned advocates for the respective respondents waive service of notice of rule.

3. Having regard to the controversy in narrow compass, with the consent of the learned advocates for the parties, the matter is taken up for hearing.

4. The petitioner has prayed for quashing and setting aside the order dated 24.08.2023 rejecting the refund application of the petitioner on the basis of the circular dated 10.11.2022. The petitioner has therefore, also challenged the said circular.

5. The petitioner is engaged in the business of manufacturing orthopedic soft goods for upper extremity, lower extremity and spine as well as mobility assistive devices for home and hotel use.

6. The applicable rate of tax on output supplies of the products manufactured by the petitioner is 5% as its majority of goods are classifiable under HSN90211000 whereas, the applicable rate of tax on main inputs used by the petitioner to manufacture its product ranges from 12% to 18%.

7. The petitioner also availed input services which attracted GST rate of 18%. The petitioner had utilized input tax credit on account of such facts as the rate of tax on the input being more than the rate of tax on the output supply.

8. The petitioner therefore made an application under section 54(3) of the GST Act to get the refund of unutilized input tax credit as per the formula prescribed in Rule 89(5) of the Central/Gujarat Goods and Services Tax Rules, 2017 (for short ‘the Rules’).

9. The petitioner was granted refund computed as per the formula under the inverted duty structure for all the applications made prior to 05.07.2022 on the ground that prior to 05.07.2022, by unamended formula, the petitioner was not entitled to include the input services as part of the formula and as the petitioner has made the refund application prior to 05.07.2022, as per the Notification No. 14/2022 dated 05.07.2022 read with Circular dated 10.11.2022, the petitioner was not entitled to the refund as per the amended formula.

10. It is the case of the petitioner that the formula for calculating the refund under Rule 89(5) of the GST Rules was challenged before different High Courts on the ground that it was ultra vires to section 54(3) of the GST Act and as the refund in respect of unutilized input tax credit attributable to input services was not being granted and, in the alternative, it was urged that the formula was defective as the entire input tax credit pertaining to inputs was first adjusted towards output tax liability for computing refund under Rule 89(5) of the GST Rules.

11. It would be germane to refer to the amended and unamended Rule 89(5).

Unamended rules prior to 05.07.2022 was as under:

“89(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:

Maximum Refund Amount = [(Turnover of inverted rated supply of goods and services) x Net ITC+ Adjusted Total Turnover] - tax payable on such inverted rated supply of goods and services.

Explanation: For the purposes of this sub-rule, the expressions:

(a) “Net ITC” shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both.

(b) “Adjusted Total turnover” and “relevant period” shall have the same meaning as assigned to them in sub-rule (4).”

Amended Rule read as under:

Rule 89. Application for refund of tax, interest, penalty, fees or any other amount:

(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:

Maximum Refund Amount = [(Turnover of inverted rated supply of goods and services) x Net ITC Adjusted Total Turnover] - 21[tax payable on such inverted rated sup