The Karnataka High Court has clarified that while the two-year limitation under Section 54 of the CGST Act for refund claims is mandatory, the writ jurisdiction under Article 226 of the Constitution remains available to grant relief in cases of genuine delay, provided corresponding extensions are granted to tax authorities to invoke remedial provisions.
Background & Facts
The Dispute
The respondent-assessee, M/s Merck Life Science Private Limited, is a company engaged in healthcare and life sciences, providing intermediary services to foreign entities and earning commission income. In its GSTR-3B return for October 2017, the assessee treated the transaction as an "export of services" and paid Integrated Goods and Services Tax (IGST). Subsequently, in March 2018, it revised its position, treating the same transaction as an intra-State supply and paid Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST). This resulted in the payment of tax twice - once as IGST and again as CGST and SGST.
Key Facts
- The IGST payment of Rs. 1,25,00,000 (approx.) was made in October 2017
- CGST and SGST payments were made in March 2018 for the same transaction
- The assessee did not claim refund of the IGST paid at the time of the revised return
- Notification No. 35/2021 - Central Tax dated 24.09.2021 introduced Rule 89(1A) of the CGST Rules, prescribing the procedure and timelines for refund claims
- The proviso to Rule 89(1A) allowed a one-time window of two years from 24.09.2021 to claim refunds arising from transactions prior to that date
- The assessee filed its refund application under Section 54 of the CGST Act on 30.03.2024
- The refund claim was rejected by the tax authorities on 27.05.2024 on the ground that it was filed beyond the two-year limitation under Section 54 and beyond the extended window under Rule 89(1A)
- The assessee filed writ petitions before the Single Judge of the Karnataka High Court in five consolidated cases (WP Nos. 27259/2024, 27261/2024, 27552/2024, 27691/2024, 28151/2024)
- The Single Judge, by order dated 07.11.2025, held that Section 54 and Rule 89(1A) were directory and not mandatory, and directed the authorities to process the refund
Procedural History
- October 2017: IGST paid on transaction treated as export of services
- March 2018: CGST and SGST paid on same transaction treated as intra-State supply
- 24.09.2021: Rule 89(1A) of CGST Rules notified, introducing formal refund procedure and a two-year window for pre-notification claims
- 30.03.2024: Refund application filed under Section 54 of CGST Act
- 27.05.2024: Refund claim rejected by Assistant Commissioner on limitation grounds
- 07.11.2025: Single Judge of Karnataka High Court allowed writ petitions, holding limitation directory
- 17.03.2026: Division Bench of Karnataka High Court delivered judgment on five consolidated writ appeals (WAs 110, 119, 122, 126, 140 of 2026)
The Parties' Positions
Appellants (Revenue): Argued that Section 54’s two-year limitation is mandatory, as it ensures finality, prevents abuse, and aligns with Sections 73 and 74 which have fixed limitation periods for reassessment. The absence of any condonation power under the Act makes strict compliance essential.
Respondent (Assessee): Contended that since tax was paid twice without legal authority, the refund claim is not governed by limitation. The mechanism under Rule 89(1A) was not available until 2021, and the delay was not due to laches but due to procedural uncertainty.
Relief Sought
The assessee sought: (1) quashing of the rejection order dated 27.05.2024; (2) direction to the authorities to process and grant refund of IGST paid in October 2017; (3) interest on the refund amount from the date of payment; and (4) costs.
The Legal Issue
Is the two-year limitation period prescribed under Section 54 of the CGST Act, 2017 for filing a refund claim mandatory or directory, and if mandatory, is there any legal remedy available to a taxpayer who files a genuine refund claim beyond this period?
Arguments Presented
For the Appellant/Petitioner
The Revenue, represented by Senior Standing Counsel Aravind V. Chavan, argued that Section 54 is a self-contained code with a clear, mandatory two-year limitation from the "relevant date" - defined as the date of tax payment in residuary cases. The provision’s structure, read with Sections 73 and 74, shows that the two-year window is designed to allow authorities sufficient time to detect and act upon erroneous payments or wrongful availment of credit. Declaring it directory would undermine the entire statutory scheme, create uncertainty, and enable taxpayers to delay claims indefinitely, thereby defeating the purpose of finality in tax administration. The absence of any condonation power under the Act further reinforces its mandatory nature.
For the Respondent/State
The assessee, represented by Advocate Bharath B. Raichandani, submitted that Article 265 of the Constitution prohibits levy or collection of tax without authority of law. Where tax is paid erroneously - here, both IGST and CGST/SGST on the same transaction - the Revenue cannot retain the amount as unjust enrichment. The mechanism under Rule 89(1A) was not available until 2021, and the delay in filing was not due to negligence but due to the absence of a prescribed form and procedure. The word "may" in Section 54 indicates directory intent, and the courts must interpret fiscal statutes in a manner that prevents hardship and upholds constitutional principles.
The Court's Analysis
The Division Bench, per Justice K.V. Aravind, undertook a comprehensive analysis of the CGST Act’s scheme, emphasizing that every provision is time-bound, from return filing under Chapter IX to assessment under Sections 59 - 62 and adjudication under Sections 73 and 74. The Court held that the two-year limitation under Section 54 is not merely procedural but structural to the Act’s integrity.
"The period of two years carries considerable importance and bears relevance to the periods of three years and five years contemplated under Sections 73 and 74, respectively. The only plausible reason that can be discerned for prescribing the two-year limitation is that, if any situation contemplated under Sections 73 or 74 is noticed during the consideration of a refund application, the authorities are enabled to take appropriate remedial action, instead of allowing the taxpayer to take undue advantage."
The Court rejected the argument that the word "may" renders the provision directory, stating that statutory language must be interpreted contextually. The absence of any enabling provision for condonation of delay under the Act further supported the mandatory construction.
However, the Court recognized that a rigid application of Section 54 could lead to unjust outcomes where tax is paid without legal authority. Citing Dhulabhai v. State of Madhya Pradesh and Salonah Tea Co. Ltd. v. Superintendent of Taxes, the Court affirmed that Article 226 of the Constitution remains available to grant relief where the statute provides no remedy.
"Merely because the provision under Section 54 is held to be mandatory, it cannot be said that the jurisdiction vested in this Court under Article 226 stands excluded or rendered unavailable."
The Court further held that condonation of delay under Article 226 must be conditional: if the Court condones the delay in filing the refund claim, it must simultaneously extend the time available to the proper officer to invoke Sections 73 or 74, if applicable. This ensures balance between taxpayer rights and revenue protection.
The Verdict
The writ appeals were allowed in part. The order of the Single Judge dated 07.11.2025 was set aside. The Court held that the two-year limitation under Section 54 is mandatory, but the delay in filing the refund application dated 30.03.2024 was condoned on the ground of genuine error and absence of mala fide. The authorities are directed to consider the refund application in accordance with law. The time for compliance is sixty days from the date of receipt of this order. The entitlement to refund is not in dispute; the only issue was limitation.
What This Means For Similar Cases
Mandatory Limitation Cannot Be Ignored, But Writ Jurisdiction Is a Safety Valve
- Practitioners must now treat Section 54’s two-year limit as strictly mandatory in administrative proceedings
- Refund applications filed beyond this period will be rejected by tax authorities without exception
- However, a writ petition under Article 226 remains a viable remedy if the taxpayer can demonstrate genuine error, lack of procedural clarity, or unjust enrichment
Condonation Requires Reciprocal Extension of Time for Authorities
- Courts will not condone delay unless the taxpayer agrees that the tax authorities are granted a corresponding extension to invoke Sections 73 or 74
- This prevents abuse: a taxpayer cannot benefit from delayed filing while simultaneously blocking reassessment
- Practitioners must plead and prove both the genuineness of the claim and the absence of laches or prejudice to the Revenue
Rule 89(1A) Proviso Does Not Override Section 54’s Core Limitation
- The one-time window under Rule 89(1A) is a procedural facilitation, not a statutory extension of Section 54
- Claims filed beyond even the Rule 89(1A) window (e.g., after 24.09.2023) are not automatically valid
- Only writ jurisdiction under Article 226 can provide relief in such cases, subject to the conditions laid down in this judgment
Taxpayers Must Act Promptly, But Courts Will Not Permit Unjust Enrichment
- The judgment reinforces that tax cannot be retained without legal authority (Article 265)
- Where tax is paid twice on the same transaction, courts will intervene even if the claim is technically time-barred
- Practitioners should advise clients to file refund claims within two years, but if missed, prepare a writ petition with affidavits establishing the error and absence of delay attributable to negligence
