Facts of the Case

The petitioner, Messers Filatex India Ltd. (GSTIN 24AAACF0027B1ZM), a manufacturer of textile yarns, filed refund claims of unutilised Input Tax Credit (ITC) for exports made between January 2018 and October 2019, computed under the formula in Rule 89(4) of the CGST Rules, 2017, and these claims, aggregating over Rs. 85.85 crore, were sanctioned. A subsequent similar claim for November 2019 was rejected by the Assistant Commissioner on the ground that it ought to have been filed under Rule 89(4B), not Rule 89(4). On appeal, the Joint Commissioner (Appeals) agreed that Rule 89(4B) - which prescribes no formula - governed the claim, and remanded the matter for fresh adjudication without expressing any opinion on merits. Thereafter, on 19.07.2021, the Joint Commissioner passed a fresh order under Section 74(1) of the CGST Act, 2017, confirming recovery of the entire Rs. 85,37,07,928/- earlier sanctioned for Jan-18 to Oct-19, with interest and an equal penalty, treating it as erroneously refunded. The petitioner approached the High Court of Gujarat at Ahmedabad challenging both the appellate order and the recovery order, and also challenging the constitutional validity of Rule 89(4B) as ultra vires Sections 54 and 164 of the CGST Act, Section 16 of the IGST Act, and Articles 14 and 19(1)(g).

Issues Involved

  1. Whether refund of unutilised ITC on zero-rated exports, for the relevant period, is to be computed under the formula in Rule 89(4) or is instead governed by Rule 89(4B), which prescribes no formula.
  2. Whether the recovery order dated 19.07.2021, treating the earlier sanctioned refunds as erroneous and demanding recovery with interest and equal penalty under Section 74(1), was sustainable.
  3. Whether it was necessary for the Court to adjudicate the constitutional validity of Rule 89(4B) at this stage.

Petitioner's Arguments

  • Rule 89(4B) does not prescribe any formula for computing the refund of unutilised ITC, and the only workable formula is that found in Rule 89(4), which should therefore continue to apply.
  • The department's own reply affidavit, filed by the Principal Commissioner, stated that every manufacturer-exporter can identify the input-output ratio of raw materials used in the exported goods and bifurcate the ITC availed accordingly, effectively supplying a workable method for determining the refund even under Rule 89(4B).
  • Sub-Rule (4B) of Rule 89 is ultra vires Sections 54 and 164 of the CGST Act, Section 16 of the IGST Act, and Articles 14 and 19(1)(g) of the Constitution, and the recovery order and the appellate order ought to be quashed.

Respondent's Arguments

  • The Assistant Commissioner's original order held that the petitioner's claim for the relevant period fell squarely under Rule 89(4B), and not under the general formula of Rule 89(4), since the petitioner had availed benefits under specified notifications.
  • The Principal Commissioner's affidavit stated that the petitioner's contention regarding inability to bifurcate ITC attributable to exports was untenable, as every manufacturer-exporter is expected to know its input-output ratio and can determine the ITC used in exports accordingly.
  • The Joint Commissioner (Appeals) itself had earlier found that Rule 89(4B), not Rule 89(4), governed the claim and had remanded the matter without opining on its merits.

Court Order / Findings

  • The Court declined to examine the constitutional validity of Rule 89(4B) at this stage, clarifying that the challenge was not being given up and could be agitated in appropriate litigation later.
  • The Court held that since the Joint Commissioner (Appeals) had already found Rule 89(4B) applicable and the Principal Commissioner's own affidavit supplied a workable input-output-ratio formula for computing the refund under that Rule, there was no need to disturb the appellate remand; the claim should be redetermined by the Assistant Commissioner applying that formula.
  • The Court quashed and set aside the subsequent recovery order dated 19.07.2021, which had confirmed a demand of Rs. 85,37,07,928/- with interest and an equal penalty under Section 74(1) on the premise that the earlier sanctioned refunds were erroneous.
  • The Assistant Commissioner was directed to adjudicate the refund claims afresh under Rule 89(4B), applying the input-output ratio formula set out in the department's own reply affidavit, and to determine and pay the refund within eight weeks.
  • In the connected writ application (SCA No. 17703 of 2021), the Court clarified that the petitioner's earlier claims should not be treated as time-barred merely because the refund adjudication is being undertaken afresh, subject to clearance of the deficiency memo.

Important Clarification

  • Where the department's appellate authority itself holds that Rule 89(4B), rather than Rule 89(4), governs a refund claim, and the department's own affidavit before the Court supplies a workable formula (such as the input-output ratio) for computing the refund under Rule 89(4B), a writ court can direct the refund to be redetermined on that basis without needing to strike down the appellate order or decide the constitutional validity of Rule 89(4B).
  • A recovery order under Section 74(1) treating an earlier sanctioned refund as "erroneous" cannot be sustained where the underlying entitlement to refund itself remains to be redetermined under the correct provision, rather than definitively negated.

Sections Involved

  • Rule 89(4), CGST Rules, 2017 - formula for computing refund of unutilised ITC on zero-rated supplies exported without payment of tax.
  • Rule 89(4B), CGST Rules, 2017 - governs refund of unutilised ITC where inputs were procured under specified duty/tax exemption notifications, without prescribing a formula.
  • Section 74(1), CGST Act, 2017 - determination of tax not paid/short paid or erroneously refunded by reason of fraud or wilful misstatement, invoked for the recovery order.
  • Section 54, CGST Act, 2017 and Section 16, IGST Act, 2017 - provisions on refund and zero-rated supply, against which Rule 89(4B) was challenged as ultra vires.

Decision – In Favour of

Disposed of with directions, substantially in favour of the Assessee. The Section 74(1) recovery order demanding Rs. 85.37 crore with interest and equal penalty was quashed, and the refund claim was directed to be redetermined under Rule 89(4B) using the department's own input-output ratio formula, though the constitutional challenge to Rule 89(4B) was left open and not decided.

Case Details

  • Court: High Court of Gujarat at Ahmedabad
  • Case No.: R/Special Civil Application No. 13491 of 2021 with R/Special Civil Application No. 17703 of 2021
  • Coram: Hon'ble Mr. Justice J.B. Pardiwala and Hon'ble Ms. Justice Nisha M. Thakore
  • Date of Order: 18.02.2022
  • Parties: Messers Filatex India Ltd. vs Union of India

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