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Case Law Details

Case Name : Empire Foundation Vs Union Of India & Ors. (Gujarat High Court)
Appeal Number : R/Special Civil Application No. 3678 Of 2021
Date of Judgement/Order : 17/10/2024
Related Assessment Year :
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Empire Foundation Vs Union Of India & Ors. (Gujarat High Court)

In the case of Empire Foundation Vs Union of India & Ors., the Gujarat High Court dismissed a petition challenging the constitutional validity of Section 17(2) of the CGST Act, 2017. The petitioner sought to declare the provision unconstitutional as it restricted refunds under the inverted duty structure. Additionally, they requested the recognition of their right to claim a refund of accumulated Input Tax Credit (ITC) on goods and services used for exempted services. The petitioner relied heavily on the earlier Gujarat High Court judgment in VKC Footsteps India Pvt. Ltd. Vs Union of India, which was subsequently overturned by the Supreme Court.

The Court noted that the Supreme Court in the VKC Footsteps case had clarified that the CGST Act provisions are not ultra vires and that refund claims must align with the statutory framework. The petitioner also urged the Court to direct the GST Council to reconsider the anomalies in Rule 89(5) of the CGST Rules regarding ITC refunds. However, the Court concluded that there is no constitutional or statutory entitlement for refunds on ITC for exempted output services. It held that the petitioner’s claims were not substantiated under the law and dismissed the petition, discharging the notice.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. By this petition under Article 226 of the Constitution of India, the petitioner has prayed for the following reliefs:

“(a) to declare section 17(2) of the CGST Act as unconstitutional and ultra vires Article 14 of the Constitution of India to the extent it restricts the refund under the inverted duty structure and/or;

(b) hold the vested right of the petitioner to claim refund of accumulated Input Tax Credit of goods and services on account of inverted duty structure under first proviso to section 54(3) of the CGST Act and/or;

(c) read down the restrictions imposed on the petitioner on availment of credits used for exempted services under section 17(2) of the CGST Act and claiming refund of taxes on inputs and input services under the first priviso to section 54(3) of the CGST Act and/or;

(d) hold that right to avail Input Tax Credit is an indefeasible right under Article 300A of the Constitution    and cannot be  restricted on the basis of taxability of output service;

(e)    uphold that the benefit of taxes paid on both inputs and input services should be eligible to the petitioner in light of the decision of this Hon’ble Court in case of VKC Footsteps India Pvt. Ltd vs. UOI and others [TS-585-HC-2020 (Guj.)]

(f) issue an appropriate order or direction permitting the petitioner to apply for registration and file GST returns with effect from 1st July 2017 to avail Input Tax Credit; andor

(g) grant interim/ad interim reliefs as prayed for in clause (e) above and/or;

(h) Grant such further reliefs as this Hon’ble Court may deem fit and proper;

2. Brief facts of the case are that the petitioner is providing exempted education services but, at the same time, the petitioner uses various taxable inputs, capital goods and input services and GST on such inputs, capital goods and input services is borne by the petitioner which adds to the cost to the petitioner. It is the case of the petitioner that the petitioner is entitled to the refund of the GST borne by it on inputs, capital goods and input services. However, as per the provision of section 54(3)(ii) of the Central Goods and Service Tax Act,2017 [‘CGST Act’ for short], the petitioner is not subjected to the GST and as education service is exempted, the petitioner is not entitled to get the refund of the input tax credit.

3. Learned advocate Mr. Abhishek Rastogi submitted that when the petition was filed, heavy reliance was placed on the decision of this Court in case of VKC Footsteps India Pvt. Ltd vs. Union of India and others [TS-585-HC-2020 (Guj.)] however, the same was reversed by the Hon’ble Supreme Court wherein it is categorically held that the provisions of the Act or the rules cannot be held to be ultra vires.

4. It was pointed out that however, the Hon’ble Supreme Court in case of Union of India vs. VKC Footsteps India Pvt. Ltd. reported in (2022) 2 SCC 603, directed the GST Council to consider the anomaly in the format prescribed in Rule 89(5) of the CGST Rules. It was submitted that similar directions may be given in this case also, for betterment of the student community at large of the country, to the GST Council to consider prayer made by the petitioner to permit the refund of the GST input tax credit paid by the educational institution though the same is exempt under the provisions of the GST Act and necessary directions may be issued by the Council to that effect.

5. Having considered the submissions of learned advocate Mr. Rastogi for the petitioner, it would be germane to refer to the provisions of section 54(3) of the CGST Act which reads as under:

“Section 54. Refund of tax

(3) Subject to the provisions of sub­section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than–

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.”

6. Sub-clause (ii) of sub-section (3) clearly stipulates that the refund of the input tax credit could not be payable even when the credit has accumulated on account of credit of tax or inputs being higher than the rate of tax on output supplies other than fully exempt supplies. Admittedly, the education service provided by the petitioner  and  other educational institution falls in category of fully exempt supply and therefore, the petitioner would not be entitled to the input tax credit. Sub-clause (ii) of section (3) applies to the inverted rate structure only whereas, in the zero rated supply, Nil Rated supply or exempted supply, the same would not be applicable as the very basis of inverted rate structure would not be applicable as the entire GST paid on the inputs would be liable to be refunded in such cases.

7. Therefore, the legislature has rightly provided that the tax credit which has accumulated on account of rate of tax on inputs being higher than the output tax would not cover the supplies having Nil rate or exempted supplies to entitle the service provider or the manufacturer to avail the refund of the input tax credit. In view of the above and more particularly, as held by the Hon’ble Apex Court in case of VKC Footsteps India Pvt. (supra) as under:

“105. Parliament engrafted a provision for refund Section 54(3). In enacting such a provision, Parliament is entitled to make policy choices and adopt appropriate classifications, given the latitude which our constitutional jurisprudence allows it in matters involving tax legislation and to provide for exemptions, concessions and benefits on terms, as it considers appropriate. The consistent line of precedent of this Court emphasises certain basic precepts which govern both judicial review and judicial interpretation of tax legislation. These precepts are: 105.1 Selecting the objects to be taxed, determining the quantum of tax, legislating for the conditions for the levy and the socio-economic goals which a tax must achieve are matters of legislative policy. Chief Justice M. Hidayatullah, speaking for the Constitution Bench in Commissioner of Urban Land Tax v. Buckingham and Carnatic Co. Ltd held:

“10…The objects to be taxed, the quantum of tax to be levied, the conditions subject to which it is levied and the social and economic policies which a tax is designed to subserve are all matters of political character and these matters have been entrusted to the Legislature and not to the Courts. In  applying   the test of reasonableness it is also essential to notice that the power of taxation is generally regarded as an  essential attribute of  sovereignty  and constitutional provisions relating to the power of taxation are regarded not as grant of power but as limitation upon the power which would otherwise be practically without limit.

105.2   The same principle has been reiterated in Federation of Hotel & Restaurant Association of India v. Union of India44, where Justice MN Venkatachaliah (as the learned Chief Justice then was), speaking for the Constitution Bench held:

“46. It is now well settled that though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of  a hostile,
discriminatory treatment what is looked into is not its phraseology, but the real effect of its provisions. A legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law  would  not be discriminatory. Decisions of this Court on the matter have permitted the legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes.

47. But, with all this latitude certain irreducible desiderata of equality shall govern classifications for differential treatment in taxation laws as well. The classification must be rational and based on some qualities and characteristics which are to be found in all the persons grouped together and absent in the others left out of the class. But this alone  is  not sufficient. Differentia must have a rational nexus with the object sought to be achieved by the law. The State, in the exercise of its governmental power, has, of necessity, to make laws operating differently in relation to different groups or classes of persons to attain certain ends and must, therefore, possess the power to distinguish and classify persons or things. It is also recognised that no precise or set formulae or doctrinaire tests or  precise  scientific principles of exclusion or
inclusion are to be applied. The test could only be one of palpable arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience.”

105.3 In  matters of classification, involving fiscal legislation, the legislature is permitted a larger discretion so long as there is no transgression of the fundamental principle underlying the doctrine of classification. In Hiralal Rattanlal (supra), Justice KS Hegde, speaking for a four judge Bench observed:

“20. It must be noticed that generally speaking the primary purpose of the levy of all taxes is to raise funds for public good. Which person should be taxed, what transaction should be taxed or what goods should be taxed, depends upon social, economic and administrative considerations. In a democratic set up it is for the Legislature to decide what economic or social policy it should pursue or what administrative considerations it should bear in mind. The classification between the processed or split pulses and unprocessed or unsplit pulses is a reasonable classification. It is based on the use to which those goods can be put. Hence, in our opinion,  the impugned classification is not violative of Article 14.”

105.4 More recently in Union of India v. NITDIP Textile Processors Private Limited45, a two judge Bench observed:

“67. It has been laid down in a large number of decisions of this Court that a taxation statute, for the  reasons  of   functional expediency and even otherwise, can pick and choose to tax some. A power to classify being extremely broad and based on diverse considerations  of  executive pragmatism, the judicature cannot rush in where even the legislature warily treads.   All these
operational restraints on judicial power must weigh more emphatically where the subject is taxation. Discrimination resulting from fortuitous circumstances arising out of particular situations, in which some of the tax-payers find themselves, is not hit by Article 14 if the legislation, as such, is of general application and does not single them out for harsh treatment. Advantages   or disadvantages   to  individual assessees are accidental and inevitable and are inherent in every taxing statute as it has to draw a line somewhere and some cases necessarily fall on the other side of the line.”

106.The   principles  governing  a benefit, by way of a refund of tax paid, may well be construed on an analogous frame with an exemption from the payment of tax or a reduction in liability (Assistant Commissioner of Commercial Tax (Asst.) v. Dharmendra Trading Company.

107. In Elel Hotels and Investments Limited and Others v. Union of India47, Justice MN investments (as the learned Chief Justice then was) held that:

“20…It is now well settled that a very wide latitude is available to the legislature in the matter of classification of objects, persons and things for purposes of taxation. It must need to be so, having regard to the complexities involved in the formulation of a taxation policy. Taxation is not now a mere source of raising money to defray expenses of Government. It is a recognised fiscal tool to achieve    fiscal  and   social objectives. The differentia of classification presupposes and proceeds on the premise that it distinguishes and keeps apart as a distinct class hotels with higher economic status reflected in one of the indicia of such economic superiority. The presumption of constitutionality has not been dislodged by the petitioners by demonstrating how even hotels, not brought into the class, have also  equal or higher chargeable receipts and how the assumption of economic superiority of hotels to which the Act is applied is erroneous or irrelevant.”

108. In Spences Hotel Pvt Ltd. v. State of West Bengal48, a two judge Bench, speaking through Justice KN Saikia, revisited the precedents of this Court  governing the principles  of classification in tax legislation and held:

“24…The history of taxation is oneof evolution as is the case cin all human affairs. Its progress is one of constant growth and development in keeping with the advancing economic and social conditions; and the fiscal intelligence of the State has been  advancing concomitantly, subjecting by new means and methods hitherto untaxed property, income, service and provisions to taxation. With the change of scientific, commercial and economic conditions and ways of life new species of property, both tangible and intangible gaining enormous values have come into existence and new means of reaching and subjecting the same to contribute towards public finance are being developed, perfected and put into practical operation by the legislatures and courts of this country, of  course  within constitutional limitations

    1. The Court held that the principle of equality does not preclude the   classification  of property, trade, profession and events for taxation – subjecting one kind to one rate of taxation and another to a different rate. The State may exempt certain classes of property from any taxation at all and impose different specific taxes upon different species which it seeks to regulate. The Court held:

“27. “Perfect equality in taxation has been said time and again, to be impossible    and      unattainable.
Approximation to it is all that can be had. Under any system of taxation, however, wisely and carefully   framed, a disproportionate share of the public burdens would be thrown on certain kinds of property, because they are visible and tangible, while others are of a nature to elude vigilance. It is only where statutes are passed which impose taxes on false and unjust principle, or operate to produce gross inequality, so that they cannot be deemed in any just sense proportional in their effect on those who are to bear the public charges that courts can interpose and    arrest  the course of legislation by declaring such enactments void.” “Perfectly equal taxation”, it has been said, “will remain an unattainable good as long as laws and government and man are imperfect.” ‘Perfect uniformity and perfect equality of taxation’, in all the aspects in which the human mind can view it, is a baseless dream.”

110. Parliament while enacting the provisions of  Section 54(3), legislated within the fold of the GST regime to prescribe a refund. While doing so, it has confined the grant of refund in terms of the first proviso to Section 54(3) to the two categories which are governed by clauses (i) and (ii). A claim to refund is governed by statute. There is no constitutional entitlement to seek a refund. Parliament has in clause (i) of the first proviso allowed a refund of the unutilized ITC in the case of zero-rated supplies made without payment of tax. Under clause (ii) of the first proviso, Parliament has envisaged a refund of unutilized ITC, where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. When there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted. Such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing  the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions. If the judiciary were to do so, it would run the risk of encroaching upon legislative choices, and on policy decisions which are the prerogative of the executive. Many of the considerations which underlie these choices are based on complex balances drawn between political, economic and social needs and aspirations and are a result of careful analysis of the data and information regarding the levy of taxes and their collection. That is precisely the reason why courts are averse to entering the area of policy matters on fiscal issues. We are therefore unable to accept the challenge to the constitutional validity of Section 54(3).”

8. In view of above dictum of law , when the provisions of Section 54(3) of the GST Act provides for refund in terms of the first proviso to section 54(3) categories which are governed by clauses (i) and (ii) and there is no constitutional entitlement to seek a refund as in clause (i) of the first proviso allowed a refund of the unutilized ITC in the case of zero-rated supplies made without payment of tax where as under clause (ii) of the first proviso, refund of unutilized ITC is available where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies other than inputs utilised for output having Nil rate or exempted . Therefore, when there is neither a constitutional guarantee nor a statutory entitlement to refund, the the claim of the petitioner to grant refund of ITC on output service exempt from tax cannot be accepted.

9. We are therefore of the opinion that no interference is called for by granting any relief as prayed for and the petition is accordingly    dismissed.  Notice is discharged.

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