Gujarat HC Reinstates Patanjali’s ₹1.7 Crore GST ITC Refund After Revenue Recovery Attempt

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

The applicant, Patanjali Foods, is a foremost manufacturer and seller of edible oil who applied for an ITC refund after noting that the tax rate on output supplies made by the petitioner surpasses the tax rate on input supplies. Thereafter, Patanjali applied for a refund under the inverted duty structure provision of Section 54(3) of the GST Act.

Authorities granted the refund dated January 12, 2024, but on April 25, 2024, a notice was furnished u/s 73 of the GST Act alleging that the refund had been granted incorrectly and asked for the recovery of the amount, including the interest u/s 50 of the GST Act coupled with a penalty of Rs 17,00,709.

The applicant contested this demand, claiming that the refund was attained at the final stage and could not be withdrawn arbitrarily.

However, an Order-in-Original was passed dated 10 September 2024 confirming the demand and penalty there against which the present Petition has been lodged.

Uchit N. Sheth, appearing for Patanjali Foods, claimed that the reliance of the government on Circular No. 181/13/2022-GST dated November 10, 2022, which restricted refunds under the inverted duty structure for specific goods, was prohibited.

The applicant prayed that the Gujarat High Court strike down the impugned para 2(2) of Circular No. 181/13/2022-GST on 10.11.2022 claiming that the circular tried to apply the restriction retrospectively, even after the notification itself being prospective, effective from July 18, 2022.

As Patanjali Foods’ refund application is related to the period of February- March 2021, the limitation can not apply. He outlined that the authorities have not furnished a plea against the refund order, making its withdrawal legally untenable.

The recovery action is been defended by Deepak N Khanchandani and Hetvi H Sancheti appearing for the Respondents, claiming that the refund has been incorrectly granted and was within reassessment u/s 73(10) of the GST Act. It was claimed that the review procedure of the refund order is an internal procedure of the department for securing the revenue loss against the incorrect refund.

It was noted by the division bench comprising Justice Bhargav D. Karia and Justice D.N. Ray that an artificial classification of taxpayers based on the refund application date was discriminatory and breached Article 14 of the Constitution.

It was ruled by the bench that the circular could not override the legal provisions, and as the refund was statutory sanctioned before the restriction came into force, its recovery was unexplained.

Therefore, the Gujarat High Court struck down Paragraph 2(2) of Circular No. 181/13/2022-GST dated November 10, 2022, ruling that it was ultra vires Section 54 of the GST Act and could not be applied retrospectively.

Also, the court quashed the impugned order in the original keeping that once the refund sanction order on January 12, 2024, attains the last phase, then no further show cause notice revoking the advantages of a quasi-judicial order could be instated.