Navigating IGST Refund Rejections: Understanding the Invalidity of Circular 37/2018

A recent judicial precedent from the Madras High Court has provided significant clarity for businesses facing Integrated Goods and Services Tax (IGST) refund rejections. Specifically, the Court’s ruling in Fives Call – KCP Ltd. Vs Chief Commissioner of Customs has set aside rejections based on Circular No. 37/2018 dated 09.10.2018, deeming the circular invalid. This means that if your IGST refund claim was denied solely due to this circular, you may have grounds for reconsideration.

The Invalidity of Circular No. 37/2018 and Its Impact on IGST Refunds

The core issue revolves around Circular No. 37/2018, dated October 9, 2018, which has been a point of contention for many exporters. This circular effectively restricted IGST refunds for exporters who had claimed the higher rate of duty drawback. The rationale behind this restriction, as implemented through a computerized module, was that if a higher rate of drawback was availed, the system would automatically disallow the IGST refund. This created a situation where exporters felt unfairly penalised, as they were often unaware of the implications of selecting certain drawback codes.

However, the legal landscape surrounding this circular has evolved significantly. The Gujarat High Court, in the landmark case of Amit Cotton Industries v. Principal Commissioner of Customs (2019) 75 GST 33 (Gujarat), unequivocally declared Circular No. 37/2018 to be invalid. The primary reason for this invalidation was its inconsistency with the statutory provisions and the Rules governing the grant of IGST refunds. A circular, by its very nature, cannot override or contradict the parent statute or its associated rules. If it does, it loses its legal enforceability.

This crucial judgment from the Gujarat High Court has since been followed and affirmed by the Madras High Court in various cases, including W.P. No. 14847 of 2023 and by a Division Bench in M/s. Precot Meridian Limited v. Commissioner of Customs and another (2020 (1) TMI 90). These repeated judicial pronouncements solidify the position that Circular No. 37/2018 cannot be a valid basis for rejecting IGST refund claims. For businesses, this means that any rejection order citing this specific circular is legally vulnerable and can be challenged.

Understanding the Madras High Court’s Decision in Fives Call – KCP Ltd. Vs Chief Commissioner of Customs

In the case of Fives Call – KCP Ltd. Vs Chief Commissioner of Customs, the petitioner challenged an order from September 9, 2022, which had rejected their IGST refund claim. The rejection was explicitly based on the petitioner having claimed the higher rate of duty drawback, specifically citing the suffix "A" to the Drawback Scheme Code in their Shipping Bills. The impugned order stated that this indicated an intention to avail the higher rate of drawback, and consequently, the computerized system prevented the processing of the IGST refund as per Board’s Circular No. 37/2018.

The petitioner’s counsel effectively argued the invalidity of Circular No. 37/2018, referencing the Amit Cotton Industries judgment and its subsequent adoption by the Madras High Court itself. They emphasized that the circular was struck down due to its inconsistency with statutory provisions and rules governing IGST refunds, asserting the petitioner’s entitlement to relief based on these judicial precedents.

The Madras High Court, after careful consideration of these submissions and the cited legal precedents, concurred with the petitioner. The Court’s decision was clear and decisive:

• Setting Aside the Impugned Order: The Court set aside the rejection order dated September 9, 2022. This means the original rejection is nullified, and the matter is to be treated as if the rejection never occurred.
• Direction for Reconsideration: The third respondent (the authority that issued the rejection) was directed to reconsider the petitioner’s claim for IGST refund afresh. This reconsideration is not a mere formality; it must be carried out in strict accordance with the law, taking into account the judgments referred to by the Court (including Amit Cotton Industries and M/s. Precot Meridian Limited), and considering all relevant statutory provisions and rules.
• Opportunity of Hearing: A crucial procedural safeguard was also mandated: the petitioner must be afforded a reasonable opportunity of hearing during this reconsideration process. This ensures that the exporter can present their case and address any concerns the authorities might have.
• Time Limit for Reconsideration: To ensure timely resolution, the Court stipulated that this reconsideration process must be completed within a period of four weeks from the date of receipt of a copy of the order. This provides a clear timeline for the authorities to act.

This ruling provides a clear pathway for other exporters who have faced similar rejections based on the now-invalidated Circular No. 37/2018.

Practical Steps for Exporters Facing IGST Refund Rejection

If your IGST refund claim has been rejected, or you anticipate a rejection, based on the grounds related to Circular No. 37/2018 and the higher rate of duty drawback, here are practical steps you should consider:

1. Review Your Rejection Order: Carefully examine the rejection order received from the customs or GST authorities. Identify if Circular No. 37/2018 dated 09.10.2018 is explicitly cited as a reason for the rejection, particularly in conjunction with claiming a higher rate of duty drawback or the use of specific drawback scheme codes (e.g., suffixed with "A").

2. Gather Documentation: Compile all relevant documentation related to your export transactions, shipping bills, IGST payment, duty drawback claims, and the refund application. This will be crucial for presenting your case during reconsideration.

3. Cite Judicial Precedents: When challenging the rejection, prominently refer to the key judicial pronouncements that have invalidated Circular No. 37/2018. Specifically, mention:

   • Amit Cotton Industries v. Principal Commissioner of Customs (2019) 75 GST 33 (Gujarat)
   • M/s. Precot Meridian Limited v. Commissioner of Customs and another (2020 (1) TMI 90) (Madras High Court Division Bench)
   • Fives Call – KCP Ltd. Vs Chief Commissioner of Customs (Madras High Court – the specific case discussed in this article)

4. Emphasize Statutory Inconsistency: Clearly articulate that the circular is inconsistent with the statutory provisions and rules governing IGST refunds. This is the fundamental legal flaw that led to its invalidation. A circular cannot create restrictions that are not present in the primary law.

5. Request a Hearing: Insist on your right to a reasonable opportunity of hearing. This allows you to explain your position, clarify any ambiguities, and present your arguments directly to the adjudicating authority.

6. Follow Up: Ensure that the reconsideration process adheres to any timelines set by the courts or applicable regulations. Proactive follow-up can help expedite the resolution of your claim.

The Principle: Circulars Cannot Override Law

The repeated judicial invalidation of Circular No. 37/2018 underscores a fundamental principle of administrative law in India: circulars, instructions, or trade notices issued by administrative bodies cannot override or contradict the provisions of the parent statute or the rules framed thereunder.

• Legal Hierarchy: The hierarchy of laws places the Constitution at the apex, followed by parliamentary enactments (Acts), then rules and regulations framed under those Acts, and finally, administrative instructions like circulars. Circulars are meant to clarify or explain the law, not to amend or impose new restrictions that are not envisaged by the Act or Rules.
• Impact on Businesses: When a circular attempts to impose restrictions beyond the scope of the law, it creates legal uncertainty and can lead to arbitrary rejections. This principle safeguards taxpayers from undue hardship caused by administrative overreach.
• Recourse for Taxpayers: This judicial stance empowers taxpayers to challenge administrative actions that are based on invalid circulars. It reinforces the idea that the rule of law must prevail, and authorities must act within the bounds of their statutory powers.

This principle is vital for maintaining predictability and fairness in the tax regime. It means that even if a computerized system is programmed to reject claims based on an invalid circular, the legal recourse remains available to challenge such rejections.