ITAT & High Court Ruling: Retrospective Applicability of Clarificatory Formula in Rule 89(5) for Inverted Duty Refunds

Reference: Section 54 of the CGST Act, 2017 | Rule 89(5) of the CGST Rules, 2017

Period: November 2018 to April 2019

Status: In Favor of Assessee (Matter Remanded)

1. The Core Dispute: Denial of Refund under Old Formula

The petitioner, a taxpayer under an Inverted Duty Structure (where tax on inputs is higher than tax on output supplies), sought a refund of accumulated Input Tax Credit (ITC) for the period between November 2018 and April 2019.

Revenue’s Stand: The adjudicating and appellate authorities rejected the refund applications in 2021 and 2022. They relied on the then-existing Rule 89(5) formula, which was seen as restrictive and often resulted in a lower or nil refund amount because it did not proportionately account for the utilization of ITC from input services.
Assessee’s Stand: The petitioner challenged the rejection, arguing that the subsequent amendment to the formula in Rule 89(5) was intended to fix an inherent anomaly and should apply to pending claims.

2. Legal Analysis: Clarificatory vs. Prospective Amendments

The High Court examined the nature of the amendment to the formula in Rule 89(5), which was modified via Notification No. 14/2022-Central Tax (following recommendations from the 47th GST Council meeting and observations by the Supreme Court in the VKC Footsteps case).

I. The “Clarificatory and Curative” Nature

The Court held that the amendment to the formula was not a “new” rule but a rectification of a defect in the existing calculation mechanism.

The Ruling: Amendments that are curative or intended to remove an anomaly are generally retrospective in operation. Even if the rejection orders were passed before the official notification of the amendment, the taxpayer’s continued agitation (via writ/appeals) kept the claim “alive.”

II. The Modified Formula

The amended formula now ensures that the “tax payable on inverted rated supply” is reduced in the same proportion as the ITC availed on inputs and input services.

Impact: This modification prevents the “Net ITC” (which only includes inputs) from being unfairly depleted by the total output tax, leading to a more equitable and accurate refund.

3. Final Ruling: Fresh Consideration Directed

The Court set aside the rejection orders of the primary and appellate authorities.

Verdict: The applications are to be reconsidered afresh.
Directive to AO: The primary authority is directed to apply the modified/amended formula in Rule 89(5) to the petitioner’s claims for the relevant period (Nov 2018 – April 2019).
Outcome: This ensures the taxpayer receives the “rightful” refund as intended by the substantive provisions of Section 54(3).

Key Takeaways for Taxpayers

Revisiting Old Rejections: If your Inverted Duty Structure refund was rejected or reduced under the old formula for periods prior to July 2022, you may have grounds to seek a re-adjudication based on this “retrospective/clarificatory” principle.
Supreme Court Precedent: The Supreme Court in Union of India vs. Tirth Agro Technology (2025) and Ascent Meditech has affirmed that this curative amendment supports substantive justice over technical timing.
Calculation Check: Always ensure that your “Net ITC” excludes capital goods and that your “Adjusted Total Turnover” excludes exempt supplies to ensure your claim is not rejected on factual grounds.

HIGH COURT OF ANDHRA PRADESH

AWL Agri Business Ltd.

Joint Commissioner^*

R. RAGHUNANDAN RAO AND T.C.D. SEKHAR, JJ.

WRIT PETITION NOS. 28622, 28632 & 28708 OF 2025

JANUARY 21, 2026

Karan Talwar for the Petitioner. Santhi Chandra for the Respondent.

ORDER

R. Raghunandan Rao, J.- The petitioner imports edible oil and supplies the same in the domestic market after refining and packing the said oil. The petitioner, sought refund of accumulated input tax credit on account of inverted duty structures for the periods November, 2018, March, 2019 and April, 2019, by way of three separate applications. These applications were rejected by the adjudicating authority on the ground that Rule 89(5) of the CGST Rules precludes grant of such refund. Aggrieved by the same, the petitioner approached the appellate authority, by way of three separate appeals, which also came to be dismissed, on 25.02.2022. Aggrieved by the said order of dismissal, the petitioner has now approached this Court, by way of the present writ petitions.

2. As all these writ petitions have been filed by the same writ petitioner and raise the same issues are being disposed of, by way of this common order.

3. Heard Sri Karan Talwar, learned counsel appearing for the petitioner and Smt. N. Santhi Chandra, the learned Standing Counsel appearing for the respondents.

4. The learned counsel for the petitioner would draw the attention of this Court to paragraph No.12 of the order in appeal. The appellate authority, in this paragraph, recorded the submissions of the petitioner that Rule 89(5) was being reconsidered and that the appeals be kept pending till the GST council decides on the matter. It appears that the GST council, in its meeting held on 28/29.06.2022 pursuant to the observations of the Hon’ble Supreme Court in its order, dated 13.09.2021, in Union of India v. VKC Footsteps India (P.) Ltd. 2 GSTL 513 (SC)/(2022) 2 SCC 603 took cognizance of the anomalies in the formula prescribed under Rule 89(5) and accepted the recommendation of the Law Committee which had suggested an amendment in the formula. The learned counsel for the petitioner would contend that in view of this change, which is clarificatory in nature, it would only be appropriate to remand the matters back, to the original authority, for applying the modified formula.

5. Smt. N. Santhi Chandra, the learned Standing Counsel would contend that the modification of the formula is not retrospective and the same cannot be relied upon, by the petitioner, inasmuch as both the original orders of rejection and the appellate orders had been passed even before the amendment to the formula. The learned Standing Counsel would also rely upon the Circular No.181/13/2022-GST, dated 10.11.2022 wherein a clarification was issued by the Principal Commissioner (GST) that the amendment to the formula would only be prospective w.e.f.05.07.2022.

6. Learned counsel for the petitioner has now drawn our attention to the judgment of the Hon’ble High Court of Gujarat in the case of Tirth Agro Technology (P.) Ltd. v. Union of India (Gujarat)/2025 (1) TMI 719 :2024:GUJHC:71361-DB. In this judgment, the Hon’ble High Court of Gujarat had set aside the said circular to the extent that it clarifies that the amendment to Rule 89(5) is not clarificatory in nature. It is settled law that once a circular is set aside by one High Court, the same would stand set aside for the entire country.

7. In view of the aforesaid facts and submissions, it is clear that the amendment to the formula in Rule 89(5) has to be treated to be clarifictory in nature and consequently would be retrospective. In the present case, though the orders of rejection as well as the appellate order were passed prior to the amendment, the fact remains that the petitioner had continued to agitate his claims in regard to the refund sought by the petitioner.

8. In view of the above, these Writ Petitions are allowed setting aside the orders of rejection dated 09.06.2021, 13.01.2021 and 24.03.2021 passed by the primary authority as well as the appellate orders, dated 25.02.2022 and the applications of the petitioner, for refund, shall be considered by the primary authority afresh and by applying the modified formula in Rule 89(5) of the GST Rules.

9. As a sequel, pending miscellaneous petitions, if any, shall stand closed. There shall be no order as to costs.