2025 (6) TMI 1156 - HC - GST

Validity of of Rule 96 (10) of the Central/State Goods and Services Tax Rules 2017 as substituted by the Central Goods and Services Tax (12th Amendment) Rules 2018 with effect from 9.10.2018 - refund of actual amount of excise duty so paid on the goods exported under Rule 18 of the Central Excise Rules 2002 - breach of fundamental rights under Articles 14 19 (1) (g) of the Constitution of India - Effect of a change in the law between a decision at first instance and the hearing of an appeal from that decision - Principles of statutory interpretation - retrospective Or Prospective operation of the statute - Effect of repeal - Provisions of the General Clauses Act vis-a-vis the repeal or omission or implied repeal. Whether Notification No. 20/2024 dated 8th October 2024 whereby Rule 96 (10) has been omitted with effect from the date of notification would be applicable retrospectively or not? - HELD THAT - On coming into force of the Rule 96 (10) the refund claims of the petitioners for IGST paid on export of goods or services were denied even if the petitioners had utilised only a small portion of the inputs imported without payment of custom duty under Advance Authorisation License. Being aggrieved the petitioners have challenged vires of Rule 96 (10) in this group of petitions - The GST Council in its 54th meeting recommended to omit Rule 96 (10) Rule 89 (4A) and Rule 89 (4B) of the CGST Rules 2017 prospectively to simplify and expedite the procedure for refund in respect of exports considering the difficulties being faced by the exporters due to the restrictions in respect of refund on exports in cases where benefits of specified concessional/exemption notification is availed on the inputs. On perusal of the Central Goods and Services Tax (Second Amendment) Rules 2024 it appears that whenever amendment in various rules prescribed therein is to come into effect from a particular date such date is mentioned in rules - Similarly in Rules 3 4 6 7 8 11 and 12 of the said Rules, 2024 it is stipulated that the said rules shall be inserted with effect from 1st day of November 2024. Therefore except Rules 2 9 and 10 effective date of applicability of amendment in various Rules of CGST Rules is provided whereas amendment in Rule 36(3) Rule 89 and Rule 96 (10) no such effective date is provided. Therefore as per Rule 1(2) of the Rules 2024 such Rules comes into force on the date of publication in the Official Gazette i.e. 8th October 2024 meaning thereby Rules 2 9 and 10 of the Rules 2024 would come into effect from 8th October 2024. The fact remains that Rule 96 (10) of the CGST Rules has been recommended to be omitted by GST Council prospectively to remove the difficulties of the exporters in claiming refund of the IGST paid on export of goods on account of four exemption notifications from payment of duty for importation of the inputs utilised for manufacture of goods to be exported - Sub-rule(2) of Rule 1 of the Rules 2024 clearly stipulates that the rules save as otherwise provided in the said rules shall come into effect on the date of the publication in the Official Gazette i.e 8th October 2024. Reliance placed on behalf of the petitioners in case of CIT Kolkatta v. Calcutta Export Company 2018 (5) TMI 356 - SUPREME COURT as to whether omission of Rule 96 (10) by Rules 2024 is curative in nature and therefore should be applied retrospectively i.e. from the date of insertion of the said rule from 9th October 2018 is also required to be applied to the facts of the case because the Rules 2024 clearly stipulates for applicability from the date of publication in Official Gazette in consonance with the recommendation of the GST Council to omit Rule 96 (10) of the CGST Rules 2017 prospectively. It cannot be said that omission of Rule 96 (10) is curative or remedial because by omission it affects substantive rights of the assessee to claim refund of IGST paid on export of goods when duty free inputs are utilised. If the omission of Rule 96 (10) is to be applied with retrospective effect the Rules, 2024 would have stipulated but even the GST Council has recommended omission of Rule 96 (10) with prospective effect. Such recommendation is binding upon the Government. Whether Notification No. 20/2024 whereby Rule 96 (10) of the CGST Rules has been omitted with effect from 8th October 2024 would be applicable to the proceedings including this group of petitions which are pending before the Court or any other proceedings which are pending before the respondents or not? - HELD THAT - The Hon ble Apex Court in case of Fibre Boards Private Limited Bangalore v. Commissioner of Income Tax Bangalore 2015 (8) TMI 482 - SUPREME COURT while considering the applicability of the aforesaid provisions of the General Clauses Act vis-a-vis the repeal or omission or implied repeal regarding conditions laid down in section 54G of the Income Tax Act 1961 has held that At this stage it is important to note that a temporary statute does not attract the provision of Section 6 of the General Clauses Act only for the reason that the said statute expires by itself after the period for which it has been promulgated ends. In such cases there is no repeal for the reason that the legislature has not applied its mind to a live statute and obliterated it. In all cases where a temporary statute expires the statute expires of its own force without being obliterated by a subsequent legislative enactment. But even in this area if a temporary statute is in fact repealed at a point of time earlier than its expiry it has been held that Section 6 of the General Clauses Act would apply. In view of the above decision rendered by the Apex Court omission would be included in the interpretation of word repeal and hence omission of Rule 96 (10) with effect from 8th October 2024 would amount to repeal without any saving clause. General Clauses Act 1897 is largely based on the English Interpretation Act 1889 and according to such law the effect of repealing a statute was to obliterate it completely from the records of Parliament as if it had never been passed except for the purpose of those actions which were commenced prosecuted and concluded while it was an existing law. Therefore repeal without any saving clause would destroy any proceeding whether or not yet begun or whether pending at the time of enactment of the repealing Act and not already prosecuted to a final judgment so as to create a vested right. The recommendations of the GST Council to omit Rule 96 (10) prospectively would apply to all the pending proceedings and cases - By N/N. 20/2024 Rules 2024 have been notified and as per Rule 10 of the said Rules Rule 96 (10) of the CGST Rules has been omitted with prospective effect. This would give rise to three situations firstly whether the same would be applicable retrospectively or secondly prospectively or thirdly same would be applicable prospectively but also to pending proceedings . As discussed here-in-above Rule 10 of Rules 2024 is applicable prospectively and the same also would be applicable to pending proceedings. N/N. 20/2024 dated 8th October 2024 would be applicable to all the pending proceedings/cases meaning thereby that Rule 96 (10) would stand omitted prospectively but applicable to pending proceedings/cases where final adjudication has not taken place - the omission of Rule 96 (10) would apply to all the proceedings/cases/ petitions which are pending for adjudication either before this Court or before the respondent adjudicating authority and no further proceedings are required to be carried forward and petitioners would be entitled to maintain refund claims of IGST paid on export of goods. Conclusion - The omission of Rule 96 (10) would apply to all the proceedings/cases/ petitions which are pending for adjudication either before this Court or before the respondent adjudicating authority and no further proceedings are required to be carried forward and petitioners would be entitled to maintain refund claims of IGST paid on export of goods. The petitions therefore succeed in view of applicability of N/N. 20/2024 whereby Rule 96 (10) is omitted and the said Notification would be applicable to all the pending proceedings/cases as on 8th October 2024. The impugned show cause notices and the orders-in-original are therefore quashed and set aside - Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this group of petitions are:

(i) Whether Notification No. 20/2024 dated 8th October, 2024, which omits Rule 96(10) of the Central Goods and Services Tax Rules, 2017 (CGST Rules), applies retrospectively or prospectively?

(ii) If the omission is prospective, whether it applies to all pending litigation and proceedings that challenge or involve Rule 96(10)?

(iii) Whether Rule 96(10), as it existed prior to omission, is ultra vires Articles 14 and 19(1)(g) of the Constitution of India, violating fundamental rights to equality and freedom of trade and commerce?

(iv) Whether the doctrine of proportionality and reasonableness is applicable in assessing the validity of Rule 96(10), including the consideration of legislative motive?

(v) Whether the rationale for Rule 96(10) is arbitrary and discriminatory, particularly in creating a "class within class" of exporters-those who import goods under the Advance Authorisation Scheme (AAS) and those who do not?

(vi) Whether exporters can be prevented from claiming refund of IGST paid on exports on grounds of alleged "double benefit" arising from duty-free imports under AAS combined with refund claims?

(vii) Whether Rule 96(10) is ultra vires Section 164 of the CGST Act as it purportedly goes beyond the rule-making power granted to the Government?

(viii) Whether Rule 96(10) contravenes Section 16(3)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act), by imposing restrictions on the right to claim refund of IGST paid on exports?

(ix) Whether the phrase "conditions, safeguards and procedure" in Section 16(3)(b) of the IGST Act permits the rule-making authority to impose restrictions on classes of persons claiming refund, especially when such restrictions deny refund on exports made without availing benefits on corresponding inputs?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) and (ii): Applicability and Retrospectivity of Notification No. 20/2024 Omitting Rule 96(10)

Legal Framework and Precedents: Rule 96(10) was inserted and amended retrospectively from 23.10.2017 and further amended in 2018 and 2020. Notification No. 20/2024 omits Rule 96(10) with effect from 8.10.2024. Sections 6, 6A, and 24 of the General Clauses Act, 1897 govern the effect of repeal or omission of statutes and rules. Apex Court precedents establish that repeal or omission without a saving clause obliterates the provision as if it never existed, affecting pending proceedings unless otherwise stated.

Court's Reasoning and Findings: The Court examined the legislative history and the text of Notification No. 20/2024. Unlike other amendments in the same notification, no specific retrospective effective date was provided for the omission of Rule 96(10). The default rule under Rule 1(2) of the Notification is that it comes into force on the date of publication, i.e., 8.10.2024.

The Court held that omission of Rule 96(10) amounts to repeal of that provision without any saving clause, thereby terminating any proceedings pending under it, except those already finalized. The Court relied on authoritative decisions holding that omission is a form of repeal and that repeal without saving clause affects pending proceedings.

The Court rejected petitioners' submissions that omission should be construed as curative or retrospective, noting that the GST Council expressly recommended prospective omission. The absence of express retrospective language and the Council's recommendation bind the Government. Therefore, the omission applies prospectively from 8.10.2024 but also applies to all pending proceedings not yet finalized, including these petitions.

Issue (iii), (iv), (v), (vi): Constitutionality and Reasonableness of Rule 96(10)

Legal Framework and Precedents: Articles 14 and 19(1)(g) of the Constitution guarantee equality before law and freedom of trade, respectively. The doctrine of proportionality, as elaborated in landmark judgments including K.S. Puttaswamy, requires that restrictions on rights must have legitimate goals, be suitable, necessary, and balanced. Legislative classification must have a rational basis and not be arbitrary or discriminatory. The rule-making power under Section 164 of the CGST Act must be exercised within the scope of the parent Act.

Court's Reasoning and Findings: The petitioners contended that Rule 96(10) creates an arbitrary classification by denying refund of IGST paid on exports if even a small portion of inputs were imported duty-free under schemes such as Advance Authorisation, EPCG, or EOU, while allowing other exporters to claim full refund. This "class within class" denies equality and freedom of trade.

Petitioners argued that the rule is ultra vires Section 16(3)(b) of the IGST Act, which permits refund on payment of IGST subject only to "conditions, safeguards and procedure," not blanket restrictions on classes of persons. They submitted that the rule goes beyond procedural regulation and imposes substantive restrictions, thus exceeding rule-making powers.

Respondents defended Rule 96(10) as a necessary safeguard to prevent "double benefit" or "encashment" of input tax credit (ITC) where inputs are imported duty-free but exporters claim refund of IGST paid on exports by utilizing ITC on other inputs, which is contrary to the principle that taxes should not be exported.

The Court noted that refund is not an unfettered right; it is subject to statutory conditions and safeguards. The GST Council and CBIC issued Rule 96(10) to ensure that refund claims are legitimate and to prevent misuse. The rule was framed under Section 164 with retrospective effect, approved by the GST Council, a constitutional body.

However, the Court observed that the petitioners' grievance relates to the denial of refund on the entire export transaction even if only a small portion of inputs were imported duty-free. The rule's application results in denial of refund on inputs and services on which tax was paid, causing hardship and arguably disproportionate impact.

While the Court recognized the legitimate objective of preventing misuse, it also acknowledged that the rule's blanket bar may be disproportionate and arbitrary in some cases, as it denies refund even when the exporter has paid IGST on exports and on majority of inputs. The Court also noted the absence of an alternative or proportionate mechanism for such exporters under Rule 89.

The Court further considered the principle that rule-making authority cannot impose restrictions that defeat statutory rights granted by Parliament. The expression "conditions, safeguards and procedure" in Section 16(3)(b) does not empower the Government to impose absolute prohibitions on classes of persons, especially when such restrictions are not explicitly provided in the statute.

Nevertheless, given the subsequent omission of Rule 96(10), the Court refrained from adjudicating the constitutional validity of the rule at this stage.

Issue (vii) and (viii): Validity of Rule 96(10) under Section 164 and Section 16(3)(b) of the IGST Act

Legal Framework and Precedents: Section 164 of the CGST Act empowers the Government to make rules for carrying out the provisions of the Act, including retrospective rules. Section 16(3)(b) of the IGST Act allows registered persons to pay IGST on exports and claim refunds subject to conditions, safeguards, and procedure prescribed.

Judicial precedents emphasize that rules must conform to the parent statute and cannot supplant or override substantive provisions. The rule-making power is ancillary and cannot create substantive rights or disabilities beyond the statute.

Court's Reasoning and Findings: The Court noted that Rule 96(10) was framed under Section 164 and approved by the GST Council. The rule imposes conditions restricting refund claims to prevent misuse of exemptions on inputs imported duty-free.

Petitioners argued that the rule exceeds the scope of Section 164 as it restricts substantive rights under Section 16(3)(b) and is therefore ultra vires. Respondents contended that the rule is a valid procedural safeguard consistent with the statute.

The Court acknowledged that while rules can prescribe procedure and safeguards, they cannot impose restrictions that effectively deny statutory rights. The distinction between conditions and restrictions was discussed, with emphasis that "restrictions" on persons' rights are not contemplated under Section 16(3)(b).

However, the Court deferred detailed examination of ultra vires challenge in light of the omission of Rule 96(10).

Issue (ix): Whether Rule 96(10) Imposes Unauthorized Restrictions on Classes of Persons

Legal Framework and Precedents: The phrase "conditions, safeguards and procedure" in Section 16(3)(b) has been interpreted to permit regulation of the manner of claiming refunds but not to impose blanket prohibitions on classes of persons. The Supreme Court's decision in Sankar Ram and Co. v. Kasi Naicker emphasizes that every word in a statute must have meaning and legislative intent must be given effect.

Court's Reasoning and Findings: The Court observed that Rule 96(10) prohibits refund claims by persons who have availed benefits under specified notifications, regardless of whether the exported goods were manufactured without availing such benefits on corresponding inputs. This creates a broad prohibition on a class of persons rather than regulating the manner of refund claims.

The Court noted that such blanket prohibitions are not authorized by the statute and contradict the purpose of Section 16(3)(b), which aims to facilitate exports by allowing refund of IGST paid. The rule thus imposes a restriction beyond the scope of "conditions, safeguards and procedure."

Again, the Court refrained from final adjudication due to the omission of Rule 96(10).

3. SIGNIFICANT HOLDINGS

"The omission of Rule 96(10) of the CGST Rules by Notification No. 20/2024 dated 8th October, 2024, amounts to repeal without any saving clause, and accordingly, the said omission applies prospectively from the date of publication and also to all pending proceedings which have not attained finality as on that date."

"Refund of IGST paid on export of goods is a statutory right conferred under Section 16(3)(b) of the IGST Act, subject only to conditions, safeguards and procedure prescribed. Rule 96(10) of the CGST Rules, by imposing blanket prohibitions on classes of persons who have availed benefits under certain exemption notifications, goes beyond procedural regulation and imposes substantive restrictions, which may be ultra vires the parent statute."

"The principle of proportionality and reasonableness applies in assessing the validity of fiscal laws and subordinate legislation. Restrictions on fundamental rights, including the right to equality under Article 14 and freedom of trade under Article 19(1)(g), must have legitimate aims, be suitable, necessary, and balanced. Rule 96(10)'s creation of a 'class within class' of exporters and denial of refund on the entire export transaction for partial duty-free imports may be disproportionate and arbitrary."

"Refund is not an unfettered right but is subject to statutory conditions and safeguards. The GST Council, a constitutional body, has the authority to recommend rules under Section 164 of the CGST Act, including retrospective rules, to prevent misuse of refund provisions. However, such rules cannot defeat statutory rights or impose unauthorized restrictions."

"The omission of Rule 96(10) by Notification No. 20/2024 will govern all pending proceedings and petitions where final adjudication has not taken place, entitling petitioners to maintain refund claims of IGST paid on exports in accordance with law."

"The impugned show cause notices and orders-in-original issued under Rule 96(10) are quashed and set aside in view of the omission of the said rule."