Supreme Court’s July 2025 ruling in Union of India vs. Tata Steel Ltd., concerning Rule 89(4) of the CGST Rules

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In a significant GST ruling, the Supreme Court held that the July 2022 amendment to Rule 89(4) is substantive and cannot be applied retrospectively. The Court remanded the issue of Circular No. 125/2019’s legality to the High Court, raising key constitutional questions on equality, trade rights, and delegated legislation.

📖 Facts of the Case

  • The petitioner (Tata Steel) challenged the correctness and constitutional validity of Circular No. 125/44/2019‑GST dated 18 Nov 2019. Paragraph 47 of the circular required that, for export refund claims, the refund value of Input Tax Credit (ITC) be computed as the lower of the amounts declared in the tax invoice and the shipping bill.
  • Later, Notification No. 14/2022‑Central Tax (issued 5 July 2022) amended Rule 89(4) of the CGST Rules to incorporate the same comparison requirement into the rule itself.
  • Tata Steel argued:
    1. The amendment was substantive, not merely clarificatory.
    2. It should not apply retrospectively to periods before July 2022.
    3. The circular restriction was ultra vires and violated constitutional guarantees (Articles 14 & 19(1)(g)).

⚖️ Supreme Court’s Holdings

1. Retrospective vs. Prospective Application

  • The Court affirmed the High Court’s view that the amendment to Rule 89(4) was substantive, as it introduced a new requirement—an obligation to compare invoice value with FOB value in shipping bills, and choose the lower.
  • It is not merely explanatory or clarificatory, hence it must apply only prospectively—valid from the date of notification in July 2022 onwards—not to earlier periods .

2. Remand on Circular’s Legality

  • The Court remanded the matter back to the High Court, specifically to review the legality and constitutional validity of Circular No. 125/44/2019.
  • The SC did not endorse or reject the circular itself; it merely instructed the High Court to assess its validity under the parent Act and constitutional framework .

🧩 Implications for Exporters

  1. Pre-July 2022 Refund Claims
    • Exporters should not be denied refunds for periods before the amendment based on the invoice/shipping bill comparison rule—it doesn’t apply retrospectively.
  2. Post-July 2022 Claims
    • The new rule applies strictly from July 2022 onwards.
  3. Circular Still in Issue
    • The High Court must now determine if the circular itself was lawful when issued—exporters may still have grounds to challenge its earlier use.

📌 Summary

  • Issue: Was the comparison rule in Rule 89(4) retrospective and was the circular lawful?
  • Held:
    • Rule 89(4) amendment is substantive and prospective only.
    • Circular’s validity requires further judicial review.
  • Next Step: Await High Court’s decision on whether Circular No. 125/44/2019 was ultra vires and constitutional.

Here is a deeper legal analysis of the constitutional issues raised in the Tata Steel export refund case, where the Supreme Court upheld that Rule 89(4) (amended in July 2022) is substantive and prospective only, but remanded the question of the legality of Circular No. 125/44/2019-GST to the High Court for review.

⚖️ Background Recap

  • Circular No. 125/44/2019-GST, issued on 18 November 2019, required refund of unutilized Input Tax Credit (ITC) on export of goods (without payment of tax under LUT) to be restricted to the lower of:
    • (i) Invoice value, and
    • (ii) FOB (Free on Board) value declared in the shipping bill.
  • Rule 89(4) of CGST Rules was amended via Notification No. 14/2022–Central Tax (dated 5 July 2022) to codify this very restriction.
  • Tata Steel challenged this requirement before the amendment, arguing that the circular imposed restrictions not backed by the parent law.

🧩 Constitutional Issues Raised

1. Violation of Article 14 – Equality before Law

Argument:

  • Exporters are being unreasonably classified into those whose invoice value matches shipping bill FOB value and those whose invoice value is higher.
  • This classification has no rational nexus with the objective of granting GST refunds of ITC on exported goods.
  • Exporters are treated unequally, even though they incur the same inputs and input tax costs.

Legal Basis:

  • Article 14 prohibits arbitrary classification unless:
    1. There is intelligible differentia between groups.
    2. That differentia has a rational nexus to the objective of the legislation (e.g., State of W.B. v. Anwar Ali Sarkar, AIR 1952 SC 75).

Analysis:

  • No evidence that refund fraud or inflated invoices were a widespread issue needing this restriction.
  • Exporters with genuine commercial invoice pricing are arbitrarily denied refund on the excess of invoice over FOB value.
  • This violates Article 14, as the rule and circular penalize legitimate exporters for standard business pricing.

2. Violation of Article 19(1)(g) – Right to Practice Any Profession or Trade

Argument:

  • The refund restriction disincentivizes exports, since legitimate exporters lose refund on part of their ITC due to artificial valuation comparison.
  • This constitutes an unreasonable restriction on the freedom to trade internationally, especially in sectors like steel, pharma, and textiles where the invoice price includes packaging, inland transport, or insurance beyond FOB.

Legal Basis:

  • Article 19(1)(g) guarantees the right to practice any profession or carry on any occupation, trade, or business.
  • Reasonable restrictions are permitted only under Article 19(6) in the interest of the general public and must be proportional (see: Modern Dental College v. State of M.P., (2016) 7 SCC 353).

Analysis:

  • The refund restriction harms exporters’ working capital and increases litigation risk.
  • No proportionality or least restrictive alternative was considered.
  • Thus, it may fail the test of proportionality under Article 19(6).

3. Doctrine of Ultra Vires – Circular beyond scope of parent Act

Argument:

  • Circular No. 125/44/2019 imposed restrictions before Rule 89(4) was amended in July 2022.
  • At the time of its issuance (Nov 2019), no provision in Section 54 or Rule 89 allowed such a limitation.
  • A circular cannot override or supplement the statutory scheme, especially if it affects substantive rights (see: CCE v. Ratan Melting & Wire Industries, (2008) 13 SCC 1).

Legal Basis:

  • Section 168(1) of the CGST Act empowers CBIC to issue circulars to ensure uniform implementation, not to create new legal conditions.
  • The rule-making power under Section 164 requires delegated legislation; circulars cannot do what rules must.

Analysis:

  • Since the parent rule did not contain the comparison requirement in 2019, the circular was ultra vires and invalid to that extent.
  • The later amendment in 2022 does not cure the illegality of the circular for prior periods.

🧾 What the High Court Must Now Decide

The Supreme Court remanded the case to the High Court to decide:

  • Whether the circular violated Articles 14 and 19(1)(g).
  • Whether the circular was ultra vires the CGST Act and rules as they existed pre-2022.
  • Whether exporters are entitled to refund claims for pre-July 2022 periods under the earlier (more liberal) interpretation of Rule 89(4).

✅ Conclusion

The constitutional arguments against the circular are legally well-founded and may lead to:

  • Quashing of the circular for being ultra vires.
  • Refund relief for exporters whose claims were rejected or curtailed based on FOB vs invoice mismatches before July 2022.

  • A precedent reinforcing that executive circulars cannot override substantive statutory rights.

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