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A textile principal running a persistent inverted-duty accumulation across a financial year faces two independent risks. First, the accumulated Rule 89(5) entitlement is a working-capital-heavy asset that only converts to cash on filing Form GST RFD-01. Second, the entitlement is time-barred by the Section 54(1) 2-year window from the relevant date defined in Explanation 2(e), meaning an un-filed FY balance permanently forfeits the cash refund at the end of the 24-month window. Without a monthly refund pipeline reconciled against a 2-year clock per FY and a D-90 escalation trigger, tier-2 principals routinely discover time-barred exposure only at year-end audit — by which point the remedy is a P&L write-off, not a refund file.
Build a per-FY inverted-duty accumulation ledger that ingests the electronic credit ledger, the outward supply pattern (turnover of inverted-rated supply and adjusted total turnover), and the tax payable on inverted-rated supply, and computes the Rule 89(5) maximum refund per month post-Notification 14/2022 (Net ITC excludes input services and capital goods). Anchor a 2-year clock per FY at 31 March of the accumulation FY. Track the cumulative refund pipeline in three states: filed and acknowledged (RFD-02), sanctioned (RFD-06), and rejected or deficiency-memo (RFD-08 or RFD-03 needing re-file). Compute un-filed FY balance = accumulation entitlement − cumulative filed. Escalate at D-90 before the FY 2-year expiry if any un-filed balance exists. Write-off log records any balance that crosses expiry unfiled.
FY-anchored accumulation register with monthly turnover of inverted-rated supply, Net ITC (post Notification 14/2022, excluding input services and capital goods), adjusted total turnover, and tax payable on inverted-rated supply; Section 54(1) 2-year clock configuration with FY-end anchor date (31 March of accumulation FY) and expiry-plus-24-months compute; RFD-01 filing status feed (RFD-02 acknowledgement, RFD-03 deficiency memo, RFD-06 sanction, RFD-08 rejection); escalation threshold at D-90 before expiry to CFO and tax lead; permanent write-off log for time-barred balances; audit committee disclosure feed for any material write-off in the reporting period.
A month-end textile refund pipeline pack: opening un-filed FY balance by accumulation FY, additions in the period (RFD-01 filed), reductions in the period (RFD-06 sanctioned, RFD-08 rejected, RFD-03 re-file required), closing un-filed balance by FY, and days-to-expiry per FY. FY balances within D-90 of expiry are surfaced in a dedicated escalation section with the responsible tax lead named and the required action (file RFD-01 or resolve deficiency memo). Any FY balance that crossed expiry in the period is booked to the permanent write-off log with the amount, the accumulation FY, the relevant date used for the 2-year computation, and the reason for non-filing — providing the audit committee an unambiguous view of every time-barred forfeiture.
A Mumbai textile principal running a legacy Bombay Dyeing-shape operation closes FY 2024-25 books on 30 April with two open Rule 89(5) inverted-duty refund exposures on the ledger. The first is an FY 2023-24 balance of ₹1.85 crore — inverted-duty accumulation from a full 12-month cycle where combed cotton yarn (input GST 5 percent) and man-made fibre inputs (input GST 12 percent on staple, 18 percent on some technical yarns) drove a Net ITC pool above the output tax collected on cotton and blended fabric supplies at 5 percent. The second is an FY 2022-23 balance of ₹42 lakh from the previous cycle — unfiled through 2023-24 and 2024-25 on a rolling operational delay, now sitting at 24 months and 15 days from the FY 2022-23 relevant date. The 24-month clock on the FY 2022-23 balance expired on 31 March 2025. The ₹42 lakh is time-barred. It cannot be sanctioned by any proper officer. It is a permanent write-off. This is Rule 89(5) 2 year time limit textile refund claim reconciliation at its unforgiving edge — and the monthly refund pipeline and D-90 escalation trigger described below are what convert a working entitlement into cash before the clock runs out.
Quick reference
| Aspect | Detail |
|---|---|
| Statute — 2-year limit | Section 54(1) CGST Act 2017 — 2 years from relevant date |
| Statute — inverted-duty refund | Section 54(3) CGST Act read with Rule 89(5) CGST Rules |
| Relevant date (inverted-duty ITC) | Explanation 2(e) to Section 54 — due date of Section 39 return for period claim arises |
| Statutory instrument for Explanation 2(e) | Finance Act 2022, effective 1 October 2022 (Notification 18/2022-CT) |
| Formula (Net ITC post-14/2022) | (Turnover of inverted-rated supply × Net ITC / Adjusted total turnover) − Tax payable on inverted-rated supply |
| Net ITC exclusions | Input services + capital goods (Notification 14/2022-CT dated 5 July 2022) |
| Filing form | Form GST RFD-01 (fully electronic) |
| Filing frequency | Monthly, quarterly, or annual (principal’s operating cycle) |
| Refund period per application | Cannot span more than one FY |
| Acknowledgement / rejection forms | RFD-02 ack, RFD-03 deficiency memo, RFD-06 sanction, RFD-08 rejection |
| Escalation threshold (operational) | D-90 before expiry per FY balance |
| Condonation of delay | No statutory mechanism (barring extraordinary COVID exclusion) |
The reconciliation in one paragraph
Section 54(1) of the CGST Act 2017 requires that any refund application be filed before the expiry of two years from the relevant date. For refund of unutilised input tax credit on account of inverted-duty structure under Section 54(3) and Rule 89(5), Explanation 2(e) to Section 54 — inserted by the Finance Act 2022 with effect from 1 October 2022 via Notification 18/2022-Central Tax — defines the relevant date as the due date for furnishing the return under Section 39 for the period in which the claim for refund arises. The Section 39 return is GSTR-3B. In operational terms, the 2-year clock starts at the end of the tax period (month) in which the accumulated ITC qualifies for refund, and it runs 24 months forward from that anchor. Textile principals commonly build annual refund packs anchored at end-of-financial-year (31 March of the accumulation FY), giving the entire year’s accumulation a common conservative expiry two years later. A refund application filed after that expiry is time-barred and cannot be sanctioned. The un-refunded ITC balance remains in the electronic credit ledger and can still be applied against future outward liability, but the cash conversion is forfeited — a permanent working-capital and, in effect, P&L loss for the principal.
What the time-limit scenario looks like in India
Bombay Dyeing (illustrative), Sutlej Textiles, Banswara Syntex, Siyaram Silk Mills, Donear Industries, and Filatex India represent a shape of textile operation particularly exposed to Rule 89(5) time-bar risk. These are principals running long-cycle inverted-duty accumulations — man-made fibre spinners in Surat, worsted suiting mills in Bhilwara, blended fabric weavers in Ludhiana and Panipat — where input GST rates on synthetic staple, tow, filament, and technical yarns (5 percent to 18 percent depending on HSN and product category) structurally exceed the output GST rate on the finished cotton or blended fabric (5 percent for pure cotton, 12 percent for made-ups above the threshold, 5 percent for man-made fibre fabrics under specific HSN patterns). The accumulation is not a transient event — it is a persistent monthly pattern that produces an ITC pool sitting on the electronic credit ledger without a matching outward liability to consume it.
At the vertically integrated end, tier-1 principals such as Vardhman Textiles, Trident Ltd, Arvind Ltd, Raymond, Welspun India, KPR Mill, ABFRL, and Aditya Birla Fashion and Retail (Pantaloons, Allen Solly, Van Heusen) run large monthly refund pipelines with dedicated tax teams that file RFD-01 on a monthly or quarterly cycle. For these principals, the 2-year clock is rarely a binding constraint on filing — the operational discipline files within 12 to 18 months of accumulation. The time-limit risk sits on rejected or deficiency-memo returns, where the applicant must re-file within the original 2-year window, and the 90-day window from rejection to re-file can push a marginal case past expiry.
At the tier-2 and mid-tier end — Page Industries, Shahi Exports, Gokaldas Exports, Indo Count, Himatsingka Seide, Lux Industries, Rupa & Co, Dollar Industries, Siyaram Silk Mills, Donear Industries, Garware Technical Fibres, Filatex India, Sutlej Textiles, Banswara Syntex, Bombay Dyeing, and Pearl Global Industries — the time-limit risk is materially higher. Smaller tax teams, competing priorities on other refund heads (RoDTEP, RoSCTL, IGST refund on exports), and legacy accumulations from pre-2022 periods (before the Explanation 2(e) definition sharpened the relevant date computation) mean that FY balances routinely sit un-filed past 18 months. Regional clusters — Tiruppur knitwear, Surat man-made fibres, Ludhiana winter knitwear, Panipat home furnishings, Bhilwara suiting, Coimbatore and Erode cotton, Solapur jacquard — have their own cluster-typical accumulation patterns because the input mix and output HSN mix differ by regional specialisation.
The persistent structural feature — inverted-duty accumulation on the input pool combined with a hard 2-year window on cash conversion — is what makes a monthly refund pipeline with a per-FY 2-year clock the base reconciliation discipline for the entire cluster.
The regulatory overlay — Section 54, Rule 89(5), and Notification 18/2022
Section 54(1) of the CGST Act 2017 governs the 2-year limitation. It reads that any person claiming refund of any tax, interest, or any other amount paid by them may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed. The 2-year period is a hard statutory limit — the proper officer has no discretion to accept an application filed beyond it. There is no explicit condonation-of-delay mechanism in Section 54 for inverted-duty refunds, and the accepted judicial position is that statutory limitation periods in tax refund contexts are not condonable outside extraordinary judicial exclusions.
The relevant date — the point from which the 2-year clock is measured — is defined in Explanation 2 to Section 54. Sub-clause (e) of Explanation 2, which specifically addresses refund of unutilised input tax credit under Section 54(3), was inserted by the Finance Act 2022 with effect from 1 October 2022 via Notification 18/2022-Central Tax dated 28 September 2022. It reads that in the case of refund of unutilised input tax credit under sub-section (3), the relevant date is the due date for furnishing of return under Section 39 for the period in which such claim for refund arises. The Section 39 return for the standard monthly filer is GSTR-3B, and its due date is generally the 20th of the following month for aggregate turnover-based classes. Read strictly, this creates a per-month clock — each month of accumulation has its own 2-year window running from the 20th of the month following that accumulation month.
Prior to Notification 18/2022, the relevant date for accumulated ITC refunds was subject to competing interpretations because Explanation 2 did not have a sub-clause specifically for Section 54(3) refunds. Some tax administrations treated end-of-financial-year as the relevant date; others treated end-of-tax-period. The Finance Act 2022 amendment resolved this by anchoring the clock explicitly to the Section 39 return due date for the tax period in which the claim arises — an end-of-month anchor. In practical industry adoption, however, the tax-period-level clock is often operationalised as an FY-end anchor by tax teams building annual refund packs, on the reasoning that the last month’s relevant date (March GSTR-3B due 20 April) is later than the FY-end anchor (31 March), so counting 2 years from 31 March gives the entire FY’s accumulation a common conservative expiry that never overshoots the strict tax-period computation on the earliest month.
Rule 89(5) of the CGST Rules 2017 sets the maximum refund formula: Maximum Refund Amount = (Turnover of inverted-rated supply of goods and services × Net ITC / Adjusted Total Turnover) − Tax payable on such inverted-rated supply of goods and services. Notification 14/2022-Central Tax dated 5 July 2022 amended the definition of Net ITC in the formula to exclude input services and capital goods, tightening the recoverable quantum. The refund application is filed in Form GST RFD-01, fully electronic through the GST portal. Circular 125/44/2019-GST dated 18 November 2019 and successor clarifications lay out the fully electronic refund process, including that the refund period in a single application cannot span more than one financial year.
The end-to-end filing lifecycle for a textile principal is: RFD-01 application → RFD-02 acknowledgement (typically within 15 days) → either RFD-04 provisional refund (up to 90 percent for zero-rated cases, less relevant for inverted-duty), RFD-03 deficiency memo (which requires re-file — the re-file must still be within the original 2-year window from the relevant date), RFD-06 sanction, or RFD-08 rejection notice. A deficiency memo does not adjourn the 2-year clock — the applicant remains under the original expiry.
A worked example — a legacy inverted-duty balance running against the clock
Illustrative — the following figures represent an operating pattern of a mid-tier textile principal of the shape of a Bombay Dyeing-style legacy operation. Public financial disclosures do not reveal the underlying refund pipeline. Cross-verify against your own electronic credit ledger, RFD-01 filing history, and GSTR-3B due-date computation before any decision.
The principal is a Mumbai-based blended fabric manufacturer with approximately ₹950 crore turnover, running man-made fibre inputs (input GST 12 percent on staple, 5 percent on some HSN-specific yarns) and output at 5 percent on the majority of finished fabric SKUs. The persistent monthly accumulation over FY 2023-24 built a Rule 89(5) entitlement of approximately ₹1.85 crore net of the tax payable on inverted-rated supply — computed as follows on a full-year basis using the Notification 14/2022 amended formula (Net ITC excluding input services and capital goods):
| FY 2023-24 accumulation (illustrative) | Value (₹ crore) |
|---|---|
| Turnover of inverted-rated supply (12 months) | 480.0 |
| Adjusted total turnover (12 months) | 950.0 |
| Net ITC — input goods only (12 months) | 24.5 |
| Rule 89(5) maximum refund = 480 × 24.5 / 950 | 12.38 |
| Tax payable on inverted-rated supply @ 5 percent | 24.00 |
| Effective refund entitlement (capped by output tax adjustment) | 1.85 |
The illustrative numbers above use a stylised computation. In practice the formula is applied month-by-month, and the effective refund entitlement per month is the lesser of the formula-computed maximum and the balance in the electronic credit ledger attributable to input goods (net of input services and capital goods, per Notification 14/2022). The full-year figure of ₹1.85 crore represents the cumulative effective entitlement across 12 months.
The relevant date for the FY 2023-24 accumulation, on the conservative FY-end anchor interpretation, is 31 March 2024. The Section 54(1) 2-year time-limit falls on 31 March 2026. The tax team files RFD-01 for the full FY 2023-24 balance in October 2025 — five months before expiry, with sufficient runway for the standard 15-day RFD-02 acknowledgement and, if any RFD-03 deficiency memo issues, the 15-day re-file window without pushing past the 31 March 2026 expiry. The RFD-06 sanction lands in December 2025. Cash refund of ₹1.85 crore credits the principal’s bank account in January 2026.
The failure mode: the FY 2022-23 balance of ₹42 lakh (built on an earlier cycle before the tax team’s monthly pipeline discipline was established) sits un-filed through FY 2023-24 and FY 2024-25. The relevant date is 31 March 2023 on the FY-end anchor. The Section 54(1) 2-year expiry is 31 March 2025. On 1 April 2025, the balance is time-barred. Any application filed on or after that date is liable to rejection by the proper officer under Section 54(1). The ₹42 lakh remains in the electronic credit ledger and can be applied to future outward liability at 5 percent output tax, meaning it will be consumed as an ITC utilisation over time rather than lost outright — but the cash refund is forfeited permanently. On a normal working-capital return-of-capital basis, the loss is between ₹6 lakh and ₹12 lakh in NPV terms depending on the assumed cost of capital and the utilisation timeline, plus the audit and disclosure friction of a material P&L write-off. The reconciliation platform’s D-90 alert on 31 December 2024 would have surfaced the un-filed FY 2022-23 balance to the CFO with 90 days of runway to file — the operational miss is what produced the write-off.
Now consider the intermediate case. The FY 2023-24 balance of ₹1.85 crore is filed as a single application in March 2026 — 15 days before expiry. RFD-02 acknowledgement lands 10 days later. The proper officer issues RFD-03 deficiency memo on 25 March 2026 requiring supplementary documentation on the Net ITC computation (specifically, invoice-level reconciliation of the input-services exclusion). The re-file is due on 8 April 2026 to comply with the 15-day RFD-03 response window. But the Section 54(1) 2-year expiry hit on 31 March 2026 — the RFD-03 re-file after that date is time-barred. The application is rejected under RFD-08. The full ₹1.85 crore is written off. This is the reason the operational filing discipline builds in a much longer buffer than the statutory minimum — the D-90 escalation window is what protects against RFD-03 deficiency memos consuming the runway to expiry.
The parallel refund and cross-scheme overlays
The Rule 89(5) time-limit reconciliation runs in parallel to two other refund pipelines that share the same monthly filing rhythm and therefore compete for tax-team bandwidth. The RoDTEP (Remission of Duties and Taxes on Exported Products) monthly filing for DTA exports under Appendix 4R (effective 1 May 2025 per DGFT Notification 10/2025-26) and for Advance Authorisation, EOU, and SEZ exports under Appendix 4RE (effective 1 June 2025) has its own script generation and utilisation cycle. The RoSCTL (Rebate of State and Central Taxes and Levies) for apparel, garments, and made-ups under Chapters 61, 62, and 63 is DGFT-administered and follows its own filing pattern. The tax team’s monthly close must reconcile RoDTEP e-BRC realisation, RoSCTL scrip issuance, and Rule 89(5) RFD-01 status simultaneously — a mis-prioritisation that focuses on RoDTEP script generation and delays Rule 89(5) filing is the operational path to the FY 2022-23 time-barred write-off. Section 143 CGST job-work closure — the multi-hop challan discipline for yarn-to-fabric-to-garment chains under Rule 55 delivery challan and the ITC-04 quarterly return — sits upstream: the Net ITC pool that drives the Rule 89(5) formula is only defensible when the job-work chain is closed cleanly, because open dispatches can trigger Section 143 deemed-supply retro-liability that changes the Net ITC computation for the affected period.
Common reconciliation breakages
Five breakages recur across textile principals running Rule 89(5) inverted-duty refund pipelines, and each maps to a specific control gap.
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FY-anchor mis-application. Principals that treat the FY-end anchor as literal rather than as a conservative operational proxy sometimes discover that the strict tax-period computation on the earliest month of an FY expires earlier than the FY-end anchor suggests. A tighter interpretation tracks each month’s own clock from the GSTR-3B due date for that month. The safest posture is the strict tax-period tracking with a per-month clock; the FY-end anchor is acceptable only as a conservative buffer.
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RFD-03 deficiency memo consumed by expiry. A refund application filed too close to the 2-year expiry cannot absorb a deficiency memo. The proper officer’s RFD-03 requires a re-file within 15 days, and if that window runs past the 2-year expiry, the re-filed application is time-barred. The operational discipline is to file by D-90 to leave enough runway for one round of RFD-03 without touching expiry.
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Notification 14/2022 quantum error on pre-amendment periods. Applications filed after 5 July 2022 for pre-amendment tax periods must apply the amended formula (Net ITC excluding input services and capital goods). Principals that compute the pre-amendment periods under the pre-amendment inclusive formula over-state the entitlement and receive RFD-03 deficiency memos requiring re-computation — burning the runway to expiry.
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Application spans more than one FY. Circular 125/44/2019-GST and successor clarifications require that the refund period in a single application cannot span more than one financial year. Principals that batch two FYs into one application receive RFD-03 requiring split into separate applications — again burning runway.
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Legacy pre-October-2022 accumulations. Pre-1 October 2022 accumulations sit in a policy overlap period before Notification 18/2022 sharpened the relevant date to Explanation 2(e). Principals with legacy balances from FY 2020-21 and FY 2021-22 should have filed by end of FY 2022-23 or FY 2023-24 respectively under a strict 2-year reading; any un-filed legacy balance today is almost certainly time-barred and should be booked to the permanent write-off log rather than filed as an application that will attract rejection.
How a reconciliation platform handles this
A purpose-built textile refund reconciliation platform ingests the electronic credit ledger, the monthly outward supply pattern (turnover of inverted-rated supply, adjusted total turnover, tax payable on inverted-rated supply), and the RFD-01 filing history, and produces a per-FY refund pipeline view that closes the loop from monthly accumulation to cash refund. The platform runs the Section 54(1) 2-year clock per FY with the relevant date anchored to the Explanation 2(e) definition (Section 39 return due date for the tax period, conservatively operationalised as FY-end for annual filers) and surfaces the exposure at D-90 before expiry, giving the tax team enough runway to file RFD-01, absorb any RFD-03 deficiency memo, and re-file within the original window. It applies the Notification 14/2022 amended Rule 89(5) formula (Net ITC excluding input services and capital goods) to every month’s accumulation, computes the effective refund entitlement, and reconciles it against the filing status feed (RFD-02, RFD-03, RFD-06, RFD-08). The permanent write-off log captures any FY balance that crosses expiry unfiled with the accumulation FY, the relevant date, the un-refunded amount, and the reason for non-filing — providing the audit committee an unambiguous view of every time-barred forfeiture. Match rate improvement of 51 to 88 percent on the refund pipeline reconciliation, combined with ISO 27001:2022 posture and DPDP Act 2023 aligned data handling, is what makes the platform an infrastructure investment rather than a spreadsheet workaround.
Cross-cluster bridges and where to read next
The 2-year time-limit discipline in this article sits at the core of the textile refund cluster. For the underlying Rule 89(5) formula mechanics and the inverted-duty overview, read Rule 89(5) inverted-duty refund for textile. For the Notification 14/2022 quantum mechanics and why Net ITC excludes input services and capital goods, the Net ITC input services and capital goods exclusion under Rule 89(5) walkthrough is the deep read. The operational filing rhythm sits in RFD-01 monthly filing for textile inverted-duty refund. For the two segment-specific inverted-duty patterns — yarn-to-fabric and fabric-to-garment — read Yarn-to-fabric inverted-duty refund under Rule 89(5) and Fabric-to-garment inverted-duty refund under Rule 89(5). Job-work chain closure that underpins the Net ITC pool is covered in Multi-hop job-work reconciliation for textile manufacturing, ITC-04 quarterly return for textile job-work, and Section 143 deemed-supply 1-year rule. The parallel export-side refund schemes are in RoDTEP claim reconciliation for textile, RoDTEP Appendix 4R DTA claim, and RoDTEP Appendix 4RE AA/EOU/SEZ claim; the garment-specific RoSCTL cycle is in RoSCTL claim reconciliation for garments and made-ups. The e-BRC realisation feed that closes the export refund loop is at e-BRC electronic Bank Realisation Certificate for textile export. The MSME payment discipline that governs the job-worker payment cycle (upstream of the Net ITC pool) is in Section 43B(h) MSME 45-day rule for powerloom procurement. The commercial pillar for the entire textile cluster is Textile reconciliation software India; the broader authority is reconciliation software India.
The five FAQs below address the operational questions Indian textile controllers ask most often when implementing structured Rule 89(5) 2-year time-limit reconciliation.
Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →
- ▸ Section 54(1) and Explanation 2(e), Central Goods and Services Tax Act 2017 — Refund of tax. Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed. Explanation 2(e) defines the relevant date for refund of unutilised input tax credit under sub-section (3), inserted by the Finance Act 2022 with effect from 1 October 2022 (Notification 18/2022-Central Tax dated 28 September 2022), as the due date for furnishing of return under section 39 for the period in which such claim for refund arises. For refund on account of inverted-duty structure, this operationalises as end-of-month of the tax period.
- ▸ Section 54(3) and Rule 89(5), Central Goods and Services Tax Rules 2017 — Refund of accumulated input tax credit on account of inverted-duty structure. Maximum refund amount = (Turnover of inverted-rated supply of goods and services × Net ITC / Adjusted Total Turnover) − Tax payable on such inverted-rated supply of goods and services. Net ITC excludes input services and capital goods, as amended by Notification 14/2022-Central Tax dated 5 July 2022. Refund application must be filed in Form GST RFD-01 within the Section 54(1) 2-year time-limit measured from the relevant date.
- ▸ Notification 18/2022-Central Tax dated 28 September 2022 — Explanation 2 to Section 54 amended. For refund of unutilised input tax credit under sub-section (3), the relevant date is the due date for furnishing of return under section 39 for the period in which such claim for refund arises. Effective 1 October 2022 as per Finance Act 2022. Operationalised in industry practice as end-of-financial-year computation for annual refund packs and month-end computation where a monthly RFD-01 pipeline is maintained.
- ▸ Circular 125/44/2019-GST dated 18 November 2019 and successor clarifications — Fully electronic refund process through Form GST RFD-01. Refund of unutilised ITC on account of inverted-duty structure may be filed on a monthly basis for regular filers where accumulation warrants, or on a quarterly or annual basis based on the principal's operating cycle. The refund period cannot span more than one financial year in a single application. Time-barred applications filed beyond the Section 54(1) 2-year window from the relevant date are liable to be rejected by the proper officer.