Retrospective Rule 89(5) Amendment Entitles Assessee To Inverted Duty Structure ITC Refund

By | September 24, 2026
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Retrospective Rule 89(5) Amendment Entitles Assessee To Inverted Duty Structure ITC Refund

Issue

Whether the amendment to Rule 89(5) of the CGST/GGST Rules via Notification No. 14/2022-CT applies retrospectively to process refund claims of unutilized ITC under an inverted tax structure for the periods 2017-18 and 2018-19.

Facts

  • ITC Refund Claim: The assessee claimed a refund of unutilized Input Tax Credit (ITC) under an inverted tax structure for the periods 2017-18 and 2018-19.
  • Issuance of Deficiency Memos: The tax authority issued Form GST RFD-03 deficiency memos, restricting the refund strictly to “inputs” while excluding “input services.”
  • Writ Petition Filed: The assessee filed a writ petition challenging the validity of Rule 89(5) to the extent it excluded input services, seeking the quashing of RFD-03 deficiency memos and direction for refund of unutilized ITC on input services.

Decision

  • Retrospective Application of Amendment: Following the Supreme Court ruling in VKC Footsteps and the precedent in Ascent Meditech Ltd., the amendment to Rule 89(5) via Notification No. 14/2022-CT is curative, classificatory, and applicable retrospectively to periods prior to 05.07.2022.
  • Quashing of Deficiency Memos: The RFD-03 deficiency memos issued against the assessee for the relevant period are quashed and set aside.
  • Processing of Refund Claims: The Revenue is directed to re-process the assessee’s refund claims under Rule 89(5) read with Section 54(1) in accordance with the revised formula.
  • Verdict: Ruled in favor of the assessee.

Key Takeaways

  1. Curative Nature of Rule 89(5): The modified formula for inverted duty structure refunds under Notification No. 14/2022-CT operates retrospectively to resolve anomalies for past tax periods.
  2. Deficiency Memos Unsustainable: Rejection or restriction of refund applications issued prior to the clarification on retrospective application is liable to be quashed.
  3. Mandatory Re-adjudication: Tax authorities must re-evaluate pending or rejected inverted duty structure refund claims in line with the revised statutory formula and binding judicial precedents.
HIGH COURT OF GUJARAT
Pranav Overseas LLP
v.
Union of India
A.S. Supehia and Ms. VAIBHAVI D. NANAVATI, JJ.
R/SPECIAL CIVIL APPLICATION NO. 12861 of 2020
JULY  2, 2026
Uchit N. Sheth for the Petitioner. Ankit Shah and Utkarsh R. Sharma for the Respondent.
ORDER
A.S. Supehia, J.- The present writ petition has been filed for the following reliefs:
“28 (A) This Hon’ble Court may be pleased to declare that the definition of ‘Net ITC’ retrospectively introduced in Rule89(5) of the GST Rules thereby restricting refund only to “inputs” and not “input services is ultra-vires Section 54(3) of the GST Acts as well as the legislative scheme and policy of the GST Acts;
(B) This Hon’ble Court may be pleased to issue a writ of mandamus or writ in the nature of mandamus or any other appropriate writ or order quashing and setting aside the deficiency memo in Form GST RFD-03 for the years 2017-18 and 2018-19 (annexed at Annexure-B) issued by the 3rd Respondent authority.
(C) This Hon’ble Court may be pleased to issue a writ of mandamus or writ in nature of mandamus or any other appropriate writ or order directing the respondents to forthwith grant refund of unutilized input tax credit attributable to input services to the petitioner for the years 2017-18 and 2018-19.
(D) Pending, notice, admission and final hearing of this petition, this Court may be pleased to direct the respondents to forthwith grant refund of unutilized input tax credit attributable to input services to the petitioner for the years 2017-18 and 2018-19.
** “
2. When the matter is called out, learned advocate Mr. Uchit N. Sheth has pointed out the subsequent development in law, relating to the Rule 89(5) of the Central Goods & Service Tax, Rules, 2017 (for short ‘ CGST Rules’). It is submitted that the Supreme Court in the case of UOI v. VKC Footsteps India (P.) Ltd.  52 GSTL 513 (SC)/(2022) 2 SCC 603, while setting aside the judgment and order passed by this court rendered in VKC Footsteps India (P.) Ltd. v. UOI 81 GST 628/43 GSTL 336 (Gujarat)/Special Civil Application No. 2972 of 2019 dated 24.07.2020 has finally held thus:
“142. The above judicial precedents indicate that in the field of taxation, this Court has only intervened to read down or interpret a formula if the formula leads to absurd results or is unworkable. In the present case however, the formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on accumulation of unutilised ITC. It is merely the case that the practical effect of the formula might result in certain inequities. The reading down of the formula as proposed by Mr Natarjan and Mr.Sridharan by prescribing an order of utilisation would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Accordingly, we shall refrain from replacing the wisdom of the legislature or its delegate with our own in such a case. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same.
143. Having devoted our attention to the submissions at the Bar, we have come to the conclusion that the judgment of the Madras High Court needs to be affirmed by dismissing the appeals challenging that verdict while the appeals against the judgment1 of the Gujarat High Court by the Union of India should be allowed.
144. Division Bench of the Gujarat High Court having examined the provisions of Section 54(3) and Rule 89(5) held that the latter was ultra vires. In its decision in VKC Footsteps (India) (P) Ltd.1, the Gujarat High Court held that by prescribing a formula in subrule (5) of Rule 89 of the CGST Rules to execute refund of unutilised ITC accumulated on account of input services, the delegate of the legislature had acted contrary to the provisions of sub-section (3) of Section 54 of the CGST Act which provides for a claim of refund of any unutilised ITC. The Gujarat High Court noted the definition of ITC in Section 2(62) and held that Rule 89(5) by restricting the refund only to input goods had acted ultra vires Section 54(3). The Division Bench of the Madras High Court on the other hand while delivering its judgment in Tvl. Transtonnelstroy Afcons JV2 declined to follow the view of the Gujarat High Court noting that the proviso to Section 54(3) and, more significantly, its implications do not appear to have been taken into consideration in VKC Footsteps (India) (P) Ltd. 1 except for a brief reference. Having considered this batch of appeals, and for the reasons which have been adduced in this judgment, we affirm the view2 of the Madras High Court and disapprove of the view of the Gujarat High Court.”
3. Pursuant to the directions issued by the Supreme Court, the GST Counsel has accordingly vide Notification No.14/2022-Central Tax dated 05.07.2022, has subsequently amended the provision of Rule 89 of the CGST Rules had introduced Clause(d) in sub-rule(5) which reads thus :
“(d) in sub-rule (5), for words “tax payable on such inverted rated supply of goods and services”, the brackets, words and letters “(tax payable on such inverted rated supply of goods and services X (Net ITC ^ ITC availed on inputs and input services)).” shall be substituted;”
4. Thereafter, it appears that the issue with regard to the applicability of the provision of amended sub-rule 5 of Clause (d) of Rule 89 of the CGST Rules, arose and the same was the subject matter of challenge before this Court in Special Civil Application no. 18317 of 2013 by the judgment and order dated 17.10.2024 passed in Ascent Meditech Ltd. v. UOI  [2025] 93 GSTL 85 (Gujarat)/(2025) 145 GSTR 246. The Coordinate Bench has held the applicability of the amended Rules prior to the Notification dated 05.07.2022, and it was held that the Notification No. 14/2022 is applicable retrospectively as the amendment brought in Rule 89(5) of the CGST Rules is curative and classificatory in nature. Accordingly, the same would be applied for rectification application filed within two years as per the time period prescribed under Section 54(1) of the Central Goods & Service Tax Act, 2017. The said decision of the Coordinate Bench was challenged by the Union of India before the Supreme Court, by filing UOI v. Ascent Meditech Ltd.  109 GST 613/98 GSTL 4 (SC)/Special Leave Petition No. 8134 of 2025 which was dismissed by the order dated 28.03.2025, against which a Review petition (Diary) No. 38626 of 2025 was filed which has also been dismissed by the Supreme Court by the order dated 02.12.2025.
5. The aforesaid proposition of law is not controverted by learned Senior Standing Counsel Mr. Utkarsh Sharma.
6. Under the circumstances, we are inclined to quash and set aside the deficiency memo in Form GST RFD-03 for the years 2017-18 and 2018-19, issued by the Respondent no.3. We further direct the respondent to process the claim of refund in light of the decision of the Supreme Court in the case of V.K.C Footsteps (supra) and Ascent Meditech Ltd. (supra) and as per the Notification dated 05.07.2022, within a period of 12 weeks from the date of receipt of this order.
7. With the aforesaid directions, the present writ petition stands allowed.