CGST Rule 89(4C) Amendment regarding Valuation of Zero-rated Supply of Goods Unconstitutional: Karnataka HC [Read Order]

A Single Bench of the Karnataka High Court has recently quashed an amendment to the Central Goods and Services Tax (CGST) Rule, 2017 vide Para 8 of the Notification No.16/2020-Central Tax, declaring it ultra vires and unconstitutional.

The impugned offending words, “or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier” appearing in Rule 89(4C) of the Central Goods and Services Tax Rules, 2017 was quashed by the Karnataka High Court.

Prior to the aforesaid amendment, Rule 89(4C) of the CGST Rules, read as under:-

“Turnover of zero-rated supply of goods means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both.”

After amendment w.e.f 23.03.2020, Rule 89(4C) reads as

under:-

“Turnover of zero-rated supply of goods means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier, as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both.”

The petitioner is engaged in developing innovative designs in micro-optics, lower power electronics and real-time vision processing to design imaging systems. The petitioner exported various aforementioned customized / unique products during the period from May 2018 to March 2019. Since exports made by the petitioner are “zero rated” under Section 16 of the Integrated Goods and Services Act, 2017 (IGST), the petitioner filed refund applications with the respondents on 25.05.2020, 27.05.2020 and 28.05.2020 and claimed refund of unutilized input tax credit under Section 54(3)(i) of the Central Goods and Services Act, 2017 (for short ‘the CGST Act’) read with Rule 89 of the CGST Rules.

Meanwhile, Rule 89(4)(C) of the CGST Rules having been amended w.e.f 23.03.2020, Show Cause Notices dated 27.05.2020, 03.06.2020 and 04.06.2020 were issued by the respondent-revenue on the ground that the petitioner had not given proof, which was required to be given in terms of the amended Rule 89(4)(C) of the CGST Rules and that therefore, the refund claims could not be considered.

The counsel for the petitioner submitted that, “the impugned Rule 89(4)(C) of the CGST Rules is arbitrary and unreasonable, in as much as it bears no rational nexus with the objective sought to be achieved by Section 16 of the IGST Act, in that while Section 16 of the IGST Act seeks to make exports tax-free by “zero-rating” them, the impugned Rule 89(4)(C) of the CGST Rules aims to do just exactly the opposite by restricting the quantum of refund of tax available to the expended in making such exports.”

It was also submitted that when it is impossible for any exporter to show proof of value of “like goods” domestically supplied by the “same or, similarly placed, supplier”, the refund itself cannot be denied to such exporter and consequently, Rule 89(4)(C) of the CGST Rules merely being a machinery provision cannot impose a rigorous condition to take away right to obtain refund, which the petitioner is otherwise entitled to in terms of Section 54 of Central Goods and Services Tax Act read with Section 16 of the Integrated Goods and Services Tax Act.

The petitioner further contended that, the impugned Rule 89(4)(C) of the Central Goods and Services Tax Rules, as amended on 23.03.2020 is arbitrary and unreasonable, in as much as the possibility of taking undue benefit by inflating the value of the zero-rated supply of goods, cannot be a ground to amend the Rule, which deserves to be declared invalid on this ground also.

The respondents-revenue submitted that the impugned amendment was based on the minutes of the GST Council’s 39th meeting held on 14.03.2020.

Notably, it was remarked by the court that, “insofar as the other contentions urged by the respondents – revenue in their statement of objections and before this Court, the same are neither relevant nor germane for adjudication of this petition and consequently, the same have not been referred to in detail in this order.”

The bench of Justice S R Krishna Kumar observed that, “As rightly contended by the learned Senior counsel for the petitioner, the impugned Rule 89(4)(C) is arbitrary and unreasonable, in as much as the possibility of taking undue benefit by inflating the value of the zero-rated supply of goods, cannot be a ground to amend the Rule, which deserves to be declared invalid on this ground also”, while taking due note of the element of irrationality in the amendment.

The High Court bench also made the observation that, “Further, the policy of the Government itself will have to satisfy the test of rationality and must be free from arbitrariness and discrimination.”

The impugned wordings were resultantly quashed and the petitioner was held entitled to refund along with interest. The order denying refund claim was also quashed in process.

The issue regarding validity of the Explanation to Rule 93 of the CGST Rules, challenged by the petitioner was however kept open to be dealt with in an appropriate case.

To Read the full text of the Order CLICK HERE

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