Facts of the Case

Smart Byte Technologies, a proprietorship concern, approached the Karnataka High Court under Articles 226 and 227 of the Constitution of India challenging refund rejection orders dated 08.03.2022 passed by the Assistant Commissioner of Central Tax.

The dispute concerned the petitioner’s claim for refund of accumulated Input Tax Credit arising on account of an inverted tax structure. In the reliefs reproduced by the High Court, the petitioner challenged refund rejection orders concerning the periods:

  • July 2020 to March 2021; and
  • April 2021 to September 2021.

The petitioner sought quashing of the rejection orders and consequential directions to the respondents for refund of accumulated ITC arising due to the inverted tax structure.

During the pendency of the writ petition, the respondent authorities issued a Circular dated 06.07.2022, clarifying the earlier Circular dated 31.03.2020. The petitioner relied heavily upon this subsequent clarification as well as the Gauhati High Court decision in BMG Informatics Pvt. Ltd. vs Union of India & Ors. to contend that the refund rejection could not legally survive.

Issues Involved

The principal issues before the Karnataka High Court were:

  • Whether the petitioner was entitled to claim refund under Section 54(3)(ii) of the CGST Act, 2017 on account of accumulated ITC arising from an inverted tax structure.
  • Whether the earlier Circular dated 31.03.2020 prohibited the petitioner from claiming such refund.
  • What was the legal effect of the subsequent Circular dated 06.07.2022, issued during pendency of the writ petition, clarifying the earlier Circular.
  • Whether the ratio of the Gauhati High Court in BMG Informatics Pvt. Ltd. vs Union of India & Ors. supported the petitioner’s refund claim.
  • Whether the writ petition should be rejected on the ground that the petitioner had an equally efficacious alternative remedy by way of statutory appeal.
  • Whether, despite availability of an appellate remedy, the High Court could interfere in the peculiar facts of the case in view of the subsequent clarificatory Circular and binding/relevant judicial interpretation.

Petitioner’s Arguments

The petitioner contended that the refund rejection orders dated 08.03.2022 were contrary not only to the material available on record but also to the subsequent Circular dated 06.07.2022 issued by the respondents during the pendency of the writ petition.

It was argued that the Circular dated 06.07.2022 clarified the earlier Circular dated 31.03.2020 and supported the petitioner’s entitlement to seek refund.

The petitioner further submitted that the earlier Circular dated 31.03.2020 did not prohibit grant of refund in its favour.

Reliance was specifically placed upon the judgment of the Gauhati High Court in:

BMG Informatics Pvt. Ltd. vs Union of India & Ors., WP(C) No. 3878/2021, decided on 02.09.2021

According to the petitioner, the Gauhati High Court had clarified the legal position concerning the earlier Circular dated 31.03.2020, and therefore the rejection orders deserved to be quashed.

The petitioner consequently sought directions for refund of the GST amount in accordance with law.

Respondents’ Arguments

The respondents did not dispute that, during the pendency of the writ petition, the Circular dated 06.07.2022 had been issued clarifying the earlier Circular dated 31.03.2020.

However, the respondents contended that the writ petition lacked merit and was liable to be dismissed.

The principal objection raised by the respondents was that the petitioner had an equally efficacious alternative remedy by way of appeal against the refund rejection orders.

Accordingly, it was argued that direct invocation of the High Court’s writ jurisdiction was not maintainable and that the petitioner should be relegated to the statutory appellate remedy.

Court Order / Findings

The Karnataka High Court accepted the substance of the petitioner’s contention.

The Court found that the Circular dated 31.03.2020 did not come in the way of the petitioner claiming refund under Section 54(3)(ii) of the CGST Act, 2017, as had been held by the Gauhati High Court in BMG Informatics Pvt. Ltd..

The High Court further observed that this legal position had been reiterated and clarified by the respondents themselves through the Circular dated 06.07.2022.

According to the Court, the subsequent clarificatory Circular was sufficient to demonstrate that the petitioner was entitled to seek refund of the relevant amount.

On the respondents’ objection regarding alternative remedy, the Court specifically held that notwithstanding the availability of an appellate remedy, interference under writ jurisdiction was justified in the peculiar facts and circumstances of the case.

The Court relied upon:

  • the material available on record;
  • the latest Circular dated 06.07.2022; and
  • the judgment of the Gauhati High Court in BMG Informatics Pvt. Ltd.

The High Court concluded that the impugned refund rejection orders deserved to be quashed and that the respondents were required to reconsider the petitioner’s refund claim in accordance with law.

Final Order

The Karnataka High Court passed the following operative directions:

  1. The writ petition was allowed.
  2. The refund rejection orders dated 08.03.2022, concerning:
    • July 2020 to March 2021, and
    • April 2021 to September 2021
      were quashed.
  3. The respondents were directed to reconsider the petitioner’s claim for refund of the difference of GST amount paid under Section 54(3)(ii) of the CGST Act, 2017.
  4. Such reconsideration was required to be undertaken keeping in mind:
    • the observations made by the Karnataka High Court;
    • the Circular dated 06.07.2022; and
    • the Gauhati High Court judgment in BMG Informatics Pvt. Ltd.
  5. The reconsideration was directed to be completed as expeditiously as possible and, in any event, within two months from the date of receipt of a copy of the order.

Important Clarification

This judgment should not be read as a simple unconditional judicial direction for immediate mechanical payment of every refund amount claimed by the petitioner.

The operative direction was to reconsider the refund claim in accordance with law, while specifically bearing in mind the High Court’s observations, the Circular dated 06.07.2022 and the Gauhati High Court ruling in BMG Informatics Pvt. Ltd.

The judgment is particularly significant on the following legal points:

  • The earlier Circular dated 31.03.2020 was held not to bar the petitioner’s refund claim under Section 54(3)(ii).
  • The subsequent Circular dated 06.07.2022 clarified the position during pendency of the writ petition.
  • The Court treated the subsequent clarification as materially relevant to the legality of the earlier refund rejection.
  • Availability of a statutory appeal did not prevent writ interference in the peculiar facts and circumstances.
  • Refund rejection orders could not be sustained without considering the clarified legal position.

Sections / Provisions Involved

Section 54(3)(ii) of the CGST Act, 2017 – Governs refund of unutilised Input Tax Credit where credit accumulates on account of the rate of tax on inputs being higher than the rate of tax on output supplies, subject to statutory conditions and notified exceptions.

Articles 226 and 227 of the Constitution of India – Constitutional provisions under which the petitioner invoked the writ and supervisory jurisdiction of the Karnataka High Court.

Circular dated 31.03.2020 – Earlier circular forming part of the controversy concerning the petitioner’s entitlement to refund.

Circular dated 06.07.2022 – Subsequent clarificatory circular issued during pendency of the writ petition and specifically considered by the High Court.

Link to download the order -https://mytaxexpert.co.in/uploads/1783494968_1517compressed.pdf

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