MARCH 10, 2025

By Ashwarya Sharma

Abstract

THE Hon'ble Gujarat High Court's recent judgment in Patanjali Foods Ltd. v. Union of India (2025-TIOL-383-HC-AHM-GST) has reaffirmed a fundamental principle in taxation - that government circulars cannot retrospectively restrict rights that existed under previous laws. The ruling clarifies that refunds under the inverted duty structure cannot be denied based on a circular restricting the refund for past period when the claim of refund was perfectly valid. This article critically examines the judgment, its legal basis, and its implications for taxpayers and GST jurisprudence.

1. Introduction

The doctrine of "Lex prospicit non respicit", which means "The law looks forward, not backward" is a cornerstone of not only fiscal jurisprudence but also one of the basic tenants of a society governed by rule of law as the conduct of mankind is supposed to be regulated basis existing laws and not the future adjustment of the present. In India, tax laws must adhere to constitutional principles, particularly Article 14 (Right to Equality) and Article 265 (No Tax Without Authority of Law). The recent Gujarat High Court ruling in Patanjali Foods Ltd. (supra) addressed the issue of retrospective applicability of refund restrictions under GST through Board Circular, setting a precedent on the finality of refund orders and the scope of administrative circulars restricting vested rights.

This article provides an in-depth legal analysis of the case, focusing on the interaction between statutory provisions, government notifications, circulars and judicial precedents in the context of refund claims under fiscal laws.

2. Factual Background

Patanjali Foods Ltd., engaged in the manufacture and sale of edible oils, filed a refund claim under Section 54(3) of the CGST Act, 2017 for the period February-March 2021, citing an inverted duty structure where the input tax rate exceeded the output tax rate.

However, the Central Government issued Notification No. 9/2022-Central Tax on 13.07.2022 exercising powers under clause (ii) of proviso to section 54 (3) of the CGST Act, which restricted inverted duty refund eligibility for certain goods, including edible oils, with effect from 18.07.2022. Thus, the notification clearly restricted the refund prospectively and the petitioner's refund was initially allowed through an order passed in form GST-RFD-06 dated 12.01.2024 which was issued against show cause notice issued in form GST-RFD-08.

Subsequently, the tax department issued another show cause notice on 25.04.2024 this time under section 73 of the CGST Act with form GST-DRC-01, demanding repayment of the sanctioned refund along with interest and penalty citing erroneously granted refund. Later, the Order-in-Original dated 10.09.2024 was passed and denial of refund was confirmed, leading to the petitioner's challenge before the Hon'ble High Court.

3. Legal Issues

The case primarily revolved around the following legal questions:

1. Can Notification No. 9/2022-CT though effective from 18.07.2022, be applied retrospectively to refund claims filed for past tax periods prior to its issuance but filed after the Notification due to Circular No. 181/13/2022-GST dated 10.11.2022?

2. Once a refund order is granted through proper adjudication, can it be unilaterally revoked by the department terming it to 'erroneous refund' under section 73/74 of the CGST Act without going into appeal or revision under Sections 107 and 108 of the CGST Act against the original adjudication order?

3. Constitutional Validity of Para 2(2) of Circular No. 181/13/2022-GST dated 10.11.2022 which extended the restriction introduced vide Notification No. 9/2022 for past period refunds?

4. Arguments and Counterarguments

4.1 Petitioner's Arguments

- Refunds are governed by the law applicable during the relevant tax period, not subsequent notifications or circulars.

- Denial of refunds based solely on the date of application is arbitrary, creating an artificial classification among taxpayers.

- The Gujarat High Court's own ruling in Ascent Meditech Ltd. v. Union of India (2024-TIOL-2062-HC-AHM-GST) had already struck down similar refund restrictions as unconstitutional.

- Beneficial circulars apply retrospectively, while restrictive circulars apply prospectively.

- The department failed to challenge the refund order through proper appellate procedures, making its unilateral reversal illegal.

4.2 Respondents' Arguments

- The notification applied to all refund applications filed post-18.07.2022, regardless of the tax period.

- Section 73 of the CGST Act empowers authorities to recover erroneously granted refunds.

- The Ascent Meditech ruling was inapplicable, as it concerned refund computation rather than outright refund denial.

5. Judicial Analysis and Findings

The Hon'ble High Court ruled in favour of the petitioner, holding that:

1. Retrospective Application of the Notification is Invalid

- Notification No. 9/2022 explicitly stated that it applied prospectively from 18.07.2022. Therefore, refunds for periods before its introduction cannot be denied based on its provisions.

2. Artificial Classification of Refund Applicants Violates Article 14

- A refund application's filing date cannot determine eligibility if the claim pertains to a tax period before the notification's issuance.

- The circular's distinction between pre-18.07.2022 and post-18.07.2022 applications was arbitrary and unconstitutional.

3. Finality of Refund Orders Under GST Law

- Once a refund order is granted through adjudication, it attains finality unless overturned through a statutory appeal or revision under Sections 107 and 108 of the CGST Act.

- The department's show cause notice and subsequent recovery proceedings were illegal even on this count.

4. Quashing of the Order-in-Original

- The refund rejection Order-in-Original dated 10.09.2024, was declared ultra vires and unconstitutional.

6. Implications of the Judgment

- Strengthens protections against retrospective denial of refunds based on Circulars.

- Provides legal clarity on the finality of refund orders once issued through a speaking order passed in form GST-RFD-06.

- Ensures GST laws are interpreted in a taxpayer-friendly manner and promotes ease of doing business.

7. Conclusion

The Patanjali Foods Ltd. ruling is a landmark decision reaffirming the principle of non-retrospective taxation. By striking down arbitrary refund restrictions, the Hon'ble High Court has ensured that government circulars cannot override statutory provisions to the detriment of taxpayers.

This decision serves as a strong precedent for businesses challenging retrospective taxation policies and underscores the judiciary's commitment to upholding constitutional principles in tax matters.

Future tax policy and administration must align with this ruling, ensuring greater predictability, fairness, and adherence to legal frameworks in GST implementation.

[The writer is Co-Founder and Legal (Head) of RB LawCorp Pvt. Ltd. The views expressed are strictly personal.]