2024 (8) TMI 1538 - HC - GST

Refund claim u/s 54(3) of the CGST Act on account of Income Tax Credit (ITC) accumulated due to inverted tax structure - rejection on the ground that business / activity being carried on by the petitioner was supply of services being construction within the meaning of Clause/Entry 5(b) of Schedule II to the CGST Act and not a composite supply in relation to a works contract as contemplated under Clause/Entry 6(a) of Schedule II to the Act - rejection also on the ground that by virtue of N/N. 20/2017-Central Tax(Rate) dated 22.08.2017 works contract relating to Metro which is the subject matter of the present petition was excluded by the respondents. HELD THAT - A perusal of the material on record including the contract agreement dated 23.05.2017 entered into between the petitioner and BMRCL is sufficient to come to the conclusion that the same was a works contract within the meaning of Item / Entry / Clause 6 (a) of Schedule II to the CGST Act and not item / Entry / Clause 5(b) which was not applicable to the supply of services by the petitioner and consequently the said findings recorded by the respondents for the purpose of rejecting the refund claim of the petitioner deserve to be set aside and the refund claim of the petitioner deserves to be allowed. Insofar as the rejection of the refund claim of the petitioner by the respondents by placing reliance upon the N/N. 20/2017 dated 22.08.2017 is concerned it is relevant to state that earlier the revenue had issued a Notification bearing No. 15/2017 dated 28.06.2017 which specifically stated that no refund of unutilized ITC shall be allowed under sub-section (3) of Section 54 of the CGST Act in case of supply of services specified in sub-item (b) of Item 5 of Schedule II of the CGST Act; it is pertinent to note that as per this Notification only supply of services specified in Item 5(b) were excluded and services contemplated in Item 6(a) were not excluded from claim for refund; it followed therefrom that works contract provided in Item / Entry / Clause 6(a) were not excluded from the claim for refund and consequently the petitioner would be entitled to refund as claimed in its refund application which was erroneously rejected by the respondents by passing the impugned orders which deserve to be set aside on this ground alone. In the light of the undisputed fact that the refund claims of the petitioner related to the period from March 2018 onwards it was the N/N. 1/2018 which was applicable and the same undisputedly including works contract relating to Metro also and since the aforesaid N/N. 20/2017 dated 22.08.2017 ceased to exist from 25.01.2018 upon its substitution by N/N. 1/2018 dated 25.08.2018 the petitioner was entitled to claim refund for the subject period from March 2018 to July 2019 and consequently the impugned orders passed by the respondents deserve to be set aside and the refund claim of the petitioner deserves to be allowed on this ground also. The N/N. 15/2023 clarifies and elucidates the fact that refund of unutilized ITC is disallowed / excluded only in relation to construction activity intended for the purpose of sale in the real estate sector; in fact this Notification clearly reinforces and reiterates that works contract are neither disallowed nor excluded from refund claims. This is amply evident from the GST council recommendations in its 52nd meeting which led to the issuance of the notification which states in agenda item 3 (ix) that refund on account of inverted duty structure is denied only for construction services rendered for sale of building in real estate sector and not to other construction or works contract services. In the light of this subsequent event also that has transpired / occurred during the pendency of the present petition the impugned orders deserve to be quashed and the refund claim of the petitioner deserves to be allowed. Conclusion - Works contracts are distinct from service contracts and are not excluded from refund claims under the relevant notifications. The petitioner would be entitled to refund as claimed in its refund application which was erroneously rejected by the respondents. The impugned order is quashed - petition allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the petitioner's business activity constitutes a supply of services under Clause/Entry 5(b) of Schedule II to the CGST Act or a composite supply in relation to a works contract under Clause/Entry 6(a).
• Whether the petitioner's refund claims for unutilized Input Tax Credit (ITC) due to an inverted tax structure are valid under the applicable notifications and statutory provisions.
• The impact of various notifications, including Notification No. 15/2017, 20/2017, and 1/2018, on the petitioner's entitlement to refunds.
• The relevance of the recent Notification No. 15/2023 to the petitioner's claim for refunds.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The legal framework revolves around the interpretation of Schedule II of the CGST Act, particularly Entries 5(b) and 6(a), which differentiate between supply of services and composite supplies related to works contracts. The court also considered precedents such as the Supreme Court's decision in Commissioner of Central Excise and Customs vs. Larsen and Toubro Ltd., which clarified the distinction between service contracts and composite works contracts.

Court's interpretation and reasoning:

The Court interpreted the contract between the petitioner and BMRCL as a works contract under Clause/Entry 6(a) of Schedule II, not as a mere supply of services under Clause/Entry 5(b). The Court reasoned that the respondents' reliance on the incorrect classification led to the erroneous rejection of the refund claims.

Key evidence and findings:

The Court examined the contract agreement dated 23.05.2017 and concluded that it constituted a works contract. The Court found that the respondents had misclassified the petitioner's activities, leading to the rejection of refund claims.

Application of law to facts:

The Court applied the provisions of the CGST Act and relevant notifications to determine that the petitioner's activities were indeed works contracts, which were not excluded from refund claims under the applicable notifications.

Treatment of competing arguments:

The respondents argued that the petitioner's activities were excluded from refund claims based on the notifications. However, the Court found that the applicable notifications did not exclude works contracts from refund claims and that the respondents' reliance on outdated or inapplicable notifications was mistaken.

Conclusions:

The Court concluded that the petitioner was entitled to the refund claims, as the activities were correctly classified as works contracts under the CGST Act, and the applicable notifications did not exclude such claims.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

The Court stated, "A perusal of the material on record including the contract agreement...is sufficient to come to the conclusion that the same was a 'works contract' within the meaning of Item / Entry / Clause 6 (a) of Schedule II to the CGST Act."

Core principles established:

• Works contracts are distinct from service contracts and are not excluded from refund claims under the relevant notifications.
• Misclassification of business activities can lead to erroneous denial of legal entitlements such as refunds.
• Subsequent notifications and their interpretations can significantly impact ongoing legal proceedings and entitlements.

Final determinations on each issue:

• The Court quashed the impugned orders rejecting the refund claims based on the misclassification of the petitioner's activities.
• The Court directed the respondents to process the refund claims with applicable interest within a specified timeframe.