The Supreme Court upheld the validity of Rule 89(5) of the CGST Rules 2017 which pertains to Good and Service Tax (GST) Refund of Inverted Duty on Input Services.
As many as 14 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.
The issues raised in the petition was whether the amended Rule 89 of the CGST Rules is violative of Article 14 of the Constitution of India inasmuch as it treats dealers with accumulated credit on inputs and dealers with accumulated credit on input services differently; 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; and whether Section 164(3) is unconstitutional inasmuch as it suffers from the vice of excessive delegation.
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 a claim of refund of ‘any unutilised input tax credit’.
On the other hand 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 judgment is in contrast to the judgment of the Gujarat high court in case of VKC Footsteps.
The submission which has been urged on behalf of the assessees is that registered persons constitute a class within the meaning of sub-Section (3) of Section 54 and each of them is entitled to claim a refund of unutilized ITC whether its origin lies in input goods or input services. In other words, it has been urged that Section 54(3) constitutes one homogenous class of registered persons who have unutilized ITC. The fallacy of the argument is in the hypothesis that unutilized ITC cannot be unbundled for the purpose of fiscal legislation. Accumulated ITC may result due to a variety of circumstances, some of which may while others may not lie within the volition of a registered person.
The division bench of Justice Dr. Dhananjaya Y Chandrachud and Justice MR Shah observed that if the provision of law is explicitly clear, language unambiguous and interpretation leaves no room for more than one construction, it has to be read as it is. In that case, the provision of law has to be tested on the touchstone of the relevant provisions of law or of the Constitution and it is not open to a court to invoke the doctrine of “reading down” with a view to save the statute from declaring it ultra vires by carrying it to the point of “perverting the purposes of the statute.
“The formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on the accumulation of unutilised ITC. It is merely the case that the practical effect of the formula might result in certain inequities. The reading down of the formula as proposed by Mr Natarjan and Mr. Sridharan by prescribing an order of utilisation would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Accordingly, we shall refrain from replacing the wisdom of the legislature or its delegate with our own in such a case. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same,” the Apex Court said.
The supreme court affirmed the view of the Madras High Court and disapproved of the view of the Gujarat High Court.
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