Supreme Court ratifies Section 54(3) of CGST Act, 2017 & Rule 89(5) of CGST Rules, 2017
Inequities in Rule 89(5) are to be ironed out by the Government in the course of the application of the formula for computation of Refund in case of Inverted Tax structure
The Supreme Court on Monday 13th September 14, 2021, held that Section 54(3)(ii) of the CGST Act, 2017 excludes unutilised ITC which is accumulated w.r.t. the Input services, Union of India v. VKC Footsteps India Private Ltd.
THE CASE IN THE COURT OF LAW
The case of VKC Footsteps India Private Ltd had been creating quite an uproar, ever since the Gujrat high court held that a part of Rule 89 of CGST Rule,2017 which denies refund of unutilized credit on input services is ultra vires Section 54 of the Act
LEGAL PROVISIONS INVOLVED
Now, lets break down the relevant provisions in question here ,
Sub-Section 3 of Section 54 states that, a registered person may claim refund of any unutilised ITC at the end of any tax period:
Provided that no refund of unutilised input tax credit shall be allowed in cases other than––
Provided further that no refund of unutilised ITC shall be allowed in cases where the goods exported out of India are subjected to export duty
Provided also that no refund of ITC 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.
In the case of refund on account 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 & services X Net ITC ) / Adjusted Total Turnover ] less: tax payable on such inverted rated supply of goods and services.|
Section 2(59) : Input : 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) : Input Service: any service used or intended to be used by a supplier in the course or furtherance of business
Section 2(62): Input tax : in relation to a registered person, it means the central tax, State tax, integrated tax charged on any supply of goods & / or services made to him and includes—
but does not include the tax paid under the composition levy;
Section 2(63): Input tax credit : means the credit of input tax
Rule 89(4)(E) : Adjusted Total Turnover,for the purpose of Rule 89(5)
The sum total of the value of
Rule 89(4)(F) : Relevant period for the purpose of Rule 89(5), means the period for which the claim has been filed.
WHAT CAUSED THE CHAOS ??
LACK OF SYMMYTRY BETWEEN SECTION 54(3) & RULE 89(5)
The crux of the dispute in the case ia as to how Section 54(3) and Rule 89(5) are to be understood and interpreted.
Section 54(3) allows for refund of unutilised ITC when the rate of tax on input supplies is higher than the rate of tax on output supplies. So, it considers both Input goods & input services.
However, while Section 54(3) allows for a refund of ITC originating in input goods as well as input services, Rule 89(5) excludes tax on input services from the purview of the formula.
Rule 89(5) provides a formula for the refund of Input Tax Credit, in “a case of refund on account of inverted duty structure” which inter alia specifically doesn’t includes ‘input services’ in the scope of ‘Net ITC’ for computation of the refund amount.
It is construed, that 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
CONSTITUTIONAL VADITY OF LEGAL PROVISIONS
“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).”
“In our view, the justification of the formula under Rule 89(5) given by the ASG to create a legal bifurcation is valid. In this context, it would be material to advert to the provisions of Rule 42. Rule 42(1) provides that the ITC in respect of input goods or input services which attract the provisions of sub-Section (1) or sub-Section (2) of Section 17 being partly used for the purpose of business and partly for other purposes or partly used for affecting taxable supplies including zero rated supplies and partly for effecting exempts supplies shall be attributed for the purposes of business or for effecting taxable supplies in the manner which is indicated in the Rule. Sub-Section (1) of Section 17 provides that where the goods and services or both are used by a registered person partly for the purposes of any business and partly for any other purpose, the amount of credit shall be restricted to so much of the input tax as is attributable to the purpose of its business. Sub-Section (2) of Section 17 provides that where the goods or services or both are used by a registered person partly for effecting taxable supplies including zero rated supplies under the CGST Act or under the IGST Act and partly for effecting exempt supplies the amount of credit shall be restricted to so much of the input tax as is attributable to the taxable supplies including zero rated supplies. Rule 42, in other words, provides for the manner in which the attributions of ITC in respect of the input or input services under sub-Sections (1) or (2) of Section 17 shall be carried out. Rule 43 similarly provides the manner in which ITC in respect of capital goods attracting the provisions of sub-Section (1) of Section 17, used partly for business and partly for other purposes or partly for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies would be attracted to the purpose of business or for effecting taxable supplies. Both Rules 42 and 43 provide for a formula for attribution. Rule 86 provides for the maintenance of an electronic credit ledger. Rule 89(5) provides for a refund. In both sets of rule clusters, Rules 42 and 43 on the one hand and Rule 89(5) on the other hand, a formula is used for the purpose of attribution in a post assimilated scenario. The use of such formulae is a familiar terrain in fiscal legislation including delegated legislation under parent norms and is neither untoward nor ultra vires.”
On 13.09.21 , the Supreme court squashed the judgement of Gujrat High court and upheld the view taken by Madras High court in case of ‘TVL. Transtonnelstroy Afcons Joint Venture Vs. Union of India’.
Having devoted our attention to the submissions at the Bar, we have come to the conclusion that the judgment of the Madras High Court needs to be affirmed by dismissing the appeals challenging that verdict while the appeals against the judgment of the Gujarat High Court by the Union of India should be allowed.
1. VKC Footsteps India Pvt. Ltd. Vs. Union of India (Gujarat High Court) :Denial of ITC (inverted duty structure) invalid; Rule 89(5) ultra vires section 54(3) Provisions: Gujarat HC
2. Tvl. Transtonnelstroy Afcons Joint venture Vs Union of India (Madras High Court) :GST-Inverted duty structure- Section 54 not violates Article 14- HC
3. Union of India & Ors. Vs VKC Footsteps India Pvt Ltd. (Supreme Court of India) :SC upheld CGST rule 89(5) validity