The Supreme Court has listed the issues of Validity of Refund of Inverted Duty on Input Services on April 28, 2021 for final hearing.
The batch of petitions arose from the judgments of the High Court of Gujarat and of the High Court of Madras. The Gujarat High Court has held that Explanation (a) to Rule 89(5) of the CGST Rules 2017 is ultra vires, while a contrary view has been taken by the High Court of Madras.
Since a large number of petitions are pending in the High Courts on the same issue, the Apex court found it appropriate to list the batch of cases at 28 April 2021 for final hearing.
Issue raised
Firstly, whether the amended Rule 8 of the CGST Rules is ultra vires Section 54(5) inasmuch as Section 54(3) provides for refund of ‘any unutilized input tax credit accumulated on account of inverted duty structure thereby covering credit of both ‘inputs’ and ‘input services.
Secondly, whether the amended Rule 89 of the CGST Rules is violative of Article 14 of Constitution of India inasmuch as it treats dealers with accumulated credit on inputs and dealers with accumulated credit on input services differently.
Thirdly, whether Section 164(3) is unconstitutional inasmuch as it suffers from the vice of excessive delegation.
Fourthly, whether the amendment of Rule 89 cannot be given retrospective application.
Decision Rendered by Gujarat High Court
The Gujarat High Court in the case of VKC Footsteps India Pvt. Ltd. Vs. Union of India held that by prescribing the formula in Sub-rule 5 of Rule 89 of the CGST 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’.
The division bench of Justices J.B.Pardiwala and Bhargav D.Karia opinied that 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.
The court said that Explanation (a) to Rule 89(5) is read down to the extent that Explanation (a) which defines “Net Input Tax Credit’ means “input tax credit” only. The said explanation (a)of Rule 89(5) of the CGST Rules is held to be contrary to the provisions of Section 54(3) of the CGST Act. In fact the Net ITC should mean “input tax credit” availed on “inputs” and “input services” as defined under the Act.
The court therefore, directed the authority to allow the claim of the refund made by the petitioners considering the unutilised input tax credit of “input services” as part of the “net input tax credit” (Net ITC) for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules, 2017 for claiming refund under Sub-section 3 of Section 54 CGST Act, 2017.
Decision Rendered by Madras High Court
The Madras High Court in the case of Tvl. Transtonnelstroy afcons joint venture vs Union of India held that 54(3)(ii) does not infringe Article 14 and thus refund of only inputs is available under inverted duty structure (IDV) (section 54(3)(ii). This judgement is in contrast to the judgement of Gujarat high court in case of VKC Footsteps.
As per the Judgement Section 54(3)(ii) does not infringe Article 14.
The court said that Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power.
Therefore, there is no necessity to adopt the interpretive device of reading down so as to save the constitutionality of Section 54(3)(ii).
“Section 54(3)(ii) curtails a refund claim to the unutilised credit that accumulates only on account of the rate of tax on input goods being higher than the rate of tax on output supplies,” the court added.
The court observed that Rule 89(5) is not ultra vires to section 54(3)(ii). As a corollary, Rule 89(5) of the CGST Rules, as amended, is in conformity with Section 54(3)(ii).
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan AdFree. We welcome your comments at info@taxscan.in
