Analysis of the Landmark Judgment Passed by the Hon’ble Gujarat High Court in the case of VKC Footsteps India Pvt Ltd vs. Union of India & Others dated 24.07.2020

Background & Provisions of the GST Law

In GST, Refund of Unutilised Input Tax Credit is dealt with in Section 54(3) of the CGST Act, 2017. As per the said Section Refund of Unutilised ITC is only allowed in the following cases:

1. Zero Rated Supplies [ Supplies to SEZ Units & Exports Out of India] under Letter of Undertaking without payment of Tax and

2. In the case of Inverted Duty Structure i.e where GST Rate on Inputs are higher than the GST Rate on Outward Supplies/Sales.

Section 54(3), which is the governing section for claiming refund, has specified for refund of Unutilised Input Tax Credit. Therefore, the meaning of Input Tax Credit plays an important factor in this case. As per Section 2(63) of the CGST Act, 2017, Input Tax Credit means Credit of Input Tax.

As per Section 2(62) of the CGST Act, 2017 “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—

(a) the integrated goods and services tax charged on import of goods;

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;

(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;

(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or

(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy;

Therefore, the term Input Tax Credit is wide enough to mean GST charged on Supply of Goods or Services or both. Therefore, the apparent reading of Section 54(3) signifies that the Supplier is eligible to claim a Refund of Unutilised ITC whether the same is related to Goods or Services against a) Zero Rated Supply i.e Export or Supply to SEZ Units or b) In case of Inverted Duty Structure i.e where GST on Outward Supply is Lesser than GST on Inward Supplies.

Rule 89(5) of the CGST Rules, 2017 has specified the manner of computation of Refund Amount in case of Inverted Duty Structure. The aforesaid Rule 89(5) got amended twice by notification no. 21/2018-CT dated 18th April, 2018 followed by Notification No. 26/2018-CT dated 13.06.2018 wherein the said rule was amended giving retrospective effect from 1st July, 2017. Prior these amendments the said rule was permitting refund of both Inputs & Input Services in case of Inverted Duty Structure. However, post amendment the formula reads as follows:

Maximum Refund Amount= Turnover of Inverted Rated Supply of Goods and/or Services x Net ITC/Adjusted Total Turnover. 

In the explanation part of the said rule, Net ITC is defined as Input Tax Credit availed on Inputs during the relevant period.

Based upon the said notifications, department is disallowing refund of ITC on input services in case of Inverted Duty Structure.

Decisions made in the Judgement

The Judgement passed by Gujarat High Court in the case of VKC Footsteps India Pvt Ltd vs. Union of India & Others dated 24.07.2020 is a welcome judgement in favour of suppliers having inverted duty structure. This Judgement has categorically stated that-

“The Explanation (a) to Rule 89(5) which denies the refund of “unutilised input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act,2017.”

In forming opinion, the following important observations have been made by the Judges:

  1. Conjoint reading of the provisions of Act and Rules, it appears that by prescribing the formula in Sub-rule 5 of Rule 89 of the CGGST Rules,2017 to exclude refund of tax paid on “input service” as part of the refund of unutilised input tax credit is contrary to the provisions of Sub-section 3 of Section 54 of the CGST Act,2017 which provides for claim of refund of “any unutilised input tax credit”.
  1. The word “Input tax credit” is defined in Section 2(63) means the credit of input tax. The word “input tax” is defined in Section 2(62), whereas the word “input” is defined in Section 2(59) means any goods other than capital goods and “input service” as per Section 2(60) means any service used or intended to be used by a supplier. Whereas “input tax” as defined in section 2(62) means the tax charged on any supply of goods or services or both made to any registered person. Thus “input” and “input service” are both part of the “input tax” and “input tax credit”.
  1. Therefore, as per provision of sub-section 3 of Section 54 of the CGST Act,2017, the legislature has provided that registered person may claim refund of “any unutilised input tax”, therefore, by way of Rule 89(5)of the CGST Rules,2017, such claim of the refund cannot be restricted only to “input” excluding the “input services” from the purview of “Input tax credit”. Moreover, clause (ii) of proviso to Sub-section 3 of Section 54  also refers to both supply of goods or services and not only supply of goods as per amended Rule 89(5) of the CGST, Rules 2017.
  1. In view of the above analysis of the provisions of the Act and Rules keeping in mind scheme and object of the CGST Act, the intent of the Government by framing the Rule restricting the statutory provision cannot be the intent of law as interpreted in the Circular No.79/53/2018- GST dated 31.12.2018 to deny the registered person refund of tax paid on “input services’ as part of refund of unutilised input tax credit.

This judgement is quite loudable judgement in favour of the taxpayers having inverted duty structure. In regard to the applicability, since there is no contrary judgment in this issue till date, so, this judgement has pan India applicability.

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