The Supreme Court on Monday upheld the validity of Rule 89(5) of the CGST Rules 2017 in case of inverted duty structure under the Goods and Services Tax law.
The Division Bench of Justices D.Y. Chandrachud and M.R. Shah passed this verdict, while disposing of a bunch of petitions, which arose from the verdicts of the High Courts of Gujarat and Madras. The Gujarat High Court had held that Explanation (a) to Rule 89(5) of the CGST Rules 2017 was ultra vires, while a contrary view was taken by the High Court of Madras.
The Gujarat High Court had said that Rule 89 was violative of Article 14 of Constitution of India in as much as it treats dealers with accumulated credit on input goods and dealers with accumulated credit on input services differently.
On the other hand, the Madras High Court in the case of Tvl Transtonnelstroy Afcons joint venture vs Union of India held that 54(3)(ii) does not infringe Article 14 and thus refund of only inputs is available under inverted duty structure (IDV) (Section 54(3)(ii). This judgment is in contrast to the Gujarat high court verdict in case of VKC Footsteps.
Parliament, while enacting the Central Goods and Services Tax Act 2017, has incorporated a provision for refund of tax in Section 54. Sub-Section (3) embodies a provision for refund of unutilized input tax credit2 in cases involving:
(i) zero rated supplies made without payment of tax; and
(ii) credit accumulation “on account of rate of tax on inputs being higher than rate of tax on output supplies”.
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While envisaging a refund in the latter of the above two situations, Parliament was cognizant of the fact that ITC may accumulate due to a variety of reasons. However, Parliament envisaged a specific situation where the credit has accumulated due to an inverted duty structure, that is where the accumulation of ITC is because the rate of tax on inputs is higher than the rate of tax on output supplies. Taking legislative note of this situation, a provision for refund has been provided for in Section 54(3). The Central Goods and Service Tax Rules 20173 have been formulated in pursuance of the rule making power conferred by Section 164 of the CGST Act. Rule 89(5) provides a formula for the refund of ITC, in “a case of refund on account of inverted duty structure”. The said formula uses the term “Net ITC”. In defining the expression “Net ITC”, Rule 89(5) speaks of “input tax credit availed on inputs”.
Writ petitions under Article 226 of the Constitution were instituted before the High Court of Gujarat and the High Court of Judicature at Madras. The petitioners before the High Court submitted inter alia:
(i) Section 54(3) allows for a refund of ITC where the accumulation is due to an inverted duty structure;
(ii) ITC includes the credit of input tax charged on the supply of goods as well as services;
(iii) Section 54(3) does not restrict the entitlement of refund only to unutilized ITC which is accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies. It also allows for refund of unutilized ITC when the rate of tax on input services is higher than the rate of tax on output supplies;
(iv) While Section 54(3) allows for a refund of ITC originating in inputs as well as input services, Rule 89(5) is ultra vires in so far as it excludes tax on input services from the purview of the formula; and
(v) In the event that Section 54(3) is interpreted as a restriction against a claim for refund of accumulated ITC by confining it only to tax on inputs, it would be unconstitutional as it would lead to discrimination between inputs and input services.
N Venkataraman, Additional Solicitor General, led the arguments on behalf of the Union Government in assailing the correctness of the decision of the Gujarat High Court (and supporting the decision of Madras High Court).
Venkataraman urged that:
(i) Goods and services are distinct at a constitutional level. Article 366(12) of the Constitution defines goods, while Section 366(26A) defines services. Under the CGST Act, the expression ‘input’ in Section 2(59) means tangible commodities other than capital goods, while on the other hand ‘input service’ in Section 2(60) means any service used or intended to be used by a supplier for business. Hence, ‘goods’ and ‘services’ and ‘inputs’ and ‘input services’ have distinct definitions;
(ii) Article 366(12A) defines ‘goods and services tax’ to mean any tax on the supply of goods or services or both except taxes on the supply of alcoholic liquor for human consumption ,
(iii) Article 246A, which traces the source of power of taxation and identifies the fields of taxation, empowers the Parliament, the States and Union Territories to impose simultaneous tax both on goods and services. Consequently, though goods and services are brought to tax under a common code, both the Constitution and the statute have maintained a distinction between goods and services. They remain distinct for prescription, treatment and interpretation;
(iv) Section 2(62) and Section 2(63) define ‘input tax’ and ‘input tax credit’ which include taxes paid on goods (input goods) and services (input services) either under CGST, State Goods and Services Tax Act10 and Integrated Goods and Services Tax Act 201711;
(v) Input tax means a tax charged both on goods and services. These are taxes paid by a supplier on their outward supplies as defined under Section 2(83) which become inward supply for the recipient under Section 2(67); and
(vi) The need to integrate both taxes on input goods and input services is to enable credit on a single pool for further cross utilization on both goods and services.
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Legal Propositions
Article 265 of the Constitution provides that no tax shall be levied or collected except by authority of law. There being no challenge either to the levy or collection of taxes in these cases, taxes paid into the coffers of the Union Government or the States become the property of the Union/States. The refund of taxes is neither a fundamental right nor a constitutional right. The Constitution only guarantees that the levy should be legal and that the collection should be in accordance with law. There is no constitutional right to refund. Refund is always a matter of a statutory prescription and can be regulated by the statute subject to conditions and limitations.
The submission which has been urged on behalf of the assessee is that:-
(i) The assessee is, inter alia, engaged in the manufacture and supply of footwear which attracts output tax (goods and services tax14) at the rate of 5%;
(ii) The assessee, inter alia, procures input goods such as synthetic leather, PU Polyol and input services such as job work service, goods transport agency service on payment of applicable GST for use in the course of business and avails ITC on the GST paid thereon. A majority of the input goods and input services attract tax at the rate of 12% or 18%;
(iii) The rate of GST paid by the assessee on procurement of input goods and input services is higher than the rate of tax payable on their outward supply of footwear. Therefore, despite utilization of credit for payment of GST on outward supply, there is an accumulation of unutilized ITC in the electronic credit ledger of the assessee;
(iv) The assessee applied for refund of such unutilised accumulated ITC under Section 54(3) of the CGST Act read with Rule 89(5) of the CGST Rules;
(v) Rule 89(5) of the CGST Rules as originally enacted provided for refund of ITC availed on both inputs (that is input goods) and input services and was in line with Section 54(3) of the CGST Act. Accordingly, the assessee was granted refund of such unutilised ITC;
(vi) Rule 89(5) was substituted by Notification No. 21/2018-CT dated 18 April 2018 prescribing a revised formula for determining the refund on account of inverted duty structure. The above substitution was given retrospective effect from 1 July 2017 by Notification No. 26/2018-CT dated 13 June 2018;
(vii) The revised formula inter alia excludes ‘input services’ from the scope of ‘Net ITC’ for computation of the refund amount under the said Rule;
(viii) The substituted Rule 89(5) of the CGST Rules denies refund on the unutilised ITC availed on input services and allows relief of refund of ITC availed on input goods alone;
(ix) The Revenue is relying on amended Rule 89(5) to contend that refund will not be allowed on taxes paid on input services; and
(x) The Revenue is allowing refund of accumulated ITC of tax paid on input goods such as synthetic leather, and PU Polyol. Further, the Revenue is allowing accumulation of ITC paid on procurement of input services such as job work service and goods transport agency service. However, the refund of accumulated unutilized ITC paid on input services is being denied and refund already granted has been recovered from the assessee.
The Court observed that if the provision of law is explicitly clear, language unambiguous and interpretation leaves no room for more than one construction, it has to be read as it is. In that case, the provision of law has to be tested on the touchstone of the relevant provisions of law or of the Constitution and it is not open to a court to invoke the doctrine of “reading down” with a view to save the statute from declaring it ultra vires by carrying it to the point of “perverting the purposes of the statute.
The court said that the legislature has made the distinction for claims of refunds clear and added: “With reference to exports, the ITC on input goods and input services brought in the fold of the Act in contrast with domestic supplies.” “While discharging function, the GST Council will be guided by the need for harmonized structure for GST,” the court said in its order. The court also said the second stage cascading effects of GST must be kept in mind. The SC further added that the dual system of GST law operates within the federal structure and has to be progressively realized.
The Apex Court further said that the formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on the accumulation of unutilized ITC. It is merely the case that the practical effect of the formula might result in certain inequities. The reading down of the formula as proposed by Mr Natarjan and Mr. Sridharan by prescribing an order of utilization would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Accordingly, we shall refrain from replacing the wisdom of the legislature or its delegate with our own in such a case. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same.
Having considered this batch of appeals, and for the reasons which have been adduced in this judgment, we affirm the view of the Madras High Court and disapprove of the view of the Gujarat High Court. We accordingly order and direct that:
(i) The appeals 55 filed by the Union of India against the judgment of the Gujarat High Court dated 4 July 2020 in VKC Footsteps India Pvt. Ltd. (supra) and connected cases are allowed and the judgment shall be set aside;
(ii) The appeals56 filed by the assessees against the judgment of the Madras High Court in Tvl Transtonnelstroy Afcons Joint Venture (supra) and connected cases dated September 21, 2020 shall stand dismissed. As a consequence, the writ petition filed by the assessees shall also stand dismissed. There shall no order as to costs; and
(iii) The observations in paragraphs 104 to 111 shall be considered by the GST Council to enable it to take a considered view in accordance with law,” the order read.