Ascent Meditech Ltd Vs Union of India & Ors. (Gujarat High Court)

In a significant ruling for businesses grappling with Goods and Services Tax (GST) refunds under an inverted duty structure, the Gujarat High Court has set aside a Central Board of Indirect Taxes and Customs (CBIC) circular that limited the applicability of an amended refund formula. The court, in the case of Ascent Meditech Ltd. Vs. Union of India & Ors., declared that the amendment to Rule 89(5) of the Central/Gujarat Goods and Services Tax Rules, 2017, is clarificatory and curative in nature, thus having retrospective effect.The petitioner, Ascent Meditech Ltd., a manufacturer of orthopedic soft goods, faced a common issue in the GST regime known as an “inverted duty structure.” This occurs when the tax rate on inputs (raw materials and services) is higher than the tax rate on the finished output product. Ascent Meditech’s products were taxed at 5%, while its main inputs attracted GST rates ranging from 12% to 18%, including 18% on input services. This disparity led to an accumulation of unutilized Input Tax Credit (ITC), for which the company sought a refund under Section 54(3) of the GST Act.The Genesis of the Dispute: Rule 89(5) and its EvolutionAt the heart of the dispute was Rule 89(5) of the GST Rules, which prescribes the formula for calculating refunds in cases of inverted duty structure. Prior to July 5, 2022, the unamended formula for “Maximum Refund Amount” (MRA) considered only the ITC availed on inputs, excluding input services. This exclusion often resulted in a lower refund than the actual accumulated unutilized ITC, particularly for businesses with significant input service costs.This anomaly in the unamended Rule 89(5) was challenged before various High Courts, arguing that it was ultra vires Section 54(3) of the GST Act, which permits refunds of unutilized ITC arising from inverted duty structures.Judicial Precedent: The Supreme Court’s Intervention in VKC FootstepsThe matter eventually reached the Supreme Court in the case of Union of India vs. M/s. VKC Footsteps India Pvt. Ltd.. While the Apex Court upheld the validity of Rule 89(5), it acknowledged and took “cognizance of the anomalies” in the formula. The Supreme Court noted that the formula “skewed the formula in favour of the revenue” by assuming that output tax was paid solely by utilizing ITC on inputs, with no utilization of ITC on input services. Consequently, the Supreme Court strongly urged the GST Council to reconsider the formula and take a policy decision to address these inequities.GST Council’s Response and Subsequent AmendmentActing on the Supreme Court’s directive, the GST Council, in its 47th meeting on June 28-29, 2022, recommended an amendment to Rule 89(5). The revised formula aimed to account for the utilization of ITC on both inputs and input services for payment of output tax in the same ratio as the ITC was availed.Following this recommendation, the CBIC issued Notification No. 14/2022-Central Tax dated July 5, 2022, which amended Rule 89(5). The key change involved replacing “tax payable on such inverted rated supply of goods and services” with “{tax payable on such inverted rated supply of goods and services x (Net ITC ÷ ITC availed on inputs and input services)}.” This modification sought to align the formula more accurately with the legislative intent of granting a refund for accumulated unutilized ITC.The Contested Circular and Discriminatory PracticeDespite the amendment, the CBIC subsequently issued Circular No. 181/13/2022-GST dated November 10, 2022. This circular clarified that the amended formula was “not clarificatory in nature and is applicable prospectively with effect from 05.07.2022.” It further stated that refund applications filed before July 5, 2022, would be processed under the old formula.Ascent Meditech, whose refund application for a period prior to July 5, 2022, was initially granted under the unamended formula, filed a rectification application for the differential refund amount based on the new formula. This application was rejected, citing the CBIC circular.The petitioner argued that the amendment was inherently clarificatory and curative, intended to rectify an anomaly identified by the Supreme Court. Therefore, it should apply retrospectively. It was contended that the circular, by making the amendment prospective, created an “absurd and discriminatory situation.” As per the circular, if a refund application for a period prior to July 5, 2022, was filed after that date, the new formula would apply. However, if the application for the same period was filed before July 5, 2022, the old, less beneficial formula would be used. This, the petitioner asserted, violated Article 14 of the Constitution (equality before law) and penalized assessees who filed their applications promptly.Respondent’s Defense and Jharkhand High Court PrecedentThe respondents, the Union of India and others, defended the circular, asserting that Notification No. 14/2022 explicitly stated its prospective application from the date of publication. They cited the decision of the Jharkhand High Court in Tata Steel Ltd. vs. Union of India, where a similar amendment to Rule 89(4) was held to be prospective because the notification itself provided for retrospective application for certain other rules (Rules 7, 9, 10, and 19) but not for Rule 89(4). The respondents contended that since no retrospective date was indicated for Rule 89(5) in Notification No. 14/2022, the CBIC’s circular was justified in clarifying its prospective application.Gujarat High Court’s Ruling and ReasoningThe Gujarat High Court, after considering the arguments and comparing the amended and unamended Rule 89(5), concluded that the amendment was indeed clarificatory in nature. The court emphasized that the change harmonized the numerator and denominator in the refund formula, addressing the anomaly identified by the Supreme Court in the VKC Footsteps case.The court rejected the respondent’s reliance on the Jharkhand High Court’s decision in Tata Steel Ltd., distinguishing it by noting that the amendment in the present case was undertaken specifically to remove an anomaly pointed out by the Apex Court.Crucially, the Gujarat High Court relied on the Supreme Court’s decision in Allied Motors (P.) Ltd. Vs. Commissioner of Income Tax, which held that a curative or declaratory amendment would have retrospective operation. The court found this precedent directly applicable, stating that the amendment to Rule 89(5) was curative, aimed at rectifying a defect and aligning the rule with the intent of Section 54(3) of the GST Act.The court also took note of its own previous rulings, such as Otsuka Pharmaceutical Pvt. Ltd. vs. Union of India, where a clarificatory GST amendment was held to have retrospective effect, even if introduced prospectively.In its judgment, the Gujarat High Court observed that the CBIC’s circular, by stating the amendment was not clarificatory, was “contrary to the purport of the amendment brought on statute pursuant to the recommendation of the GST Council as per the direction issued by the Hon’ble Apex Court.”Impact of the JudgmentThe Gujarat High Court’s decision to quash the restrictive circular has significant implications for businesses seeking GST refunds under the inverted duty structure. By deeming the amendment to Rule 89(5) retrospective, the court ensures that taxpayers are not unfairly deprived of their rightful refunds based solely on the date of filing their application. This ruling promotes equitable treatment among assessees and reinforces the principle that curative amendments, especially those aimed at addressing anomalies identified by higher courts, should operate retrospectively to achieve their intended purpose. The judgment highlights the judiciary’s role in ensuring that delegated legislation aligns with the spirit and intent of the parent act and judicial pronouncements.