The Gujarat High Court struck down Paragraph 2(2) of Circular No. 181/13/2022-GST, declaring it ultra vires Section 54 of the GST Act and inapplicable retrospectively.
The Gujarat High Court has ruled in favor of Patanjali Foods Ltd., affirming its right to retain an Input Tax Credit (ITC) refund of ₹1,70,07,091. This refund was initially sanctioned but later challenged by the revenue department in an attempt to recover the amount.
Background of the Case
Patanjali Foods Ltd., a leading manufacturer and seller of edible oil, applied for an ITC refund under the inverted duty structure provision of Section 54(3) of the Goods and Services Tax (GST) Act. The company cited a tax rate disparity where the tax rate on output supplies exceeded that on input supplies, justifying its refund claim.
The refund was granted on January 12, 2024. However, on April 25, 2024, authorities issued a notice under Section 73 of the GST Act, alleging that the refund was wrongly approved. They sought to recover the amount along with interest under Section 50 and a penalty of ₹17,00,709.
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Legal Challenge by Patanjali Foods
Patanjali Foods challenged the recovery action, arguing that once a refund reaches its final stage, it cannot be arbitrarily revoked. The Order-in-Original, dated September 10, 2024, confirmed the demand and penalty, prompting Patanjali to file a petition before the Gujarat High Court.
Patanjali Foods’ Stand
Uchit N. Sheth, representing Patanjali Foods, contended that the revenue authorities relied on Circular No. 181/13/2022-GST (dated November 10, 2022), which restricted refunds under the inverted duty structure for specific goods. He argued that applying this circular retrospectively was unlawful since the notification itself was effective from July 18, 2022.
Furthermore, Patanjali’s refund claim pertained to the February-March 2021 period, making the retrospective application of restrictions legally untenable. Additionally, the revenue authorities had not challenged the initial refund order, making its withdrawal legally unsustainable.
Revenue Department’s Defense
Appearing for the Respondents, Deepak N. Khanchandani and Hetvi H. Sancheti defended the recovery action, asserting that the refund was incorrectly sanctioned and was subject to reassessment under Section 73(10) of the GST Act. They maintained that the review of refund orders is an internal process intended to prevent revenue loss due to incorrect refunds.
Court’s Ruling
A division bench, comprising Justice Bhargav D. Karia and Justice D.N. Ray, ruled that the classification of taxpayers based on refund application dates was discriminatory and violated Article 14 of the Constitution. The bench held that a circular could not override statutory provisions and that refunds sanctioned before the restriction’s implementation could not be arbitrarily revoked.
Consequently, the Gujarat High Court struck down Paragraph 2(2) of Circular No. 181/13/2022-GST, declaring it ultra vires Section 54 of the GST Act and inapplicable retrospectively. The court also quashed the impugned Order-in-Original, stating that once a refund order reaches its finality, it cannot be withdrawn through a show-cause notice.
Key Takeaways
- The Gujarat High Court upheld Patanjali Foods’ ITC refund of ₹1.7 crore, rejecting the revenue department’s attempt to recover the amount.
- The court ruled that Circular No. 181/13/2022-GST could not be applied retrospectively.
- The ruling reinforces that once a refund order attains finality, it cannot be arbitrarily revoked.
- This judgment sets a precedent for businesses facing similar refund disputes under the GST inverted duty structure.
Case Details
- Case Title: Patanjali Foods Ltd. Vs. Union of India & Ors.
- Citation: 17298 of 2024
- Court: Gujarat High Court
This landmark ruling is a significant victory for taxpayers, ensuring that refunds lawfully granted cannot be reversed arbitrarily by the revenue authorities. Businesses can now cite this case as a strong precedent when contesting wrongful ITC recovery attempts.
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