CA Vinod Kaushik

CA Vinod Kaushik

Recent Judgment of Hon’ble Gujarat High Court in case of VKC Footsteps India Pvt. Ltd. vs. Union of India


Let’s start the discussion with brief introduction of controversy due to which the matter went to Hon’ble High Court and there was necessity of Court to intervene. Section 54 of CGST Act, 2017 is basically dealing with all types of refund situations in GST and most precisely section 54(3) is talking about situations in which refund is granted to the registered persons.

Section 54(3) starts with the word that Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilized input tax credit at the end of any tax period. The Act in this case is giving most wide meaning to the situation under which refund is granted in a particular case. The executive through subordinate rule i.e. rule 89(5) had made retrospective change and restricted refund in case of inverted duty structure only to input and not input services.

The petitioner in this particular case had challenged the virus of rule 89(5) which is not consistent with section 54(3) and against the objects of most historic Goods and Service Tax Law.

Definition of Input, Input services and Capital goods

Section 2(59) defines input which says “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

Section 2(60) defines input service which says input service means any service used or intended to be used by a supplier in the course or furtherance of business.

As per section 2(19) of Act “capital goods” means goods, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

As per section 2(63) input tax credit means the credit of input tax.

Controversy in whole situation

Can subordinated legislation restrict the vested rights granted by plenary legislation i.e. CGST/SGST Act, 2017?

The Hon’ble Court had discussed this issue at length and held that rules which are subordinate to main Act cannot prescribe a new levy or restrict any existing right. The rules in particular rule 89(5) is not in consonance with section 54(3).

Hon’ble Supreme Court in the case of Ispat Industries Limited vs. Commissioner of Customs (2006) 12 SCC 583 has held that there is hierarchy of various provisions in law.

In our case this hierarchy is as under:

1. Constitution of India

2. The Statutory Act, passed either by Parliament or State Legislature

3. The delegated or subordinate legislation which may be in the form of rules or regulation subordinate to Act

4. Administrative orders or executive instructions without any statutory backing

It is a well settled principal of interpretation that if there are two interpretations possible of a rule, one which sub serve the object of a provision in a statute while other would invalidate it, the former should be preferred.

What is Rule 89(5)?

Rule 89(5) basically prescribes the method of calculation of refund amount in case of in the case of inverted duty structure.

Refund of input tax credit shall be granted as per the following 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.

Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rule (4A) or (4B) or both; and

Department was contenting that since proviso to section 54(3) uses that words inputs hence the refund shall be admissible only for inputs and not for input services and capital goods.

Challenge to rule making power under section 164

The department was contending that they draw power to make rules from section 164 of CGST/SGST Act, 2017. Section 164 states as under:

(1) The Government may, on the recommendations of the Council, by notification, make rules for carrying out the provisions of this Act.

(2) Without prejudice to the generality of the provisions of sub-section (1), the Government may make rules for all or any of the matters which by this Act are required to be, or may be, prescribed or in respect of which provisions are to be or may be made by rules.

The Hon’ble Court had narrowed down this interpretation of section 164 and ruled that rule making power can be used for making procedures etc. and it cannot be used for restricting input tax credit which is otherwise good as per main Act. The Parliament had specifically restricted/ blocked credits vide section 17(5) of the Act.

Rule 89(5) violates Article 265 and 114 of Indian Constitution

The perpetual retention / appropriation of unutilized input tax credit on services amounts to levy of tax against the intention of legislature without authority of law in violation of article 265 of Indian Constitution. It denies a crystallized and vested right created by the statute by virtue of the statutory entitlement to credit which keeps accumulating but cannot be used.

The restrictions imposed by rule 89(5) violate article 114 due non similar restrictions in the case of export of goods/services. In case of exports of goods or services refund of both inputs as well as input services is admissible hence rule 89(5) placed excessive restrictions to a similarly place persons.

Any provision of law which makes discrimination between similarly placed persons is termed in violation of article 114 of Indian Constitution.

Case of VKC Footsteps India Pvt. Ltd. Vs. Union of India (Gujarat High Court)


The judgment pronounced by Hon’ble High Court is landmark and will boost the cash flow of industries in inverted duty structure. Now Industries can take refund on input services also and a fresh petition can be filed in Court for eligibility of refund on capital goods. Wish you happy reading.

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September 2021