GST Refund Limitation for Unutilised ITC: Amended Explanation 2(e) Operates Prospectively — Delhi High Court
Overview of the Judgment
The Delhi High Court delivered a significant ruling in Kanika Exports v. Union of India & Ors. (W.P.(C) 12512/2021), clubbed with M/s Malik Seasoning and Spices Pvt. Ltd. v. Commissioner of GST (W.P.(C) 17538/2022), addressing a critical question under the Section 54 of the CGST Act, 2017 — whether the amended Explanation 2(e) to Section 54, which came into effect on February 1, 2019, could be applied retrospectively to reject refund claims of unutilised Input Tax Credit (ITC) as time-barred.
The Court ruled decisively in favour of the assessees, holding that the limitation period for refund claims pertaining to periods prior to the amendment must be computed under the unamended version of Explanation 2(e), which treated the end of the relevant financial year as the starting point for calculating the two-year limitation window. The Court further held that retrospective application of the restrictive amendment would unlawfully extinguish vested statutory rights.
Background and Factual Matrix
Case 1: M/s Kanika Exports
M/s Kanika Exports, a partnership firm engaged in the export of readymade garments, filed a refund application on March 29, 2020, seeking refund of accumulated unutilised ITC for the period July 2017 to March 2018. The refund claim arose on account of zero-rated exports made without payment of tax.
Case 2: M/s Malik Seasoning and Spices Pvt. Ltd.
M/s Malik Seasoning and Spices Pvt. Ltd. filed two separate refund applications on March 28, 2021 and March 30, 2021, seeking refund of unutilised ITC that had accumulated due to an inverted duty structure — a situation where the rate of tax on inputs is higher than the rate of tax on output supplies.
Common Thread
In both cases, the Department (Respondent) rejected the refund claims on the ground that they were time-barred. The Respondent computed the limitation period by applying the amended Explanation 2(e) to Section 54 of the CGST Act, 2017 and, in the case of exports, also sought to invoke Explanation 2(a), which links the relevant date to the date of export. The rejection was upheld at the first appellate stage through Orders-in-Appeal, compelling both assessees to approach the Delhi High Court by way of writ petitions seeking:
- Quashing of the rejection orders (Orders-in-Original and Orders-in-Appeal), and
- A direction to the Department to process and grant the refund claims.
Legal Issue Before the Court
Whether the relevant date for computing the two-year limitation period for refund of unutilised ITC is the end of the financial year under the unamended
Explanation 2(e)toSection 54of the CGST Act, 2017 — and whether the amendment effective from February 1, 2019 can operate retrospectively to defeat refund claims relating to earlier periods?
Statutory Framework: Understanding Section 54 of the CGST Act, 2017
To appreciate the Court's ruling, it is essential to first understand the structural framework of Section 54 of the CGST Act, 2017.
Section 54(1) — General Refund Provision
Section 54(1) permits any person claiming refund of tax, interest, or any other amount paid, to file an application within two years from the relevant date, in the prescribed form and manner.
Section 54(3) — Refund of Unutilised ITC
Section 54(3) specifically deals with refund of unutilised input tax credit at the end of any tax period. It permits such refund only in two situations:
- Zero-rated supplies made without payment of tax; and
- Where ITC has accumulated due to the inverted duty structure (i.e., where the rate of tax on inputs exceeds the rate of tax on output supplies), subject to certain exclusions.