2021 (9) TMI 626 - SC - GST

Refund of unutilised ITC on input services - challenge to validity of Rule 89(5) on the ground that it is ultra vires Section 54(3)(ii) - interpretation of sub-Section (3) to Section 54 and Explanation 1 to sub-Section (1) of Section 54 - HELD THAT - Parliament while enacting sub-Section (3) of Section 54 has stipulated that no refund of unutilized ITC shall be allowed other than in the two specific situations envisaged in clauses (i) and (ii) of the first proviso. Whereas clause (i) has dealt with zero rated supplies made without the payment of tax clause (ii) which governs domestic supplies has envisaged a more restricted ambit where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. While the CGST Act defines the expression input in Section 2(59) by bracketing it with goods other than capital goods it is true that the plural expression inputs has not been specifically defined. But there is no reason why the ordinary principle of construing the plural in the same plane as the singular should not be applied. To construe inputs so as to include both input goods and input services would do violence to the provisions of Section 54(3) and would run contrary to the terms of Explanation-I which have been noted earlier - Consequently it is not open to the Court to accept the argument of the assessee that in the process of construing Section 54(3) contextually the Court should broaden the expression inputs to cover both goods and services. Refund is a matter of a statutory prescription. Parliament was within its legislative authority in determining whether refunds should be allowed of unutilised ITC tracing its origin both to input goods and input services or as it has legislated input goods alone. By its clear stipulation that a refund would be admissible only where the unutilised ITC has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies Parliament has confined the refund in the manner which we have described above. While recognising an entitlement to refund it is open to the legislature to define the circumstances in which a refund can be claimed. The proviso to Section 54(3) is not a condition of eligibility (as the assessees Counsel submitted) but a restriction which must govern the grant of refund under Section 54(3). Vires of Rule 89(5) vis- -vis Section 54(3) of the CGST Act - HELD THAT - The challenge to Rule 89(5) as a piece of delegated legislation on the ground that it is ultra vires Clause (ii) of the first proviso to Section 54(3) is lacking in substance. As reasoned in the earlier part of this judgment Clause (ii) of the first proviso is not merely a condition of eligibility for availing of a refund but a substantive restriction under which a refund of unutilized ITC can be availed of only when the accumulation is relatable to an inverted duty structure namely the tax on input goods being higher than the rate of tax on output supplies. There is therefore no disharmony between Rule 89(5) on the one hand and Section 54(3) particularly Clause (ii) of its first proviso on the other hand. It would be material to advert to the provisions of Rule 42. Rule 42(1) provides that the ITC in respect of input goods or input services which attract the provisions of sub-Section (1) or sub-Section (2) of Section 17 being partly used for the purpose of business and partly for other purposes or partly used for affecting taxable supplies including zero rated supplies and partly for effecting exempts supplies shall be attributed for the purposes of business or for effecting taxable supplies in the manner which is indicated in the Rule. Sub-Section (1) of Section 17 provides that where the goods and services or both are used by a registered person partly for the purposes of any business and partly for any other purpose the amount of credit shall be restricted to so much of the input tax as is attributable to the purpose of its business - Rule 89(5) provides for a refund. In both sets of rule clusters Rules 42 and 43 on the one hand and Rule 89(5) on the other hand a formula is used for the purpose of attribution in a post assimilated scenario. The use of such formulae is a familiar terrain in fiscal legislation including delegated legislation under parent norms and is neither untoward nor ultra vires. Parliament engrafted a provision for refund Section 54(3). In enacting such a provision Parliament is entitled to make policy choices and adopt appropriate classifications given the latitude which our constitutional jurisprudence allows it in matters involving tax legislation and to provide for exemptions concessions and benefits on terms as it considers appropriate. The consistent line of precedent of this Court emphasises certain basic precepts which govern both judicial review and judicial interpretation of tax legislation. The purpose of the formula in Rule 89(5) is to give effect to Section 54(3)(ii) which makes a distinction between input goods and input services for grant of refund. Once the principle behind Section 54(3)(ii) of the CGST Act is upheld the formula cannot be struck down merely for giving effect to the same. The Division Bench of the Gujarat High Court in VKC FOOTSTEPS INDIA PVT. LTD. VERSUS UNION OF INDIA 2 OTHER (S) 2020 (7) TMI 726 - GUJARAT HIGH COURT having examined the provisions of Section 54(3) and Rule 89(5) held that the latter was ultra vires. In its decision in VKC Footsteps India Pvt. Ltd the Gujarat High Court held that by prescribing a formula in sub-Rule (5) of Rule 89 of the CGST Rules to execute refund of unutilized ITC accumulated on account of input services the delegate of the legislature had acted contrary to the provisions of sub-Section (3) of Section 54 of the CGST Act which provides for a claim of refund of any unutilized ITC. The Gujarat High Court noted the definition of ITC in Section 2(62) and held that Rule 89(5) by restricting the refund only to input goods had acted ultra vires Section 54(3). The Division Bench of the Madras High Court on the other hand while delivering its judgment in Tvl. Transtonnelstory Afcons Joint Venture 2020 (9) TMI 931 - MADRAS HIGH COURT declined to follow the view of the Gujarat High Court noting that the proviso to Section 54(3) and more significantly its implications do not appear to have been taken into consideration in VKC Footsteps India Pvt. Ltd. except for a brief reference. The appeals filed by the Union of India against the judgment of the Gujarat High Court dated 4 July 2020 in VKC Footsteps India Pvt. Ltd. and connected cases are allowed and the judgment shall be set aside - The appeals filed by the assessees against the judgment of the Madras High Court in Tvl. Transtonnelstroy Afcons Joint Venture (supra) and connected cases dated 21 September 2020 shall stand dismissed. Application disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this judgment are:

(i) Whether the expression "inputs" in Section 54(3)(ii) of the Central Goods and Services Tax Act, 2017 ("CGST Act") includes both input goods and input services or only input goods;

(ii) Whether Rule 89(5) of the CGST Rules, which defines "Net ITC" as input tax credit availed only on inputs (i.e., input goods) and excludes input services for the purpose of refund calculation under an inverted duty structure, is ultra vires Section 54(3) of the CGST Act;

(iii) The proper interpretation of the proviso to Section 54(3), specifically whether it imposes a restriction on refund entitlement or merely a condition of eligibility;

(iv) Whether the classification excluding input services from refund under an inverted duty structure violates constitutional principles of equality under Article 14 of the Constitution;

(v) The scope and validity of the rule-making power under Section 164 of the CGST Act, particularly in framing Rule 89(5) and its retrospective amendments;

(vi) The validity and practical efficacy of the formula prescribed in Rule 89(5) for computing refund of unutilised input tax credit ("ITC") in cases of inverted duty structure;

(vii) Whether the refund of unutilised ITC includes credit on capital goods;

(viii) The applicability of the doctrine of equivalence and neutrality between goods and services in the context of refund of ITC under GST.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Interpretation of "inputs" in Section 54(3)(ii)

The Court examined the statutory definitions under the CGST Act and the constitutional definitions under Article 366. Section 2(59) defines "input" as goods other than capital goods used or intended to be used in business, while Section 2(60) defines "input service" as any service used or intended to be used in business. Constitutionally, "goods" and "services" are distinct categories under Articles 366(12) and 366(26A).

The Court noted that the plural term "inputs" in Section 54(3)(ii) is not separately defined but should be construed in line with the singular "input" as per ordinary principles of statutory interpretation. Hence, "inputs" refers only to input goods and excludes input services.

Explanation-I to Section 54(3) clarifies that refund of tax paid on zero-rated supplies includes both inputs and input services, but for domestic supplies under the inverted duty structure, refund is limited to credit accumulated on inputs (goods) alone. This distinction underlines the legislative intent to restrict refund in inverted duty cases to input goods.

The Court rejected the assessees' argument that "inputs" should be read to include input services based on economic equivalence or the doctrine of neutrality, emphasizing that the plain language and legislative scheme must prevail.

Issue (ii): Validity of Rule 89(5) excluding input services from "Net ITC"

Rule 89(5) prescribes a formula for refund of ITC on account of inverted duty structure, defining "Net ITC" as input tax credit availed on inputs (goods) only, excluding input services. The rule was amended retrospectively to this effect.

The Court held that Rule 89(5) is intra vires Section 54(3) because the proviso to Section 54(3) restricts refund of unutilised ITC in inverted duty structure cases to credit accumulated on inputs (goods) alone. Thus, the rule faithfully implements the statutory restriction.

The argument that Section 54(3) is a complete code and does not envisage rule-making for refund quantum was rejected. The Court recognized that rules may fill gaps and provide procedural or formulaic details consistent with the statute.

The Court also noted that the retrospective amendment is permissible under Section 164(3) of the CGST Act, which allows rules to be made retrospectively from the date the Act came into force.

Issue (iii): Nature of the proviso to Section 54(3)

The Court analyzed the language and structure of Section 54(3) and its provisos. The main provision allows a registered person to claim refund of any unutilised ITC at the end of any tax period. The first proviso, introduced by "no refund shall be allowed in cases other than", restricts refund to two specific cases: (i) zero-rated supplies without payment of tax, and (ii) credit accumulated on account of rate of tax on inputs being higher than rate of tax on output supplies.

The Court held that the proviso is a substantive restriction on refund entitlement, not merely a condition of eligibility. It carves out exceptions to the general refund provision and must be strictly construed.

The Court rejected the assessees' submission that the proviso only lays down threshold conditions and that the refund quantum includes ITC on input services. The language "no refund shall be allowed in cases other than" indicates a clear limitation on refund cases.

Issue (iv): Constitutional validity under Article 14

The assessees argued that excluding input services from refund under inverted duty structure violates equality under Article 14, as goods and services are treated differently despite similar treatment for ITC availment and utilization.

The Court reaffirmed the wide latitude of the legislature in fiscal matters and held that goods and services are distinct constitutional and statutory categories. Classification excluding input services from refund is rationally connected to the object of the legislation and is not arbitrary.

The Court observed that the CGST regime is still evolving with multiple tax rates and exemptions, and the legislature is entitled to make policy choices to deal with complexities. The exclusion of input services from refund in inverted duty structure cases is a valid legislative classification.

The Court also noted that refund is a statutory concession, not a constitutional right, and must be strictly construed.

Issue (v): Rule-making power under Section 164 and validity of Rule 89(5)

The Court held that Section 164 confers broad rule-making power on the Central Government to carry out the provisions of the CGST Act, including retrospective rules. The absence of express "may be prescribed" language in Section 54(3) does not preclude rule-making.

Rule 89(5) prescribing the refund formula is valid as it carries out the provisions of the Act, including providing a method to compute refund where supplies involve both inverted and non-inverted duty structures.

The Court rejected the assessees' contention that Rule 89(5) is ultra vires because it restricts refund to input goods, since this restriction is consistent with the proviso to Section 54(3).

Issue (vi): Validity and anomalies in the formula prescribed in Rule 89(5)

The Court acknowledged that the formula in Rule 89(5) is not perfect and may cause anomalies. Specifically, the formula assumes that the entire output tax payable is discharged from ITC on input goods, ignoring ITC on input services, which may reduce the refund amount and increase cascading effect.

The assessees proposed reading down the formula to allow utilization of ITC on input services first for payment of output tax, with refund calculation adjusted accordingly.

The Court declined to read down or rewrite the formula, emphasizing that judicial review should not encroach on legislative or executive policy choices. However, the Court urged the GST Council to reconsider and address the anomalies in the formula.

Issue (vii): Inclusion of capital goods in refund

The Court noted that capital goods are excluded from the definition of "inputs" under Section 2(59) and are treated separately under the CGST Act. Refund of ITC on capital goods is not covered under Section 54(3)(ii) and is outside the scope of the present dispute.

Issue (viii): Doctrine of equivalence and neutrality between goods and services

The assessees invoked the doctrine of equivalence and neutrality, arguing that since GST is a unified tax on goods and services, input goods and input services should be treated equally for refund purposes.

The Court recognized the economic rationale but held that such policy considerations cannot override the plain language of the statute. The constitutional scheme and statutory definitions maintain a distinction between goods and services, and the legislature's policy choices in refund provisions must be respected.

3. SIGNIFICANT HOLDINGS

"The provisos under Section 54(3) have to be read and interpreted as restrictions and not as qualifications."

"The expression 'inputs' in the proviso to Section 54(3)(ii) refers to input goods and does not include input services."

"Rule 89(5) of the CGST Rules, in defining 'Net ITC' as input tax credit availed on inputs (goods) alone, is intra vires Section 54(3) of the CGST Act."

"Refund of unutilised ITC is a matter of statutory concession and not a constitutional right."

"Classification excluding input services from refund under inverted duty structure is a valid legislative classification and does not violate Article 14."

"The formula prescribed in Rule 89(5) for refund computation is valid, notwithstanding its imperfections and anomalies, which should be addressed by the GST Council."

"The rule-making power under Section 164 is broad and includes power to make rules with retrospective effect from the date of commencement of the CGST Act."

"The Court cannot rewrite or read down statutory provisions or delegated legislation to enlarge the scope of refund beyond what Parliament has provided."

Final determinations:

(i) The appeals challenging the judgment of the Gujarat High Court holding Rule 89(5) ultra vires are allowed; the Gujarat High Court judgment is set aside.

(ii) The appeals challenging the Madras High Court judgment upholding Rule 89(5) are dismissed.

(iii) The GST Council is urged to consider the anomalies in the refund formula and take appropriate policy decisions.