Case Summary: Refund of accumulated ITC allowed as retrospective application of amended Rule 89(4)(C) held impermissible since refund right crystallises on date of export

Case Title: M/s Indian Herbal Store Pvt. Ltd. v. Union of India & Ors.
Court: High Court of Delhi
Petition Numbers: W.P.(C) 9908/2021 & W.P.(C) 9912/2021
Category: Refund of Accumulated ITC – Zero-Rated Supplies
Date of Judgment: 15.09.2023
Relevant Provisions:

• Section 54, Explanation (2) – CGST Act, 2017

• Section 16(3) – IGST Act, 2017

• Rule 89(4)(C) – CGST Rules, 2017

• Issue relates to refund computation for zero-rated supplies without payment of tax.

Facts of the Case (Paras 1–7)

The petitioner, an exporter of herbal products, filed four refund applications for accumulated unutilised ITC for the tax periods 01.10.2018 to 30.09.2019. The refund claims were rejected through four orders dated 15.09.2020, 24.09.2020, 22.10.2020, and 05.11.2020 on two primary grounds:

1. Non-submission of FIRCs showing receipt of export proceeds; and

2. Non-compliance with amended Rule 89(4)(C) by applying the 1.5× cap on export value while computing “turnover of zero-rated supplies”.

In appeal, the petitioner succeeded on the FIRC issue; however, the Appellate Authority upheld rejection solely on applying the amended Rule 89(4)(C). The petitioner therefore challenged:

• refund rejections;

• the retrospective application of the amendment inserted on 23.03.2020; and

• the constitutional validity of Rule 89(4)(C).

Questions/Issues Before the Court

1. Whether amended Rule 89(4)(C) inserting the 1.5× domestic value cap can be retrospectively applied to exports made before 23.03.2020.

2. Whether the petitioner’s refund right crystallises on the date of export, making subsequent procedural amendments inapplicable.

3. Whether the rejection orders and appellate orders were legally sustainable.

4. Whether the constitutional challenge to Rule 89(4)(C) requires adjudication despite the Karnataka High Court’s decision in Tonbo Imaging.

Observations of the Court (Paras 8–23)

1. Nature of Rule 89(4)(C) and date of crystallisation of refund entitlement

The Court held that the right to refund under Section 54 CGST Act crystallises on the date of export because the “relevant date” for computing limitation is tied to the date of export (Paras 17–18). Therefore, turnover must be computed strictly as per the rules in force during the period of export, and not as per subsequently introduced restrictions (Paras 19–21).

2. Interpretation of “turnover”

Referring to Cipla Ltd. (2003) 7 SCC, turnover denotes the actual gross value of exports transacted during the relevant period, and cannot be artificially capped by later amendments (Para 19). Turnover must correspond to the period in which exports were made (Para 20).

3. Rejection of Revenue’s argument on retrospective procedural application

The Revenue’s stand that the amendment is “purely procedural” and hence retrospectively applicable to refund applications filed after 23.03.2020 was rejected. The Court reasoned that the effect of the amendment is substantive, imposing a cap that materially reduces refund eligibility (Paras 13–16, 21).

4. Impact of Karnataka High Court ruling in Tonbo Imaging striking down Rule 89(4)(C)

Since the Kerala High Court in Tonbo Imaging declared the amended Rule 89(4)(C) ultra vires, the rule is treated as non-existent from its inception (Para 23). Therefore, Delhi High Court found no need to re-examine the vires argument (Para 24).

Judgment / Verdict (Paras 22, 25–27)

The Court held that the Appellate Authority erred in applying the amended Rule 89(4)(C) for exports completed in 2018–2019. Consequently:

• All refund rejection orders dated 15.09.2020, 24.09.2020, 22.10.2020 and 05.11.2020 were set aside.

• Order-in-Appeal Nos. 106–108 dated 18.06.2021 were also set aside.

• The Proper Officer was directed to process refund of accumulated ITC along with applicable interest for the period 01.10.2018 to 30.09.2019.

• The petitions were disposed of accordingly.

Summary of Cases Referred (Table)

Between the Fine Lines – Practical Takeaways for Trade & Industry

Exporters’ refund entitlement under Section 54 is locked on the date of export. Any later amendment that restricts refund—such as the 1.5× cap on turnover—cannot be applied to past exports. Officers cannot retrospectively curtail refund benefits through later procedural changes. Where Rule 89(4)(C) was invoked to reduce export turnover for refunds relating to pre-23.03.2020 periods, such orders are unsustainable and refund must be recomputed based on the actual export value.

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