Gujarat High Court reaffirms Patanjali’s Rs.1.7 crore GST ITC Refund amid Revenue Recovery Attempt

The Gujarat High Court ruled in favour of Patanjali Foods Ltd. (Patanjali), retaining the refund of an unutiliZed Input Tax Credit (ITC) of Rs 1,70,07,091, which was initially granted but later sought to be recovered by the revenue.

Patanjali Foods, a leading maker and seller of edible oil, requested for an ITC refund after determining that the petitioner’s tax rate on output supplies exceeds the tax rate on inputs. Patanjali then claimed for a refund under Section 54(3) of the GST Act, which provides for an inverted duty structure.

Authorities granted the refund on 12th January 2024, but on 25th April 2024, a notice was issued under section 73 of the GST Act alleging that the refund had been granted incorrectly and requesting the recovery of the amount, including interest under section 50 of the GST Act, as well as a penalty of Rs.17,00,709.

The applicant challenged this demand, stating that the refund had been obtained at the final stage and could not be removed arbitrarily.

Despite this, an Order-in-Original was issued on September 10, 2024, confirming the demand and penalty against which the current Petition was filed.

Uchit N. Sheth, representing Patanjali Foods, contended that the government’s reliance on Circular No. 181/13/2022-GST, dated November 10, 2022, which limited refunds under the inverted duty structure for particular goods, was prohibited.

The applicant requested that the Gujarat High Court strike down the impugned paragraph 2(2) of Circular No. 181/13/2022-GST on 10.11.2022, arguing that the circular attempted to apply the restriction retrospectively, notwithstanding the fact that the notification itself was prospective, effective July 18, 2022.

The limitation cannot apply to Patanjali Foods’ refund application because it is for the period of February to March 2021. He said that the authorities had not filed an appeal against the refund order, making its removal legally unsustainable.

Deepak N Khanchandani and Hetvi H Sancheti, arguing for the Respondents, have challenged the recovery action, saying that the refund was granted incorrectly and was subject to reassesment under Section 73(10) of the GST Act. It was alleged that the refund order review procedure is the department’s internal procedure for securing revenue loss against wrong refund.

The division bench, which included Justice Bhargav D. Karia and Justice D.N. Ray, concluded that an arbitrary grouping of taxpayers based on the refund application date was discriminatory and violated Article 14 of the Constitution.

The bench decided that the circular could not overrule the legal rules, and because the refund was statutory sanctioned before the restriction went into effect, its recovery was unclear.

As a result, the Gujarat High Court ruled that Paragraph 2(2) of Circular No. 181/13/2022-GST, dated November 10, 2022, violated Section 54 of the GST Act and could not be applied retrospectively.

Also, the court overturned the initial order, stating that until the refund sanction order on January 12, 2024, reaches the final phase, no further show cause notices revoking the benefits of a quasi-judicial order could be imposed.

For Official Judgement Download PDF Given Below: