Refund of unutilised ITC - inverted duty structure - Denial on Input services - Contradictory Judgements on the same issue - GUJARAT HIGH COURT allows the refund while MADRAS HIGH COURT not

2020 (9) TMI 931 - MADRAS HIGH COURT

2020 (7) TMI 726 - GUJARAT HIGH COURT

The Government is allowing refund of accumulated input tax credit of tax paid on inputs. However, refund of accumulated credit of tax paid on procurement of input services is being denied. 

Gujarat high court in the case of VKC FOOTSTEPS INDIA PVT. LTD. [2020 (7) TMI 726 - GUJARAT HIGH COURT] has declared the part of Rule 89(5) is ultra vires to section 54(3), which is read as,

"25. We are of the opinion that Explanation (a) to Rule 89(5) which denies the refund of “unutilised input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017.

26. In view of the above, Explanation (a) to the Rule 89(5) is read down to the extent that Explanation (a) which defines “Net Input Tax Credit’ means “input tax credit” only. The said explanation (a)of Rule 89(5) of the CGST Rules is held to be contrary to the provisions of Section 54(3) of the CGST Act. In fact the Net ITC should mean “input tax credit” availed on “inputs” and “input services” as defined under the Act.

27. The respondents are therefore, directed to allow the claim of the refund made by the petitioners considering the unutilised input tax credit of “input services” as part of the “net input tax credit”(Net ITC) for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules,2017 for claiming refund under Sub-section 3 of Section 54 CGST Act,2017."

 

On the contrary, the Madras High Court, in the case of TVL. TRANSTONNELSTROY AFCONS JOINT VENTURE, TVL. ESSA GARMENTS PRIVATE LIMITED, INDIA DYEING MILLS (P) LIMITED, M/S. VEEKESY FOOTCARE (INDIA) PVT. LTD., KALEESUWARI REFINERY PVT LTD., VICTUR DYEINGS [2020 (9) TMI 931 - MADRAS HIGH COURT] has distinguished the judgement of Gujarat High Court by stating that:

"We observe that the proviso to Section 54(3) of the CGST Act and, more significantly, its import and implications do not appear to have been taken into consideration in VKC Footsteps except for the brief reference in paragraph 23, which we have emphasised in bold font supra. In any event, we intend to independently analyse the relevant provisions before concluding as to whether we subscribe to the view in VKC Footsteps."

Thus by upholding the validity of Rule 89(5)  as intrai -vires to section 54(5), the Madras High Court held that:

"42. Keeping in mind the scope, function and role of a proviso as adumbrated above, we closely examined the text of Section 54(3)(ii) in order to test the tenability of the rival contentions. We find that Section 54(3) undoubtedly enables a registered person to claim refund of any unutilised input tax credit. However, the principal or enacting clause is qualified by the proviso which states that “provided that no refund of unutilised input tax credit shall be allowed in cases other than”.

Parliament has used a double negative in this proviso thereby making it abundantly clear that unless a registered person meets the requirements of clause (i) or (ii) of Sub-section 3, no refund would be allowed. On further examining sub-clause (ii), we find that it uses the phrase “where the credit accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies”. If the interpretation canvassed by Mr.Parthasarathy and Mr.P.B.Harish is to be accepted, the words “credit accumulated on account of " would be rendered otiose or redundant, and the proviso would have to be recast as under by deleting the said words:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than-

....

(ii) where the rate of tax on inputs being higher than the rate of tax on output supplies....

While interpreting any statute, one of the cardinal rules of interpretation is that every word of the statute should be given meaning and one should not construe a statute in such a way as to render certain words redundant. As explained above, sub-clause (ii) would have merely stated "where the rate of tax on inputs being higher than the rate of tax on output supplies" and the words "credit has accumulated on account of" would not have been introduced if the intention was not to identify the source from which - i.e. input goods and the rate of tax thereon - unutilised input tax credit should accumulate for entitlement to refund, if the intention was to provide a refund of the entire unutilised input tax credit. Therefore, we are unable to countenance the contentions of Mr.Parthasarathy and Mr.P.B.Harish, in this regard, and we conclude that Section 54(3)(ii) qualifies the enacting clause by also limiting the source/type and, consequently, quantity of unutilised input tax credit in respect of which refund is permissible. Hence, the proviso to Section 54(3) does not merely set out the two cases in which registered persons become eligible for a refund of unutilised input tax credit. The proviso performs the larger function of also limiting the entitlement of refund to credit that accumulates as a result of the rate of tax on input goods being higher than the rate of tax on output supplies.

43. Given the fact that we concluded that Section 54(3)(ii) enables a registered person to claim a refund of unutilised input tax credit only to the extent that such credit has accumulated on account of the rate of tax on input goods being higher than the rate of tax on output supplies, it remains to be considered whether Rule 89(5) is ultra vires the rule making power and Section 54(3). Keeping in mind that Section 164 confers power on the Central Government to frame rules for carrying out the provisions of the CGST Act and no fetters are discernible therein except that the rules should be in furtherance of the purposes of the CGST Act, as held by this Court in P.R. Mani Electronics v. Union of India, W.P. No.8890 of 2020, Order dated 13.07.2020, Rule 89(5) would be intra vires the CGST Act and the rule making power if it is in line with Section 54(3)(ii) and ultra vires both Sections 54(3)(ii) and 164 if it is not. Hence, that issue should be examined.

We note that Section 54(1) empowers the prescription of the form and manner of a claim for refund and Section 54(4) contains procedural requirements as regards the application for refund. Rule 89 deals with applications for refund of tax, interest, penalty, fees or any other amount.

Sub-Rule 5 thereof was amended on two occasions. In the amended Rule 89(5), the expression “Net ITC” has been defined as meaning input tax credit availed on “inputs” during the relevant period. On the contrary, the expression Net ITC in Rule 89(5), as it stood between 01.07.2017 and 18.04.2018, defined the term the Net ITC as per the meaning in sub Rule 4 thereof. Sub Rule 4 defines Net ITC as input tax credit availed on ''inputs” and “input services” during the relevant period.

44. When Rule 89(5), as it stands today, is analysed in the context of Section 54(3)(ii), it is clear that Net ITC has been re-defined in the amended Rule 89(5) so as to provide for a refund only on unutilised input tax credit that accumulates on account of input goods, whereas, as per the unamended Rule 89(5), Net ITC covered not only input tax credit availed on input goods but also on input services. In light of the conclusion that a refund is permitted only in respect of unutilised input tax credit that accrues or accumulates as a result of the higher rate of tax on input goods vis-a-vis output supplies, we are of the view that the amended Rule 89(5) is in conformity with the statute. On the other hand, the unamended Rule 89(5) exceeded the scope of Section 54(3)(ii) and extended the benefit of refund to the credit that accumulates both on account of the rate of tax on “inputs” and “input services” being higher than the rate of tax on output supplies.

Consequently, we conclude that Rule 89(5) of the CGST Rules, as amended, is intra vires both the general rule making power and Section 54(3) of the CGST Act. There is no dispute as regards the power to amend with retrospective effect either as such power is conferred under Section 164 of the CGST Act, albeit subject to the limitation that it cannot pre-date the date of entry into force of the CGST Act.

45. Mr.Parthasarathy also contended that the term Net ITC in the amended Rule 89(5) should be read as including both input goods and input services by resorting to reading down. In our view, Rule 89(5), as amended, is fully in line with Section 54(3)(ii). Therefore, there is no necessity to read into Rule 89(5). In fact, if the words input services are read into Rule 89(5), in our opinion, Rule 89(5) become ultra vires Section 54(3)(ii). This concludes our discussion and findings on the interpretation of Section 54(3). For all the above reasons, we are unable to subscribe to the conclusions in VKC Footsteps. In our view, the Gujarat High Court failed to take into consideration the scope, function and impact of the proviso to Section 54(3)."

CONCLUSIONS

63. Thus, we arrive at the following conclusions:

(1) Section 54(3)(ii) does not infringe Article 14.

(2) Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power.

(3) Therefore, there is no necessity to adopt the interpretive device of reading down so as to save the constitutionality of Section 54(3)(ii).

(4) Section 54(3)(ii) curtails a refund claim to the unutilised credit that accumulates only on account of the rate of tax on input goods being higher than the rate of tax on output supplies. In other words, it qualifies and curtails not only the class of registered persons who are entitled to refund but also the imposes a source-based restriction on refund entitlement and, consequently, the quantum thereof.

(5) As a corollary, Rule 89(5) of the CGST Rules, as amended, is in conformity with Section 54(3)(ii).

Consequently, it is not necessary to interpret Rule 89(5) and, in particular, the definition of Net ITC therein so as to include the words input services.

64. In view of the aforesaid analysis and discussions we hold as follows:

(i) All the writ petitions challenging the constitutional validity of Section 54(3)(ii) are dismissed.

(ii) All the writ petitions challenging the validity of Rule 89(5) of the CGST Rules on the ground that it is ultra vires Section 54(3)(ii) of the CGST Act and/or the Constitution are dismissed.

(iii) Consequently, all the writ petitions for a mandamus to direct the refund claims to be processed are dismissed.

(iv) Hence, all the connected miscellaneous petitions are closed. There will be no order as to costs in the facts and circumstances.

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Full Text:

2020 (9) TMI 931 - MADRAS HIGH COURT

2020 (7) TMI 726 - GUJARAT HIGH COURT