Karnataka High Court Clarifies Powers To Condoned Delay In GST Refunds Under Section 54

The Karnataka High Court in Assistant Commissioner of Central Taxes Vs Merck Life Science Private Limited has delivered an important ruling on the interplay between the limitation prescribed under Section 54 of the Central Goods and Services Tax Act, 2017 and the constitutional writ jurisdiction of the High Court under Article 226 of the Constitution of India.

The judgment settles two key issues:

  1. The two-year time limit under Section 54 for claiming refund is mandatory and not merely procedural.
  2. Despite this, the High Court can, in appropriate and genuine cases, condone delay and direct the department to process the refund, to prevent unconstitutional retention of tax.

Below is a structured analysis of the decision, its reasoning, and its practical implications for assessees facing time-barred refund claims.

Factual Background

Nature of Business and Transactions

The respondent-assessee is a company engaged in healthcare, life sciences, and electronics, rendering intermediary services to overseas entities and earning commission income. In relation to these services:

  • For October 2017, the assessee filed GSTR‑3B and paid IGST, treating the services as “export of services”.
  • Subsequently, in March 2018, the assessee filed another GSTR‑3B and paid CGST and SGST, now treating the same transaction as intra-State supply.

Thus, tax was effectively paid twice on the same transaction – once as IGST (export) and then as CGST + SGST (domestic).

  • Rule 89(1A) of the Central Goods and Services Tax Rules, 2017 was inserted by Notification No.35/2021–Central Tax dated 24.09.2021.
  • Rule 89(1A) laid down the procedure and timelines for seeking refund in cases where tax had been wrongly paid as IGST or CGST/SGST on misclassification between inter-State and intra-State supplies.
  • Circulars were also issued by the GST authorities to operationalise the said Rule.

Refund Application and Rejection

  • The assessee filed a refund application under Section 54 of the CGST Act on 30.03.2024, seeking refund of the IGST earlier paid by mistake.
  • The department rejected the claim by order dated 27.05.2024, primarily on the ground that:
    • The application was beyond two years from the relevant date under Section 54; and
    • It was also beyond the extended period of two years from 24.09.2021 granted by the proviso to Rule 89(1A).

Single Judge’s Decision

The assessee filed a writ petition challenging the rejection. The learned Single Judge:

  • Allowed the writ petition,
  • Held that:
    • The time limit under Section 54 and Rule 89(1A) was directory and not mandatory, and
    • Since the wrong payment of IGST was undisputed, the refund should not be denied on the ground of delay.
  • Directed the authorities to process the refund application.

The Revenue challenged this order in intra-court appeals under Section 4 of the Karnataka High Court Act, 1961.

Revenue’s Contentions

On behalf of the Revenue, it was argued that:

  • Section 54 provides a two-year limitation from the “relevant date” for filing a refund claim, in prescribed form and manner.
  • This two-year period is mandatory, not optional. Declaring it directory would amount to effectively rewriting the statute, which is impermissible.
  • Rule 89(1A), made effective from 24.09.2021, along with its proviso, gave a specific two-year window for past cases to file refund claims. The assessee failed to avail this window.
  • Permitting refund beyond the prescribed period would:
    • Undermine the carefully time-bound structure of the CGST Act,
    • Potentially cause unjust enrichment for the assessee, and
    • Disrupt other time-sensitive adjudicatory mechanisms such as those under Section 73 and Section 74.
  • The Single Judge overlooked the legislative purpose behind limitation in Section 54 and improperly treated it as directory.

Accordingly, the Revenue sought to restore the original rejection of the refund claim.

Assessee’s Contentions

Counsel for the assessee submitted: