Rule 96(10) Ultra Vires to Section 16 of GST Act: Detailed Analysis of Kerala HC's Judgment
The court stated that the restriction is ‘manifestly arbitrary’ and referred to the Sayara Bano case to understand the term
The Rule 96(10) is ultra vires to Section 16 of the Goods and Services Tax ( GST ) Act. The Kerala High court took the stand that the working of Rule 96(10) of the CGST Rules as presently worded creates a restriction not contemplated by Section 16 of the IGST Act, on the right to refund, thus it is ultra vires. The court stated it is ‘manifestly arbitrary’ and referred to the Sayara...
The Rule 96(10) is ultra vires to Section 16 of the Goods and Services Tax ( GST ) Act. The Kerala High court took the stand that the working of Rule 96(10) of the CGST Rules as presently worded creates a restriction not contemplated by Section 16 of the IGST Act, on the right to refund, thus it is ultra vires.
The court stated it is ‘manifestly arbitrary’ and referred to the Sayara Bano case to understand the term.
What is Rule 96(10)
Basically, the Rule 96 is about the Refund of integrated tax paid on goods or services exported out of India. And the Rule 96(10), which is declared ultra vires by the Kerala High Court is a restriction clause. It completely denies the refund to the exporters who availed certain notifications issued by the Central Government.
The Rule 96(1) states that “The persons claiming refund of integrated tax paid on exports of goods or services should not have -
(a) received supplies on which the benefit of the Government of India, Ministry of Finance notification No. 48/2017-Central Tax, dated the 18th October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1305 (E), dated the 18th October, 2017 except so far it relates to receipt of capital goods by such person against Export Promotion Capital Goods Scheme or notification No. 40/2017-Central Tax (Rate), dated the 23rd October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1320 (E), dated the 23rd October, 2017 or notification No. 41/2017-Integrated Tax (Rate), dated the 23rd October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1321 (E), dated the 23rd October, 2017 has been availed; or
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(b) availed the benefit under notification No. 78/2017-Customs, dated the 13th October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1272 (E), dated the 13th October, 2017 or notification No. 79/2017-Customs, dated the 13th October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1299 (E), dated the 13th October, 2017 except so far it relates to receipt of capital goods by such person against Export Promotion Capital Goods Scheme.
Explanation. - For the purpose of this sub-rule, the benefit of the notifications mentioned therein shall not be considered to have been availed only where the registered person has paid Integrated Goods and Services Tax and Compensation Cess on inputs and has availed exemption of only Basic Customs Duty (BCD) under the said notifications.”
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When we explain this, Rule 96(10) of the GST Rules sets conditions on exporters claiming a refund of integrated tax (IGST) paid on exported goods or services. Specifically, it restricts exporters from availing this refund if they have benefited from certain government notifications providing tax reliefs or exemptions.
Firstly, sub-rule (a) restricts the refund eligibility for exporters who have benefited from the exemptions under several Ministry of Finance notifications. For instance, under Notification No. 48/2017, which offers relief on taxes for procurement under the Export Promotion Capital Goods (EPCG) Scheme, any benefit availed on capital goods disqualifies them from claiming IGST refunds on exports. Similarly, Notifications No. 40/2017 and No. 41/2017, which allow relief on certain supplies, also bar exporters who have claimed their benefits from receiving IGST refunds.
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In sub-rule (b), the rule disallows refund claims for those benefiting under Customs Notifications No. 78/2017 and No. 79/2017, which provide exemptions for certain import duties to promote exports. However, the rule allows for an exception in cases where only Basic Customs Duty (BCD) was exempted, and the exporter paid IGST and Compensation Cess on imported goods.
This rule was made to prevent double benefits; exporters should not claim both the IGST refund and benefits under these notifications, which would lead to excessive tax relief beyond what is intended.
FACTS IN BRIEF
The petitions are brought by exporters who are eligible for tax refunds under Section 16 of the IGST Act, which establishes the concept of zero-rated supplies for exports, ensuring that exported goods are tax-free.
This allows exporters to claim refunds on taxes paid for input goods and services or the IGST paid on exported goods. Section 16 outlines two methods for claiming refunds: (a) exporting under bond or Letter of Undertaking without IGST payment, allowing for a refund of unutilized input tax credit, or (b) exporting goods or services with IGST payment and claiming a refund of the paid tax. Both methods fall under Section 54 of the CGST Act, with refunds processed per Rules 89 and 96 of the CGST Rules.
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Rule 96(10), however, imposes restrictions: if any benefit from certain notifications has been availed in input procurement, the exporter cannot claim an IGST refund. This means even minor use (e.g., 10%) of input procured with notification benefits can lead to a full denial of refund claims.
Petitioners argued this rule violates Articles 14, 19(1)(g), and 265 of the Constitution of India due to its arbitrariness, as interpreted in Shayara Bano v. Union of India (2017). Additionally, the rule's application extends across separate registration units in different states, which the petitioners argue is legally unsustainable.
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The primary points for review are:
- Whether Rule 96(10) is ultra vires to Section 16 of the IGST Act.
- Whether the Rule unlawfully restricts exporters' vested rights to claim IGST refunds.
- Whether Rule 96(10) is unconstitutional by violating constitutional protections against arbitrariness and by limiting lawful refund claims.
SUBMISSIONS FOR THE PETITIONERS
In extensive reference to Section 16 of the IGST Act, Section 54 of the CGST Act, and Rules 89 and 96 of the CGST Rules, it was argued that Rule 96(10) of the CGST Rules unduly removes an exporter’s right to claim a refund of IGST, a right originally granted by the IGST Act.
Rule 89 allows exporters to claim refunds on unutilized input tax credit by filing a bond or undertaking, while Rule 96 provides a refund method for IGST paid on exports. Notably, Rule 89 does not restrict refunds even if certain inputs were acquired through benefits under Rule 96(10) notifications; however, Rule 96(10) denies refunds outright if such benefits were availed.
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This discrepancy creates an inconsistency where exporters who opt for the bond/undertaking route retain refund rights, but those paying IGST and seeking refunds are denied, leading to an unjust differentiation unsupported by the IGST Act.
Senior Counsel G. Shivadas, representing W.P.(C) No. 17447/2023, cited Supreme Court judgments (e.g., Ispat Industries Ltd., Cellular Operators Association, Shayara Bano, Intercontinental Consultants and Technocrats, and VKC Footsteps) to argue that subordinate rules cannot contravene primary legislation, emphasizing that refund restrictions should only be introduced explicitly in plenary law.
Additionally, Senior Counsel K. Srikumar highlighted the principle from Kerala State Electricity Board v. Thomas Joseph that delegated legislation must align with its parent statute, while Senior Counsel K.N. Sreekumaran noted that the comparison between Rules 89 and 96 exposes unreasonable classifications among exporters, warranting Rule 96(10) to be struck down as ultra vires and arbitrary.
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Lastly, counsel M.P. Shameem argued that Section 16’s phrase “subject to such conditions” refers to revenue protection, not refund restrictions, and that Sections 54(3) and 54(6) of the CGST Act do not justify restrictions like those in Rule 96(10).
SUBMISSIONS FOR THE REVENUE
The Senior Standing Counsel for Revenue argued that Rule 96(10) of the CGST Rules aligns with the conditions prescribed in Section 16 of the IGST Act and Section 54 of the CGST Act, which allow for imposing conditions on the right to claim refunds.
Referring to the Supreme Court's ruling in VKC Footsteps, he contended that the right to refunds is not absolute and may be restricted for fiscal objectives, citing paragraph 99 of the judgment. He presented relevant notifications and the GST Council’s minutes, explaining the necessity of restrictions under Rule 96(10).
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Special Government Pleader Sri Mohammed Rafiq emphasizes the legislative intent behind the rule, arguing that it does not contradict Section 16 of the IGST Act. Citing Commissioner of Customs v. Dilip Kumar and Willowood Chemicals, he asserted that refund claims must adhere to the rules, suggesting an interpretation favouring revenue.
He compared Rules 89 and 96, noting the choice available to exporters in seeking refunds. In response, Senior Counsel Sri G. Shivadas references the Zenith Spinners case, upheld by the Supreme Court, asserting that the government cannot use "conditions, safeguards, and limitations" to entirely negate statutory refund rights under Section 16(3)(b) of the IGST Act and Section 54(6) of the CGST Act.
ANALYSIS BY THE HIGH COURT
The High Court noted the petitioners had a strong footing on the contentions. The bench added that Rule 96 of the CGST Rules has seen multiple amendments over time. While various cases reference the evolution of Rule 96, both the Court and the involved parties agree that examining the amendment history to determine if the rule conflicts with Section 16 of the IGST Act is unnecessary.
Section 16 of the IGST Act, both pre- and post-amendment, does not restrict claims for refunds on taxes paid for input goods, services, or IGST on exports. The Supreme Court's ruling in VKC Footsteps upheld Parliament's right to set refund conditions.
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However, the Court highlighted that the term "inputs" in Section 54(3) of the CGST Act is limited to input goods, not services, when considering inverted duty structure refunds. This established that subordinate legislation must conform to primary legislation, as reinforced by the Gujarat High Court in Zenith Spinners, where the Supreme Court upheld that an authority cannot, through notifications, restrict rights granted by the rules.
This Court evaluated the impact of Rule 96(10) of the CGST Rules, comparing refund rights under Sections 16(3)(a) and 16(3)(b) of the IGST Act. It was found that Rule 96(10), as currently structured, unfairly discriminates against exporters based on refund methods, thus rendering it inconsistent with Section 16.
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Referring to Shayara Bano, where manifest arbitrariness allows Courts to strike down legislation under Article 14, this Court notes that the Supreme Court has instructed that arbitrary provisions, either in primary or secondary legislation, warrant removal if excessively restrictive or unjust.
Justice Gopinath P ruled that “Therefore, I am constrained to hold that Rule 96(10) of the CGST Rules as presently worded is ultra vires the provisions of Section 16 of the IGST Act, it is ‘manifestly arbitrary’ as the term is to be understood in the light of the law laid down in Shayara Bano (supra) and the provision as it stands today produces absurd results, not intended by the Legislature.”
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With the recent deletion of Rule 96(10) effective October 8, 2024, through Notification No. 20/2024-Central Tax, issues arising before this date persist that as the Notification is prospective, the court was concerned about the issues that arose before the deletion date. Therefore, with regards to the Rule 96(10), the Court declares:
- Rule 96(10) of the CGST Rules, inserted by Notification No. 53/2018-CT effective October 23, 2017, as ultra vires to Section 16 of the IGST Act and unenforceable due to its manifest arbitrariness.
- Any actions based on Rule 96(10), including show cause notices and resulting orders, are quashed.
- IGST refunded between October 23, 2017, and October 8, 2024, under Rule 96(10), will not be subject to recovery.
In 2023, the Allahabad High Court addressed a similar issue in the case of M/s Saru Silver Alloys Pvt. Ltd. v. Union of India & Ors. The petitioners contended that Clause 10 of Rule 96, introduced by amendment, retrospectively limits the refund of IGST on exports for those assessees who claimed exemptions under Customs Notification 79/2017 at the time of import.
However, the Kerala High Court now issued a ruling on this matter, which will benefit taxpayers retrospectively, given that the deletion notification for Rule 96(10) has a prospective effect.
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