TMI Blog2023 (4) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... the pricing mechanism when they quote and therefore, the restriction of the same would be highly unreasonable, given the objective of the Government that exports should be zero rated and taxes should not be exported - It is also well settled that if the government perceives that there could be a possibility of abuse of a provision, it should adopt measures to keep a check on the same; however, the law cannot be amended on the premise of distrust. It is also relevant to note that in the GST Council Meeting, it was stated that the FOB value of exports will not be changed, which would mean that there is no doubt about the valuation of the goods; therefore, if there is no doubt about the value of the goods, the artificial restriction of refunds by taking the value of domestic supplies seems irrational. Further, the policy of the Government itself will have to satisfy the test of rationality and must be free from arbitrariness and discrimination. In DEPUTY COMMISSIONER OF INCOME TAX ANR. VERSUS M/S. PEPSI FOODS LTD. (NOW PEPSICO INDIA HOLDINGS PVT. LTD.) [ 2021 (4) TMI 369 - SUPREME COURT] , the Apex Court held that the expression permissible policy of taxation would refer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rule 89(4C) of the Central Goods and Services Tax Rules, 2017 (for short the CGST Rules ) as amended vide Para 8 of the Notification No.16/2020-CT dated 23.03.2020 is the subject matter of the present petition. 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 Factual Matrix of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rule 89(4)(C) of the CGST Rules as well as the Explanation to Rule 93 of the CGST Rules. 4. Heard Sri.V.Raghuraman, learned Senior Counsel along with Sri.J.S.Bhanumurthy for the petitioner and Smt.K.R.Vanitha, learned counsel for the respondents-revenue and perused the material on record. Petitioner s Contentions: 5. In addition to reiterating the various contentions urged in the petition and referring to the material on record, learned Senior counsel for the petitioner submitted that at the outset, the challenge in the present petition to the validity of the explanation to Rule 93 of the CGST Rules(Relief B ) was not being pressed into service by the petitioner, who would be restricting its claim to the remaining reliefs sought for in the petition. 5.1 It was submitted that Rule 89(4)(C) of the CGST Rules, as amended on 23.03.2020 is ultra vires and invalid and deserves to be declared unconstitutional and struck down. It was further submitted that the impugned order is illegal, arbitrary and without jurisdiction or authority of law and deserves to be quashed and the respondents be directed to accept/allow the subject refund claims of the petitioner and grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the laws must extend even to taxing statutes; if person or property of the same character has to be taxed, the taxation must be by the same standard, so that the burden of taxation may fall equally on all persons holding that kind and extent of property; if the same class of property or persons similarly situated is subjected to an incidence of taxation, which results in inequality, the law may be struck down as creating an inequality amongst holders of the same kind of property or persons. 5.5 It was submitted that Article 14 of the Constitution forbids class legislation; however, Article 14 does not prohibit reasonable classification for the purpose of legislation provided it passes two tests, viz., that the classification must be founded on an intelligible differentia, which distinguishes persons or things that are grouped together from others left out of the group; and that the differentia must have a rational relation with the object sought to be achieved by the statute; it was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be the consequences in respect of a supplier who would be pricing the local goods differently in different states for the same products being exported. It was therefore 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 CGST Act read with Section 16 of the IGST Act. 5.9 The impugned Rule 89(4)(C) of the CGST 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. 5.10 The impugned refund rejection order has been mechanically passed without any application of mind also violative of principles of natural justice; further, the refund claims of the petitioner pertain to periods pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verting to the rival contentions and the relevant statutory provisions, a brief overview of the GST scheme is required; in this context, it is relevant to state that the entire scheme of indirect taxes in India has undergone transformation upon introduction of GST with effect from 01.07.2017. This tax is being levied with concurrent jurisdiction of the Centre and the States on the supply of goods or services. For this purpose, the Constitution of India has been amended vide Constitution (101st Amendment) Act, 2016 with effect from 16th September 2016. The Constitutional Amendment Bill specifically mentions that the objective of introducing GST is to avoid cascading effect of taxes. 8. Central Government enacted the CGST Act to provide for levy and collection of tax on supply of goods or service or both where the supply is intra-state supply; so also, the CGST Rules were also framed including the impugned Rule 89(4)(C); 9. Central Government enacted the IGST Act for the purpose of levy and collection of GST on the supply of goods or services or both where the supply is inter-state supply; 10. The State of Karnataka enacted the KGST Act to levy and collect tax on intra-state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on commercial activities and is not a charge on the business but on the consumer and it would, logically, be leviable only on services provided within the country. Service tax is a value added tax. 13. In the case of Union of India v. VKC Footsteps (India) (P) Ltd., - (2022) 2 SCC 603 , the Apex Court held as under:- 44. The idea which permeates GST legislation globally is to impose a multi-stage tax under which each point in a supply chain is potentially taxed. Suppliers are entitled to avail credit of tax paid at an anterior stage. As a result, GST fulfils the description of a tax which is based on value addition. Value addition is intended to achieve fiscal neutrality and to obviate a cascading effect of taxation which traditional tax regimes were liable to perpetuate. In a sense therefore, the purpose of a tax on value addition is not dependent on the distribution or manufacturing model. The tax which is paid at an anterior stage of the supply chain is adjusted. The fundamental object is to achieve both neutrality and equivalence by the grant of seamless credit of the duties paid at an anterior stage of the supply chain. Section 16 of the IGST Act, 2017 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of central tax or claims refund of the integrated tax paid on such supplies. (4) xxxxxxxxxxxxxxxxxxxxxxxxxxx Rule 89(4) of the CGST Rules, 2017 reads as under: 89. Application for refund of tax, interest, penalty, fees or any other amount.-( 1)xxxxxxxxxxxxxxxx (4) In the case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking in accordance with the provisions of subsection (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), refund of input tax credit shall be granted as per the following formula Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC Adjusted Total Turnover Where, - (A) Refund amount means the maximum refund that is admissible; (B) Net ITC means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; (C) Turnover of zero-rated supply of goods means the value of zero-rated supply of goods made during the relevant period wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uy a notification or kept out of the purview of tax (i.e. a non-GST) supply). But if a good or service is exempted from payment of tax, it cannot be said that it is a zero rated. The reason is not har5d to find. The inputs and input services which go into the making of the good or provision of service has already suffered tax and only the final product is exempted. Moreover, when the output is exempted, tax laws do not allow availment /utilisation of credit on the inputs and input services used for supply of the exempted output. Thus, in a true sense the entire supply is not zero rated. Though the output suffers no tax, the inputs and input services have suffered tax and since availment of tax on input side is not permitted, that becomes a cost for the supplier. The concept of zero rating of supplies aims to correct this anomaly. - What is Zero Rating? - By zero rating it is meant that the entire value chain of the supply is exempt from tax. This means that in case of zero rating, not only is the output exempt from payment of tax, there is no bar on taking/availing credit of taxes paid on the input side for making/providing the output supply. Such an approach would in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 or the rules made there under. - As per Section 54(3) of the CGST Act, 2017, any unutilised input tax credit in zero rated supplies can be refunded, wherever such supplies are made by using the option of Bond/LUT. The difference between zero rated supplies and exempted supplies is tabulated as below: Exempted supplies Zero rated supplies exempt supply means supply of any goods or services or both which attracts nil rate of tax which may be wholly exempt from tax under section 11 of CGST Act or under section 6 of the IGST Act, and includes not-taxable supply zero rated supply shall have the meaning assigned to it in section 16 No tax on the outward exempted supplies, however, the input supplies used for making exempt supplies to be taxed No tax on the outward supplies; Input supplies also to be tax free Credit of input tax needs to be reversed, it taken; no ITC on the exempted supplies Credit of input tax may be availed for making zerorated supplies, even if such supply is an exempt supply IIC allowed on zero-rated supplie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide. This is in contrast with exempted supplies, where only output is exempted from tax but tax is suffered on the input side. The essence of zero rating is to make Indian goods and services competitive in the international market by ensuring that taxes do not get added to the cost of exports. The objective of zero rating of exports and supplies to SEZ is sought to be achieved through the provision contained in Section 16(3) of the IGST Act, 2017, which mandates that a registered person making a zero rated supply is eligible to claim refund in accordance with the provisions of Section 54 of the CGST Act, 2017, under either of the following options, namely:-- He may supply goods or service or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit of CGST, SGST/UTGST and IGST; or He may be supply good or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied. The second c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence regarding receipt of services for authorised operations as endorsed by the specified officer of the Zone. Thus, proof of receipt of goods or service as evidenced by the specified officer of the zone is a pre-requisite for filing of refund claim by the DTA supplier. The claim for refund when made for supplies made to SEZ unit/Developer has to be filed along with the following documents: 1. A statement containing the number and date of invoices as provided in rule 46 along with the evidence regarding the endorsement specified in the second proviso to sub-rule (1) in the case of the supply of goods made to a Special Economic Zone unit or a Special Economic Zone developer; 2. A statement containing the number and date of invoices, the evidence regarding the endorsement specified in the second proviso to sub-rule(1) and the details of payment, along with the proof thereof, made by the recipient to the supplier for authorised operations a defined under the Special Economic Zone Act, 2005, in a case where the refund is on account of supply of services made to a Special Economic Zone unit or a Special Economic Zone developer; 3. A declaration to the effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditions, safeguards and procedure as may be prescribed. He may supply goods or services or both under bond or LUT without payment of IGST and claim refund of unutilized input tax credit; or He may supply goods or services or both on payment of IGST and claim refund of such tax paid on goods or services or both so supplied. Section 54 of the CGST Act deals with refund of tax; Section 54(3) provides that a registered person may claim refund of any unutilized input tax credit at the end of any tax period. Corresponding to Section 16(3) of the IGST Act (supra), Clause (i) of first Proviso to Section 54(3) provides that refund of the said unutilized input tax credit would be available on making zero-rated supplies. Section 16 of the IGST Act contemplates that exports are zero rated (in other words, exports are tax free) and that therefore, refund can be claimed of input tax credit lying unutilized on account of such zero-rated supplies (i.e., exports) as also on the output tax. Section 54 of the CGST Act provides for refund of GST; Section 54(3) provides that a registered person may claim refund of any unutilized input tax credit at the end of any tax pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1.5*0*10 = 0 or 1000 whichever is less. Like goods domestically sold 0 0 0 17. In my considered opinion, the impugned amendment to Rule 89(4)(C) of the CGST Rules is illegal, arbitrary, unreasonable, irrational, unfair, unjust and ultra vires Section 16 of the IGST Act and Section 54 of the CGST Act for the following reasons:- (a) Rule 89(4)(C) of the CGST Rules is ultra vires Section 54 of the CGST Act read with Section 16 of the IGST Act; the very intention of the zero-rating it to make entire supply chain of exports tax free, i.e., to fully zero-rate the exports by exempting them from both input tax and output tax; accordingly, Section 16(3) of the IGST Act allows refund of input taxes paid in the course of making a zero-rated supply, i.e., supplies which covers exports as well as supplies to SEZs. The rule in whittling down such refund is ultra vires in view of the well settled principle of law that Rules cannot override the parent legislation. (b) Rule 89(4)(C) of the CGST Rules is violative of Article 14 and 19(1)(g) of the Constitution of India; the quantum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... domestic turnover in the definition of zero rated supply which is meant to cover only exports is clearly arbitrary and unreasonable. (d) It is significant to note that in exports, availability of the rotation of funds is essential for the business to thrive; the entire concept of refund of unutilized input tax credit relating to zero-rated supply would be obliterated in case the respondents are permitted to put any limitation and condition that takes away petitioner s right to claim refund of all the taxes paid on the domestic purchases used for the purpose of zero-rated supplies; the incentive given to the exporters would lose its meaning and this would cause grave hardship to the exporters who are earning valuable foreign exchange for the country; it follows there from that exporters would have factored in such incentives in the pricing mechanism when they quote and consequently, the restriction of the same by the impugned amended Rule 89(4)(C) would be highly unreasonable. (e) Rule 89(4)(C) of the CGST Rules also suffers from the vice of vagueness for the reason that the words like goods and similarly placed supplier in the impugned Rule 89(4)(C) are completely o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amending words therefore, do not sub serve the objectives set out in Section 16 of the IGST Act, 2017 nor Section 54 of the CGST Act, 2017 and are contrary to the clarifications given above. (i) The impugned amendment is also unreasonable and arbitrary as adequate reasoning is not present; this would make such amendment unreasonable for the reason that it bears no rational nexus with the objective sought to be achieved by Section 16 of the IGST Act (supra). 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, as amended on 23.03.2020 aims to do just the opposite by restricting the quantum of refund of tax available in making such exports. Further, what is seen is that including domestic turnover in definition of zero rated supply which is meant to cover only exports is clearly arbitrary and unreasonable as that would defeat the provisions of law to grant refund on zero rated goods. 18. Therefore, I am also of the view that terminology used in the impugned Rule viz., like goods and same or similarly placed supplier does not have any precise meaning in the said Rules and no guideline is pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -ended and undefined. 76. Quite apart from this, as has been pointed out above, every expression used is nebulous in meaning. What may be offensive to one may not be offensive to another. What may cause annoyance or inconvenience to one may not cause annoyance or inconvenience to another. Even the expression persistently is completely imprecise - suppose a message is sent thrice, can it be said that it was sent persistently ? Does a message have to be sent (say) at least eight times, before it can be said that such message is persistently sent? There is no demarcating line conveyed by any of these expressions - and that is what renders the Section unconstitutionally vague. 21. As rightly contended by the petitioner, in exports, availability of the rotation of funds is essential for the business to thrive. The entire concept of refund of unutilized input tax credit relating to zero-rated supply would be obliterated in case the respondents are permitted to put any limitation and condition that takes away petitioner s right to claim refund of all the taxes paid on the domestic purchases used for the purpose of zero-rated supplies. The incentive given to the exporters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, it does not behove on the part of the appellant Corporation to withdraw the said benefit before expiry of the stipulated period by issuing the notification revoking the same which the respondents were legitimately entitled to avail. We fail to understand why the appellant Corporation which made a representation and allowed the other party to act upon such representation could resile and leave the citizens in a lurch. In such a situation, the principle of promissory estoppel which has been evolved by the courts which is based on public morality cannot permit the State to act in such an arbitrary fashion. 31. Other grounds for the purpose of public interest which have been pleaded, namely, that there are two methods of tariff provided by the amendment and the actual consumption has (energy consumption charges have) been reduced based on the calculation of energy charges per KV from 308 paise to 100 paise and there was large scale theft or that units were closing down and there was no mala fide intention in the matter of revocation of the notification and the cost of production of power has gone up to Rs. 2.50 per unit, are considerations which hardly involve any public in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the FOB value of exports will not be changed, which would mean that there is no doubt about the valuation of the goods; therefore, if there is no doubt about the value of the goods, the artificial restriction of refunds by taking the value of domestic supplies seems irrational. Further, the policy of the Government itself will have to satisfy the test of rationality and must be free from arbitrariness and discrimination. In Pepsi Foods (case) supra, the Apex Court held as under:- 27. We have already seen how unequals have been treated equally so far as assessees who are responsible for delaying appellate proceedings and those who are not so responsible, resulting in a violation of Article 14 of the Constitution of India. Also, the expression permissible policy of taxation would refer to a policy that is constitutionally permissible. If the policy is itself arbitrary and discriminatory, such policy will have to be struck down, as has been found in para 20 above. 26. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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