TMI Blog2021 (9) TMI 626X X X X Extracts X X X X X X X X Extracts X X X X ..... uing 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ms. Charanya Lakshmikumaran, AOR Mr. Arvind Datar, Sr. Adv. Mr. Harish Bindhumadavan, Adv. Mr. Pawan Shree Agrawal, AOR Mr. Rahul Unnikrishnan, Adv. Mr. Ashwini Chandrashekharan, Adv. Ms. Sharyashree Thyagarajan, Adv. Mr. Manoharan Ellappan, Adv. Mr. Uchit Sheth, Adv. Mr. Santosh Krishnan, AOR Mr. Mukesh Kumar Maroria, AOR Mr. Amit Anand Tiwari, AAG Dr. Joseph Aristotle S., Adv. Mr. Saaketh Kasibhatla, Adv. Ms. Preeti Singh, Adv. Mr. Joseph Pookkatt, Adv. Mr. Prashant Kumar, Adv. Mr. Nilesh Sharma, Adv. Mr. Dhawesh Pahuja, Adv. M/s. Ap J Chambers Dr. Avinash Poddar, Adv. Mr. Anant Kumar Vatsya, Adv. Mr. Ashish Kumar Sinha, Adv. Mr. Devendra Singh, AOR Mr. Naresh Thacker, Adv. Mr. Kumar Visalaksh, Adv. Mr. Hardik Modh, Adv. Mr. Udit Jain, Adv. Mr. Amit Laddha, Adv. Mr. Abhishek Vikas, AOR (Intervenor) Mr. Arvind Datar, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. P.R. Renganath, Adv. Mr. Rohan Talwar, Adv. Mr. E. C. Agrawala, AOR (Intervenor) Mr. Vinay Shraff, Adv. Mr. Ravi Bharuka, AOR Mr. Ankit Agarwal, Adv. (Intervenor) Mr. Sandeep Goyal, Adv. Mr. Pawan Shree Agrawal, AOR (Intervenor) Mr. G. Natarajan, Adv. Mr. Kartik Jindal, Adv. Mr. Anant Gautam Adv. Mr. Nipun Sharma, Adv Mr. Madhur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ...... 117 G.3 The validity of the formula prescribed in Rule 89(5) ................................ 122 H Conclusion................................................................................................... 138 A Introduction 1 Parliament while enacting the Central Goods and Services Tax Act 2017, CGST Act has incorporated a provision for refund of tax in Section 54. Sub-Section (3) embodies a provision for refund of unutilised input tax credit - ITC in cases involving: (i) zero rated supplies made without payment of tax; and (ii) credit accumulation on account of rate of tax on inputs being higher than rate of tax on output supplies . 2 While envisaging a refund in the latter of the above two situations, Parliament was cognizant of the fact that ITC may accumulate due to a variety of reasons. However, Parliament envisaged a specific situation where the credit has accumulated due to an inverted duty structure, that is where the accumulation of ITC is because the rate of tax on inputs is higher than the rate of tax on output supplies. Taking legislative note of this situation, a provision for refund has been provided for in Section 54(3). The C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... By its judgment dated 21 September 2020, in Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India Writ Petition Nos 8596, 8597, 8602, 8603, 8605 and 8608 of 2019 and connected cases the Division Bench of the Madras High Court came to a contrary conclusion, after having noticed the view of the Gujarat High Court, which it has declined to follow. The Madras High Court has concluded that 63 (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. 6 The writ petitions challenging the validity of Rule 89(5) on the ground that it is ultra vires Section 54(3)(ii) were dismissed. The divergence between the views of the Gujarat High Court on the one hand, and the Madras High Court on the other, forms the subject matter of this batch of appeals. C Statutory Provisions 7 Section 54 of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant period; [ ] (E) Adjusted Total turnover means the turnover in a State or a Union territory, as defined under sub-section (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period; (5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula: - Maximum Refund Amount= {(Turnover of inverted rated supply of goods) x Net ITC Adjusted Total Turnover} tax payable on such inverted rated supply of goods Explanation:- For the purposes of this sub rule, the expressions Net ITC and Adjusted Total turnover shall have the same meanings as assigned to them in sub-rule (4). (emphasis supplied) 9 On 18 April 2018, the Central Goods and Services Tax (Fourth Amendment) Rules 2018- Notification No.21/2018- Central Tax by the Government of India, Ministry of Finance, Department of Revenue, Central Board Indirect tax and Customs were notified. Rule 89(5) was amended in the following terms (5). In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for consideration, it is necessary to emphasise at the outset that one of the core issues in the present batch of cases would turn upon the interpretation of the expression inputs in Section 54(3)(ii) of CGST Act and the definition of Net ITC in the amended Rule 89(5). During the course of the submissions, in the interest of maintaining clarity, Counsel on both sides used the expression input goods while dealing with goods that are used as inputs and input services while dealing with services that are used as inputs. We propose to use the same formulation to ensure conceptual clarity while distinguishing between goods which are used as inputs and services which are used as inputs. With this preface, we shall now proceed to deal with the submissions of the parties. D Submissions D.1 Union of India D.1.1 Part I- Distinction between goods and services 11 Mr N Venkataraman, learned Additional Solicitor General- ASG led the arguments on behalf of the Union Government in assailing the correctness of the decision of the Gujarat High Court (and supporting the decision of Madras High Court). Mr Venkataraman urged that: (i) Goods and services are distinct at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions (or qualifications); (iii) The provisos to Section 54(3) should be construed as restrictions for the following reasons: (a) The expression employed in the main clause of Section 54(3) is claim whereas the provisos restrict this ambit by the use of the expression allowed . The expression allowed appears in all the three provisos; (b) The main clause of Section 54(3) uses the expression any unutilised ITC . On the other hand, the expression any is conspicuous by its absence in all the provisos; (c) The main clause of Section 54(3) uses the expression a registered person may claim refund while on the other hand, the three provisos have employed a restrictive expression or a negative expression, that is, no refund of unutilized ITC shall be allowed ; (d) When the main clause used the expression any , this is expressly restricted by the use of the expression no refund of unutilised ITC shall be allowed in cases other than . In other words, the expression any has been restricted to other than ; and (e) In view of the above, the provisos under Section 54(3) have to be read and interpreted as restrictions and not as qualifications; (iv) The f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded in the statute should not be included by way of judicial interpretation; (vi) The reason why Parliament has adopted the expression unutilised ITC in the main part of Section 54(3) and the first proviso, but has chosen to employ only the expression inputs is as follows: (a) There is a significant difference between the main provision and the first proviso even in the use of the expression unutilized ITC . The expression any in the main Section is absent in the first proviso with the further limitation that refund of unutilized ITC is limited only to two circumstances specified in the proviso; (b) The first situation deals with refund on account of zero-rated supplies which are exports where refund is granted on all the taxes paid on input goods, input services including taxes paid on export supplies. This is evident from Explanation-I to Section 54(3) where the expression refund permits the above; (c) However, when it comes to an inverted duty tax structure, the refund is limited to only one category namely, credit accumulated on account of rate of tax on inputs ; (d) The expression unutilized ITC could comprise of taxes paid both on input goods an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund of taxes is neither a fundamental right nor a constitutional right. The Constitution only guarantees that the levy should be legal and that the collection should be in accordance with law. There is no constitutional right to refund. Refund is always a matter of a statutory prescription and can be regulated by the statute subject to conditions and limitations; (iii) Even in the case of an illegal levy or a levy which is unconstitutional, the decision of the nine judges Bench in Mafatlal Industries Limited v. Union of India 1997 (5) SCC 536 held that the right of refund is not automatic. The burden of proof lies on the claimant to establish that it would not cause unjust enrichment; (iv) Though tax enactments are subject to Articles 14 and 19(1)(g) of the Constitution, this is subject to two well-settled principles: (a) Discriminatory treatment under tax laws is not per se invalid. It is invalid only when equals are treated unequally or unequals are treated equally. Both under the Constitution and the CGST Act, goods, services, input (goods) and input services are not one and the same. These are distinct species, though covered by a common code; and (b) The legisla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd input services is higher than the rate of tax payable on their outward supply of footwear. Therefore, despite utilization of credit for payment of GST on outward supply, there is an accumulation of unutilized ITC in the electronic credit ledger of the assessee; (iv) The assessee applied for refund of such unutilised accumulated ITC under Section 54(3) of the CGST Act read with Rule 89(5) of the CGST Rules; (v) Rule 89(5) of the CGST Rules as originally enacted provided for refund of ITC availed on both inputs (that is input goods) and input services and was in line with Section 54(3) of the CGST Act. Accordingly, the assessee was granted refund of such unutilised ITC; (vi) Rule 89(5) was substituted by Notification No. 21/2018-CT dated 18 April 2018 prescribing a revised formula for determining the refund on account of inverted duty structure. The above substitution was given retrospective effect from 1 July 2017 by Notification No. 26/2018-CT dated 13 June 2018; (vii) The revised formula inter alia excludes input services from the scope of Net ITC for computation of the refund amount under the said Rule; (viii) The substituted Rule 89(5) of the CGST Rules den ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and services. (iv) The Statement of Objects and Reasons accompanying the bill introducing the CGST Act also emphasised that there would be a seamless transfer of ITC from one stage to another in the chain of value addition; (v) These principles reaffirmed the guidelines issued by the Organisation of Economic Co-operation and Development which emphasise that (a) value added tax systems are designed to tax final consumption; (b) only the consumers should bear the tax burden; and (c) the main characteristic of a value added tax is of preserving neutrality in the value chain. (vi) Compelling economic and fiscal realities necessitated the levy of value added tax like GST in place of traditional excise duties, service tax, sales tax and other legislation; (vii) In a tax regime which was not based on value added tax, ensuring refund of tax paid at various stages of manufacturing would be cumbersome and complicated. It was to obviate the problems of the earlier regime that GST legislation was enacted by various countries including India to fully effectuate the principle underlying value-added destination-based consumption tax; (viii) The situation in which the qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x credit but the refund is available in only two situations namely, (a) zero rated supplies; and (b) inverted duty structure. The quantum of refund is provided by the main part of Section 54(3) which stipulates the refund of any unutilised ITC. This includes credit availed on input goods as well as on input services having regard to the definitions contained in Sections 2(62) and 2(63); (xv) The proviso only provides for cases in which the refund under the main provisions of Section 54(3) will be available. Once the requirement of inverted duty structure in proviso (ii) is fulfilled, the entire unutilised ITC has to be refunded. The reason why proviso (ii) defines the inverted duty structure with reference to only input (goods) vis-a-vis output supplies may be that while services (barring a few) were leviable to tax at 18 per cent, goods were subject to various categories of rates. If input services were also considered for determining inverted duty structure, refund may be required to be granted practically to all the assessees. Hence, the legislature defined inverted duty structure only with reference to inputs (input goods). However, once a case fulfils the condition of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lised for making payments on output tax on outward supplies; (h) Clause (ii) of the proviso uses the words on account of which means by reason of or because of. By stipulating that the proviso provides for the quantum of refunds, the Revenue is attempting to substitute the words on account of with to the extent of ; (i) The submission of the Revenue cannot be accepted because clause (ii) of the proviso refers to the rate of tax. To accept the interpretation of the Revenue, the words and only to the extent will have to be added to the proviso; (j) Though the CGST Act makes a distinction between inputs and input services , this is only relevant at the stage prior to the availment of credit, namely to determine the eligibility of credits under Sections 16 and 17 of the CGST Act. After the credit has been availed, it goes in a common pool from which the credit is utilised for making payment for output tax. Utilization happens from the entire credit available for the tax period in this common pool and it cannot be co-related to ITC availed on particular input goods or input services. The balance is the unutilised ITC at the end of the tax period. At this stage, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be granted. Section 54(3) being a code in itself, there is no reference to a provision enabling the Government to frame rules in this regard. Hence, with reference to Section 54(3), any exercise of the rule making power is unwarranted; (xx) The general rule making power conferred by Section 164(1) is to carry out the provisions of the CGST Act and cannot save the offending provisions of the Explanation to Rule 89(5): (a) Accumulation of credit may occur due to various reasons such as absence of outward supplies in a tax period, supplies made at a loss, bulk purchase of inputs, excess opening balance of credit, and change in the rate of tax during the tax period; (b) A rule which provides for the identification of unutilised ITC which is attributable to supplies having an inverted duty structure and bifurcating it from credit accumulating due to other causes would be for the purpose of carrying out the provisions of the CGST Act; (c) A rule may provide a proportionate formula for determining the pro-rata amount of credit relatable to the inverted duty structure vis-a-vis total turnover. Such a formula may be needed where the assessee is making supplies involving an inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecommended by the Goods and Services Tax Council- GST Council does not elevate them to the status of a statute enacted by the legislature. The recommendations made by the GST Council under Article 279A(4) of the Constitution take effect only after they have been incorporated in the legislation passed by the Parliament or the State legislature. The CGST Act and SGST Act have been enacted on the recommendations of the GST Council, in exercise of the power under Article 279A, while the CGST Rules have been framed on the recommendations of the GST Council in exercise of the powers conferred by Section 2(87) and Section 164 of the CGST Act. There is a clear distinction between laws enacted by the legislature and delegated legislation. A rule made on the recommendation of the GST Council must be in consonance with the relevant legislation, failing which it would be ultra vires; (xxiii) Section 54(3) grants a refund of the entire unutilised ITC in the case of an inverted duty structure irrespective of whether the credit pertains to input goods or input services. The amendment made in Rule 89(5) which restricts the refund of unutilised ITC availed only on inputs is ultra vires Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Domestic supplies (a) Accumulation of unutilized input tax credit has arisen due to rate of tax on input goods being higher than the rate of tax on outputs (thus for example, accumulation due to sales made at discount/distress/non supply etc. are not to be allowed to be covered). (b) Should not be specifically excluded through notification. For example, Unutilized ITC = 300 (for goods) and 200 (for services), rate of tax on goods = 10%, rate of tax on output =7%, then: - Threshold condition of inverted duty structure satisfied qua goods, then Entire basket of ITC i.e. 500 eligible for refund subject to adjustment of tax liability. First Proviso, clause (ii) Export of goods Supplies not liable to export duty Second Proviso Export of goods or services Drawback in respect of (a) central tax not claimed or (b) refund of integrated tax not claimed. Third Proviso (iv) The object and purpose of Section 54(3) must be borne in mind: (a) The purpose of the provision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t proviso to Section 54(3) contemplates denial of the entire basket of unutilised ITC (as argued by the State) a fortiori the first part of clause (ii) should be presumed to include refund of the entire basket of unutilised credit. This is because unless the first part of clause (ii) did not entitle refund of the entire basket of ITC, carving out an exception for denial of the entire basket of ITC in the latter part would be absurd. (vii) The expression claim means a demand made of right, calling upon another to pay something which is due. Accordingly, a claim in the context of Section 54(3) is a demand for enforcement of a right of refund which becomes due. The entitlement to the right is not through the process of allowance of the claim but instead, the enforcement of the right is through the process of allowance. The entitlement to the right of the entire basket of credit accrues from the substantive provision and its enforcement happens through the proviso; (viii) The expression allowed should be interpreted to mean verification of the claim and its sanction. Allowed cannot mean the creation of an entitlement or else the main provision of Section 54(3) would become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of Section 54(3) should be construed to provide for the quantum of refund of the entire basket of credit and the proviso should be construed merely as a threshold condition that an inverted duty structure should exist qua goods; (e) If the above propositions are not acceptable, there would be an invidious discrimination between input goods and input services violating Articles 14 and 19; and (f) The only way to save the provision in such a case is by (i) reading down the word input in the proviso to include both goods and services or (ii) interpreting the proviso as laying down conditions and the quantum of refund being prescribed by the main part of Section 54(3); or (iii) striking down/severing the offending portion; (xviii) The doctrine of reading down the words of the statute to save its constitutional validity also includes reading up. If two interpretations are possible, the one which ensures that the provision is constitutionally valid must be adopted. Even otherwise, if the phrase on inputs being higher than rate of tax on output supplies is struck down, the impermissible classification between input goods and input services can be severed, thereby enla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verted duty structure would have to be applied to everyone in the same situation whether dealing in input goods or input services. Since the purpose of GST is to achieve tax neutrality, equivalence and anti-profiteering, their position is substantially the same. The taxable event, person, measure of tax, machinery, penal and prosecution provisions are substantially the same. Hence the denial of the privilege of refund to input services is arbitrary. The classification which is found to be valid in a given frame of reference may be invalid in a different frame. From a revenue harvesting perspective, goods and services may be treated as different. However, from the perspective of neutrality and achieving a true consumption tax, goods and services cannot be treated differently; (xxii) The limitation on the power of judicial review of tax legislation on grounds of wide latitude is subject to exception. The submission is that after treating tax on input goods and input services in an identical fashion by granting credit (to achieve neutrality) and making the entire credit as a part of homogeneous basket, granting refund to input goods and not to input services (from that basket) is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the phrase employed in the first proviso; (e) The second and third provisos too refer only to cases it is thus clear that first, second and third provisos are intended to deal with cases and are in nature of conditions, while it is only the fourth proviso which adverts to the quantum and there again not to restrict the quantum but only to refer to the amount claimed as refund under the main sub-section (3); and (f) It has been the Union Government s case that every word has been carefully chosen in Section 54(3) first proviso (ii). It follows that where the provision speaks the language of categories (i.e. cases ) and not the language of quantum (i.e. amount ), it cannot be read as any restriction of quantum. (iii) The word inputs in the first proviso (ii) of Section 54(3) refers to the aggregate of goods and services that are used in output supplies. In the context of the first proviso (ii), the word inputs has not been used to refer only to input goods. The word employed in the proviso is input(s) whereas definition of input under Section 2(59) refers to goods alone; (iv) The accumulation (of ITC) is because the total GST on all the inputs (goods or ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made; (viii) Chapter V (Section 16 to 21) of the CGST Act does not make any distinction between credit of input tax on goods or services. Under Section 17 of the CGST Act, the input tax on both the goods and services used in exempt supplies or other classes of supplies specified therein, are not permitted to be availed as ITC. The remaining/ balance input tax is eligible to be availed as ITC, which remains in the electronic credit ledger of the taxpayer. After utilizing such ITC in terms of Section 49 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but also beyond the scope of powers of the delegate i.e. the Central Government, because such a restriction is a typical policy change which could not have been done through a delegated legislation. 17 Appearing on behalf of intervenor, Mr G Natarajan, in the course of his submissions urged (for the purpose of his submissions) that he does not dispute the position that under Section 54(3) read with rule 89(5), refund of ITC accumulating only on account of input goods is eligible for refund and the credit accumulated on input services is not entitled for refund. Based on this hypothesis, the submissions of the learned counsel are thus: (i) The formula which has been prescribed in Rule 89(5) seeks to identify the quantum of ITC availed on inputs attributable to the outward supplies having an inverted rate structure. From the quantum of ITC on inputs, the tax payable by the supplier on the supplies having an inverted rated structure is reduced to arrive at the quantum of the credit accumulating on account of the inverted rate structure, which is available for refund; (ii) In the formula which is prescribed under Rule 89(5), while reducing the tax payable on such inverted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and input services; (ii) The electronic ledger makes no distinction between input goods and input services. The credit arises under integrated tax, central tax and state tax. The electronic ledger represents a collective credit of input goods, input services and capital goods; (iii) The inequality arises because small and medium enterprises (SMEs) with one product, facing an inverted rate structure, would get a lesser amount while availing refund whereas large companies with multiple products would get refunds violating Article 19(1)(g); and (iv) The retrospective amendment to Rule 89(5) takes away vested or accrued rights. 20 Mr Uchit Sheth, learned Counsel - Appearing in SLP (Civil) Nos 2973 of 2021, 16003 of 2020, 677 of 2021 and 1340 of 2021 has urged the following submissions: (i) Once tax credit is claimed and credited into the electronic credit ledger, it forms a consolidated pool of credit, making it impossible to segregate into credit for input goods and credit for input services. Hence, it is not possible to ascertain the source of unutilized ITC. The proviso to Section 54(3) only lays down a condition precedent for claiming ITC and once the condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g on behalf of the respondents- Appearing in SLP (Civil) No 1868/2021 , urged that the respondents are in the business of providing dyeing and printing services for textile industries. For job work operations, they procure input goods (such as chemicals, stationeries and colours) and for providing outward supplies, they also avail of input services such as contract labour, consultancies, repairs of plants and machinery. The rate on outward supply of job work on textile fabrics is 5 per cent, while the rate on input goods and the rate on input services is 12 per cent /18 per cent. Thus, most of the input goods and input services attract a higher rate of GST compared to rate of GST applicable on the outward supply which is 5 per cent. The inverted duty structure results where the rate of GST on inverted supplies is higher than the outward supplies. As a result, over a period of time, credit gets accumulated in the electronic credit ledger. In this backdrop, the following submissions have been urged: (i) Clause (ii) to the first proviso of Section 54(3) merely prescribes the eligibility conditions subject to which a refund of unutilised ITC could be made. The main part of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e term harmonised or, harmony in this context would mean uniformity, consistency, shared values and responsibilities between the Union Government and State Governments. The essence of Article 279(A)(6) is promotion of cooperative federalism; (c) If the interpretation of the respondents is accepted, it would render Article 279A(4) otiose as it allows the GST Council to make recommendations including rates and floor rates with bands of GST. (ii) Registered assessees having unutilised ITC do not form a distinct and separate class. Unutilised ITC can accumulate on account of huge discounts on output supplies of goods or services; as a business strategy to indulge in predatory pricing; loss of business resulting in undervaluation of goods; an Act of God; and inverted duty structure on account of inputs or input services, among other reasons . Thus, although registered assessees accumulating unutilised ITC constitute one category, it has numerous species. Parliament is entitled to choose the species out of the category and grant concessions or benefits. This would amount to treating equals equally, and unequals unequally; (iii) The doctrines of equivalence, neutrality or secon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pying the centre stage of the Indian economy . As economists postulate, there is no distinction between consumption of goods and consumption of services both of which satisfy human wants and needs. The Court underscored that service tax is a destination-based consumption tax, not a charge on business but on the consumer of the service. 25 Though the erstwhile regime recognised the principle of value addition-based consumption taxes, there was an absence of a seamless flow of credit, particularly between Central and State levies. The background material antecedent to the adoption of the constitutional and legal structure underlying GST in the country indicates the importance which was ascribed to developing a tax regime which would achieve a continuous chain of set-off from the original producer and service provider s point up to the retailer s level in the supply chain and eliminate the burden of cascading tax effects. Thus, the first discussion paper on GST in India published by the Empowered Committee of State Finance Ministers on 10 November 2009 emphasised that : 1.14 In the GST, both the cascading effects of CENVAT and service tax are removed with set-off, and a cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 254. 28 To illustrate, Entry 84 of the Union List provided for duties of excise on tobacco and other goods manufactured or produced in India except (a) alcoholic liquors for human consumption; and (b) opium, hemp and other narcotic drugs and narcotics. Entry 54 of the State List provided for taxes on sale or purchase of goods other than newspapers subject to Entry 92A of the Union List which provided for taxes on the sale or purchase of goods other than newspapers in the course of interstate trade or commerce. Entry 97, the residual entry of the Union List subsumed within it among other subjects, taxes not mentioned in the Union, State or Concurrent List, thereby bringing with its ambit the notion of rag-bag legislation. The field contemplated by the erstwhile Entry 83 of the Union List (duties of customs including export duties) or Entry 97 did not travel into the area of trading. State legislation in the area of sales tax and VAT defined the ambit of the expression inputs , capital goods and input tax credit . 29 The One Hundred and First Constitutional Amendment brought about a significant merger by contemplating a fiscal umbrella comprehending GST. Article 246A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es place in the course of inter-State trade or commerce; and (iii) Thirdly, Article 246A embodies the constitutional principle of simultaneous levy as distinct from the principle of concurrence. Concurrence, which operated within the fold of the Concurrent List, was regulated by Article 254. 32 The One Hundred and First Constitutional Amendment brought in amendments to the constitutional dictionary of definitions contained in Article 366. Clause 12 of Article 366 contained a definition of the expression goods to include all materials, commodities and articles. Clause 12A has been introduced by the amendment to define goods and services tax : Clause (12A) goods and services tax means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption . Clause 26A has been introduced to define services : Clause (26A) Services means anything other than goods Services , therefore, under the constitutional scheme means anything other than goods. 33 The constitutional scheme embodying GST is facilitated through the composition of the GST Council under Article 279A. The GST Council is to consist of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , an acceptance of mutual co-existence. Clauses (7) to (11) of Article 279A contain provisions for quorum, procedure and voting. Clause (9) is a clear indicator of the absence of supremacy either of the Union of the States. Under sub clause (a) of Clause 9, the vote of the Union Government is to have a weightage of one-third of the total votes cast, while the votes of all the State Governments together are to have a weightage of two-thirds of the total votes cast. Every decision of the Council is to be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting. The principle of harmony does not postulate exact coincidence in all points of comparison or reference. Harmony is a postulate of cooperative federalism and is founded on the principle of mutual co-existence, deference and equality of the coexisting units. F CGST Act F.1 Definitions 35 While understanding the provisions of Section 54(3), it becomes necessary to advert to some of the key definitions contained in the CGST Act. Section 2 (52) defines the expression goods in the following terms: goods means every kind of movable property other than money and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t distinction that while input is defined with reference to any goods , input service is defined in relation to any service . Both sets of definitions incorporate the further requirement of use or intended use by a supplier in the course or furtherance of business. 39 The expression input tax is defined in Section 2(62) : Input tax in relation to a registered person, means the Central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes- (a) the integrated goods and services tax charged on import of goods; (b) the tax payable under the provisions of sub-sections (3) and (4) of section 9; (c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act; (d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or (e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy. The expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in Chapter V and is titled as input tax credit . The marginal note to Section 16 indicates that the provision relates to eligibility and conditions for taking ITC. Sub-Section (1) of Section 16 is in the following terms: 16 Eligibility and conditions for taking input tax credit. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. 44 Under sub-Section (1) Section 16: (i) every registered person shall be entitled to take credit to input tax charged on any supply of goods and services or both to him; (ii) which are used or intended to be used in the course or furtherance of his business; (iii) subject to such conditions and restrictions as may be prescribed; and (iv) in the manner specified in Section 49. 45 The amount of input tax credit is to be credited in the electronic credit ledger of the registe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed: Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon 46 Section 16(2) indicates that the credit of input tax charged on any supply of goods or services, or both, can be availed of by a registered person subject to the conditions which are set out in the provisos. Input tax, as we have already seen, has been defined in Section 2(62) as tax charged on any supply of goods or services or both. The credit of input tax is, therefore, relatable both to the supply of goods and services. Whether tax is paid on the supply of goods or services, the recipients receive ITC in a similar manner. Taxes on goods and services are identifiable, but upon credit to the electronic ledger they form a common pool for utilization. Section 16(1) indicates that the manner in which input tax credit can be utilized is spelt out in Section 49. Sub- Section (1) of Section 49 provides: Section 49 (1) - Every depos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. F.3 Interpretation of Section 54(3) of the CGST Act 49 The controversy in the present case turns upon the interpretation of Section 54, which is found in Chapter XI titled as Refunds . The marginal note of Section 54 is titled Refund of Tax . Section 54(1) provides thus: 54. (1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed: Under sub-Section (1) of Section 54, an application has to be made within two years of the relevant date by a person claiming refund of tax and interest (if any, paid on the tax or any other amount paid), in such form and manner as prescribed. Explanation 1 to Section 54 is in the following terms: Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49, may claim such refund in the return furnished under section 39 in such manner as may be prescribed. Sub-Section (3) of Section 54 is in the following terms: Subject to the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnished. While enacting Section 54(3), Parliament has envisaged a claim for the refund of unutilized ITC by a registered person at the end of the tax period. The first tier is the main provision of Section 54(3) which lays down four conditions: (i) A claim of refund; (ii) By a registered tax person; (iii) Of any unutilized ITC; and (iv) At the end of any tax period, subject to the provisions of sub-Section (10). 52 The second tier is the first proviso. The first proviso begins with the expression no refund of unutilized ITC shall be allowed in cases other than which is followed by clauses (i) and (ii). The opening line of the first proviso contains two expressions of significance, namely, no refund shall be allowed and in cases other than . The expression allowed in the proviso must be contrasted with the expression claim in the substantive part of sub-Section (3). A refund can be allowed only in the eventualities envisaged in clauses (i) and (ii). The expression other than operates as a limitation or restriction. 53 The third tier of sub-Section 54(3) consist of the two clauses of the first proviso which deal with two distinct cases: Clause (i) deals w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such amount shall be refunded not later than expiry of two years from the end of the year in which such tax credit had become admissible: Provided that the dealer claiming such refund shall have to prove to the satisfaction of the assessing authority that the purchases of the goods on which such tax credit had been calculated have been disposed off in the manner referred to in sub-section (3) of section 11 within the period by which refund under this sub-rule becomes admissible. See also, Section 51 of the Maharashtra Value Added Tax Act 2002 read with Rule 60 of the Maharashtra Value Added Tax Rules 2005 . When the GST regime was under discussion, the first discussion paper by the Empowered Committee of State Finance Ministers published on 10 November 2009 acknowledged the problem of the accumulation of ITC on account of the rate of input tax being higher than output tax and suggested that a refund be provided of accumulated ITC. The relevant extract from the discussion paper dealing with the Salient features of the GST model reads thus: 3.2 (vi) Ideally, the problem related to credit accumulation on account of refund of GST should be avoided by both the Centr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be granted on submission of application. It may be mentioned, however, that presently the Centre does not grant refund in such cases. (emphasis supplied) While enacting Clause (ii) of the first proviso to Section 54(3) in the CGST Act, Parliament, took legislative notice of a specific eventuality namely where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies . Parliament would be cognizant of the fact that ITC may accumulate for a variety of reasons, of which an inverted duty structure is one situation. Parliament was legislating to provide for a refund and therefore restricted it to the two situations spelt out in clauses (i) and (ii) of the first proviso. The opening words of the substantive part of Section 54(3) contemplate a claim of refund of any unutilized input tax credit . Undoubtedly, any unutilized ITC would include credit on account of tax charged on any supply of goods or services or both. The opening sentence of Section 54(3) provides for (i) a claim of refund by a registered person; (ii) of any unutilized input tax credit; (iii) at the end of any tax period. But the impact of the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund of unutilized ITC as provided under sub-section(3) . The Explanation is a clear indicator that in respect of domestic supplies, it is only unutilized credit which has accumulated on the rate of tax on input goods being higher than the rate of output supplies of which a refund can be allowed. Clause (ii) of the first proviso in other words is a restriction and not a mere condition of eligibility. 56 The fulcrum of the argument of the assessees before the Gujarat and Madras High Courts and before this Court is that clause (ii) of the first proviso prescribes a condition of eligibility and not a restriction on the entitlement to refund. The entire basket of unutilized ITC, whether traceable to goods or services, is in the submission, eligible for refund. This submission has been made before the Court on three planes. The first plane on which the submission has been urged is that the purpose of enacting Section 54(3) was to ensure against a cascading effect or sticking inputs tax. According to the assesses, the GST regime is a result of a long-standing exercise of legislative preparation in the doctrine of equivalence and tax neutrality. According to the submission, the doct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation of Leasing and Financial Service Companies v. Union of India 2011 (2) SCC 352. Chief Justice S H Kapadia, speaking for a three judge Bench, dealt with the validity of the provisions of Sections 65(12) and 65(105) (zm) of the Finance Act 1994, in so far as the said provisions sought to levy service tax on leasing and hire purchase. The levy of service tax on financial leasing services was challenged as being beyond the competence of Parliament by virtue of Article 366(29A) of the Constitution. While construing the issue, the Court adverted to the decision in All India Federation of Tax Practitioners (supra) and observed: Service tax is an economic concept based on the principle of equivalence in a sense that consumption of goods and consumption of services are similar as they both satisfy human needs. Today with the technological advancement there is a very thin line which divides a sale from service . That, applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the constitutional provision reflects a goal, object and aspiration to be achieved. By emphasizing this, the provision underscores the vision that the GST Council should bear in mind in the discharge of its constitutional functions. The constitutional object is however to be realized under the auspices of legislation duly enacted under the provisions of Article 246A. The GST Council is intended to function towards the advancement of a harmonised structure for GST and market for goods and services. Contemporary doctrine would suggest that these objects of the fiscal regime may be furthered by bearing in mind (i) the doctrine of equivalence; (ii) the doctrine of neutrality; and (iii) the need of obviating secondary stage cascading effects. The realpolitik of tax policy and governance in the real world may not always match up to ideals. In an ideal tax regime, with a uniform rate of taxes on inputs goods, input services and outward supplies, the chance of accumulating unutilized ITC as a result of an inverted rate structure would be minimal. An inverted duty structure arises where the rate of tax on inputs exceeds the rate of tax on output supplies as a result of which the unutilize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciety. The form which a GST legislation in a unitary State may take will vary considerably from its avatar in a nation such as India where a dual system of GST law operates within the context of a federal structure. The ideal of a GST framework which Article 279A(6) embodies has to be progressively realized. The doctrines which have been emphasized by Counsel during the course of the arguments furnish the underlying rationale for the enactment of the law but cannot furnish either a valid basis for judicial review of the legislation or make out a ground for invalidating a validly enacted law unless it infringes constitutional parameters. While adopting the constitutional framework of a GST regime, Parliament in the exercise of its constituent power has had to make and draw balances to accommodate the interests of the States. Taxes on alcohol for human consumption and stamp duties provide a significant part of the revenues of the States. Complex balances have had to be drawn so as to accommodate the concerns of the states before bringing them within the umbrella of GST. These aspects must be borne in mind while assessing the jurisprudential vision and the economic rationale for GST l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recognize this, it is necessary to allow the legislature the latitude to distinguish between credits arising out of the input goods stream and input service stream. GST legislation in India is the product of hard constitutional and legislative work which stretched over several decades. Our fiscal regime is yet to arrive at an ideological position of one bundle for goods and services based on a single rate structure. Broadly speaking, goods and services are taxed at 5 per cent, 12 per cent, 18 per cent and 40 per cent. As on date, there is an absence of uniformity in rates and it is the multiplicity of rates which has given rise to an inverted duty structure. Registered persons with unutilized ITC may conceivably form one class but it is not possible to ignore that this class consists of species of different hues. Given these intrinsic complexities, the legislature has to draw the balance when it decides upon granting a refund of accumulated ITC which has remained unutilized. In doing so, 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed in terms too general to be quite accurate . The general rule has been stated by HIDAYATULLAH, J., in the following words: As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment, and ordinarily, a proviso is not interpreted as stating a general rule . And in the words of KAPUR, J.: The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment. Id (emphasis supplied) 64 But then these principles are subject to other principles of statutory interpretation which may supplement or even substitute the above formula. These other rules which have been categorized by Justice GP Singh are summarized as follows: (i) A proviso is not construed as excluding or adding something by implication: Except as to cases dealt with by it, a proviso has no repercussion on the interpretation of the enacting portion of the section so as to exclude something by implication which is embraced by clear words in the enactment. Id at p. 218 (ii) A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinarily foreign to the proper function of a proviso. However, this is only true of a real proviso. The insertion of a proviso by the draftsman has not always strictly adhered to its legitimate use and at times a section worded as a proviso may wholly or partly be in substance a fresh enactment adding to and not merely excepting something out of or qualifying what goes before. Id at p. 228 65 Perhaps the most comprehensive and oft-cited precedent governing the interpretation of a proviso is the decision of this Court in S Sundaram Pillai v. V R Pattabiraman (1958) 1 SCC 591 . Justice S Murtaza Fazal Ali speaking for a three judge Bench of this Court held: 43. To sum up, a proviso may serve four different purposes: (1) qualifying or excepting certain provisions from the main enactment: (2) it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable: (3) it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and (4) it may be use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plies (which is not defined, though outward supply is defined in Section 2(83)); (v) Section 54(8) and Section 49(6) provide that the balance in the electronic credit ledger is to be refunded and makes no distinction between a credit relatable to goods or to services; (vi) The expression on account of has been used in Section 22(3) and Section 18(3) and is distinct from the use of the expression to the extent of in Section 23(1)(b) and the proviso to Section 12(2). To the extent of is a limiting expression and has a distinct connotation from on account of ; (vii) The Ministry of Finance has issued a circular dated 31 December 2018- Circular No 79/53/2018-GST available at (accessed on 12 September 2021) clarifying the following position: 4. Representations have been received stating that while processing the refund of unutilized ITC on account of inverted tax structure, the departmental officers are denying the refund of ITC of GST paid on those inputs which are procured at equal or lower rate of GST than the rate of GST on outward supply, by not including the amount of such ITC while calculating the maximum refund amount as specified in rule 89(5) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circular, it is urged, would demonstrate that the phrase on account of in the proviso is interpreted by the State qua goods as a threshold condition. Hence even if one input in the basket of inputs of a manufacturer results in an inverted duty structure, the whole of the accumulated ITC can be availed of. On the other hand, for services the same phrase is interpreted so as to mean to the extent of . The expression on account of as understood for goods by the above circular must apply for services as well, meaning thereby that it is a threshold condition alone. 69 The above submissions demonstrate the scholarship which has been brought to bear upon the controversy by Counsel appearing on behalf of the assessees. The above aspects of the statutory provision Section 54(3) - must be juxtaposed together with all the features of the statutory provision including Explanation- I which have been adverted to earlier. The analysis earlier indicates why on a reading of the provision as a whole, clauses (i) and (ii) of the first proviso are restrictions and not mere conditions of eligibility. It is not possible for the Court to restrict the ambit of clause (ii) of the proviso, based o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (ii) of the first proviso, the expression refund means refund of unutilised ITC as provided under sub-Section (3). With the clear language which has been adopted by Parliament while enacting the provisions of Section 54(3), the acceptance of the submission which has been urged on behalf of the assessee would involve a judicial re-writing of the provision which is impermissible in law. Clause (ii) of the proviso, when it refers to on account of clearly intends the meaning which can ordinarily be said to imply because of or due to . When proviso (ii) refers to rate of tax , it indicates a clear intent that a refund would be allowed where and only if the inverted duty structure has arisen due to the rate of tax on input being higher than the rate of tax on output supplies. Reading the expression input to cover input goods and input services would lead to recognising an entitlement to refund, beyond what was contemplated by Parliament. 70 We must be cognizant of the fact that no constitutional right is being asserted to claim a refund, as there cannot be. Refund is a matter of a statutory prescription. Parliament was within its legislative authority in determining whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... class is sufficient: in the case of goods as well as services, the taxable event is the value addition tax and the administrative machinery treats goods as well as services similarly. The mere fact of goods being tangible is a matter of no consequence. 73 Equality, it has been stressed in the above submission, cannot be cabined, cribbed and confined. Differentiating between goods and services, it has been urged, is not permissible and does not have a reasonable nexus to the object sought to be achieved. There is an evident difference in the rates at which goods and services are taxed but, according to the submission, this is not a provision for revenue harvesting. Finally, on this limb of submission, it has been urged that the wide latitude which is available with the legislature in the case of fiscal legislation is only where a revenue harvesting measure is involved. The twin test of reasonableness and the nexus with the object sought to be achieved must be demonstrated. The nexus (a) must be based on the object of the legislation alone; and (b) indicate a discernible principle which emanates from the classification. With the clarification on inputs by the Ministry of Finance, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 The objects to be taxed, the quantum of tax to be levied, the conditions subject to which it is levied and the social and economic policies which a tax is designed to subserve are all matters of political character and these matters have been entrusted to the Legislature and not to the Courts. In applying the test of reasonableness it is also essential to notice that the power of taxation is generally regarded as an essential attribute of sovereignty and constitutional provisions relating to the power of taxation are regarded not as grant of power but as limitation upon the power which would otherwise be practically without limit. (ii) The same principle has been reiterated in Federation of Hotel Restaurant Association of India v. Union of India (1989) 3 SCC 634 , where Justice MN Venkatachaliah (as the learned Chief Justice then was), speaking for the Constitution Bench held: 46. It is now well settled that though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is for the Legislature to decide what economic or social policy it should pursue or what administrative considerations it should bear in mind. The classification between the processed or split pulses and unprocessed or unsplit pulses is a reasonable classification. It is based on the use to which those goods can be put. Hence, in our opinion, the impugned classification is not violative of Article 14. (iv) More recently in Union of India v. NITDIP Textile Processors Private Limited (2012) 1 SCC 226 , a two judge Bench observed: 67. It has been laid down in a large number of decisions of this Court that a taxation statute, for the reasons of functional expediency and even otherwise, can pick and choose to tax some. A power to classify being extremely broad and based on diverse considerations of executive pragmatism, the judicature cannot rush in where even the legislature warily treads. All these operational restraints on judicial power must weigh more emphatically where the subject is taxation. Discrimination resulting from fortuitous circumstances arising out of particular situations, in which some of the tax-payers find themselves, is not hit by Article 14 if the legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entific, commercial and economic conditions and ways of life new species of property, both tangible and intangible gaining enormous values have come into existence and new means of reaching and subjecting the same to contribute towards public finance are being developed, perfected and put into practical operation by the legislatures and courts of this country, of course within constitutional limitations. 80 The Court held that the principle of equality does not preclude the classification of property, trade, profession and events for taxation subjecting one kind to one rate of taxation and another to a different rate. The State may exempt certain classes of property from any taxation at all and impose different specific taxes upon different species which it seeks to regulate. The Court held: 27. Perfect equality in taxation has been said time and again, to be impossible and unattainable. Approximation to it is all that can be had. Under any system of taxation, however, wisely and carefully framed, a disproportionate share of the public burdens would be thrown on certain kinds of property, because they are visible and tangible, while others are of a nature to elude vigi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the challenge to the constitutional validity of Section 54(3). G Rule 89(5) 82 Rule 89(5) of the CGST Rules provides for the computation of the refund of ITC on account of an inverted duty structure. The rule, as it was originally enacted, provided for a refund of ITC paid both on input goods and input services. Rules 89(5) was amended on 18 April 2018 with prospective effect. On 13 June 2018, Rule 89(5) as amended was substituted with retrospective effect from 1 July 2017. The effect of this amendment is that refund of unutilized ITC can only be availed on input goods. 83 Section 164 of the CGST Act empowers the government (the expression government being defined in Section 2(53) to mean the Central Government) to make rules for carrying out the provisions of the Act on the recommendations of the GST Council. Sub-Section (3) of Section 164 stipulates that that power to make rules shall include the power to make rules with retrospective effect not earlier than the date on which the provisions of the Act came into force. As a result of the amendment of Rule 89(5), the formula which has been specified for the refund of ITC is as follows: Maximum Refund Amount = ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act recognizes, by using the expression prescribes , that rules may be framed for that purpose. But the converse cannot be assumed inferentially, by presuming that in other areas, recourse to the rule making power cannot be taken. By its very nature, a statutory provision may not visualize every eventuality which may arise in implementing the provisions of the Act. Hence it is open to the rule making authority to frame rules, so long as they are consistent with the provisions of the parent enactment. The rules may interstitially fill-up gaps which are unattended in the main legislation or introduce provisions for implementing the legislation. So long as the authority which frames the rules has not transgressed a provision of the statute, it cannot be deprived of its authority to exercise the rule making power. The wide powers given under Section 164 of the CGST Act are only limited by the provisions of the Act itself, in furtherance of which a rule maybe framed. It is for this reason that the powers under Section 164 are not restricted to only those sections which grant specific authority to frame rules. If such a construction, as Mr Sridharan has hypothesised, were to be accepta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure and bifurcating it from credit which has accumulated due to other causes would be a rule required for carrying out the provisions of the Act. A second instance to illustrate the same point is that a rule may provide a proportionate formula for determining the pro rata amount of ITC relatable to the inverted duty structure vis- -vis the total turnover. Such a formula is necessary where the assessee is engaged in outward supplies involving an inverted duty structure as well as those not involving an inverted duty structure. In fact, Mr Sridharan in his submissions also accepts that such a formula would be a rule made for carrying out provisions of the Act. The third illustration in the link is with reference to exports. Under the CGST Act, ITC relatable to exports (which are zero-rated supplies) has to be refunded. The assessee may have both domestic sales as well as exports in which event there is a need for a proportionate formula. Rule 89(4) provides a formula for refund of ITC to cover a situation in which zero-rated supplies of goods or services or both has been done without payment of tax under bond or letter of undertaking in accordance with Section 16(3) of the IGST Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Wealth Tax (Central) (1994) Supp 3 SCC 46 rendered by a three judge Bench. 92 The second limb of the line of challenge is that even though the rules are required to be recommended by the GST Council this will not elevate them to the status of a law enacted by the legislature. The submission which has been urged by Mr V Sridharan proceeds on an underlying assumption which is that Rule 89(5) by restricting the definition of Net ITC to mean ITC availed on input goods is an affront to Section 54(3). It is on this foundation, that it has been urged that a rule which is contrary to the statute cannot be saved merely on the ground that either (i) the rule has been laid before Parliament and is subject to its power of modification annulment or amendment; or (ii) the rule was made on the recommendations of the GST Council. The application of the second layer of the argument does not arise in the present case for the simple reason that Rule 89(5) in defining Net ITC to mean input tax credit availed on inputs does not transgress the statutory restriction which is contained in proviso (ii) of Section 54(3). The challenge to Rule 89(5) as a piece of delegated legislation on the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nomalous results. The alternative submission is made on the assumption that Section 54(3)(ii) read with Rule 89(5) is restricted to refund of ITC accumulated on account of input goods only, and not input services. 96 Mr G Natarajan, learned Counsel appearing on behalf of the intervenor, has submitted that as it was originally framed, Net ITC in Rule 89(5) allowed for a refund on account of an inverted duty structure both for input goods and input services. The position was amended initially on 18 April 2018 with prospective effect and thereafter on 13 June 2018 with retrospective effect on 1 July 2017. The formula prescribed in Rule 89(5) seeks to identify the quantum of ITC availed on input goods attributable to the outward supplies having an inverted rate structure. From such quantum of ITC on input goods, the tax payable by the supplier on such inverted rated supplies of goods and services is reduced to arrive at the quantum of credit accumulating on account of inverted rate structure, which is eligible for refund. The submission of Mr Natarajan is that in the formula prescribed under Rule 89(5), while reducing tax payable on such inverted rated supplies of goods or servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 1,00,00,000 4 GST payable @ 5% on turnover having inverted rate structure 5% on (1) ₹ 2,50,000 ₹ 2,50,000 5 GST payable @ 18% on turnover not having inverted rate structure NA ₹ 9,00,000 5 ITC on inputs availed during the tax period ₹ 3,00,000 ₹ 6,00,000 6 ITC on input services availed during the tax period ₹ 50,000 ₹ 1,00,000 7 Refund entitlement as per the formula [₹ 3,00,000 x ₹ 50,00,000/₹ 50,00,000] ₹ 2,50,000 = ₹ 50,000 [₹ 6,00,000 x ₹ 50,00,000/ ₹ 1,00,00,000] ₹ 2,50,000 = ₹ 50,000 8 Remarks The ITC of ₹ 50,000 availed on input services is neither allowed as refund, nor used f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Income Tax, Coimbatore v. Lakshmi Machine Works (2007) 11 SCC 126 and has urged before us to adopt a purposeful and schematic interpretation to the formula which will make it comparable and workable. 100 Mr Sujit Ghosh has urged before us that the formula in Rule 89(5) creates a distinction between suppliers of services having a higher component of input goods than input services as against suppliers of services having a higher component of input services than input goods. In his submissions, Rule 89(5) would favour the former as they would be entitled to a larger quantum of refund on account of more use of input goods. 101 In response to these submissions, Mr N Venkataraman, learned ASG, has conceded that certain inadequacies might exist in the formula. However, he has sought to justify the need for a formula in Rule 89(5). The ASG has submitted that under the scheme of the CGST Act, the accumulated ITC arising out of input goods and input services is booked into the electronic credit ledger and is to be utilised thereafter for payment of tax on outward supplies on goods and services in accordance with Section 49 of the CGST Act. Once payments are made from the electron ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes 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. Sub-Section (2) of Section 17 provides that where the goods or services or both are used by a registered person partly for effecting taxable supplies including zero rated supplies under the CGST Act or under the IGST Act and partly for effecting exempt supplies the amount of credit shall be restricted to so much of the input tax as is attributable to the taxable supplies including zero rated supplies. Rule 42, in other words, provides for the manner in which the attributions of ITC in respect of the input or input services under sub-Sections (1) or (2) of Section 17 shall be carried out. Rule 43 similarly provides the manner in which ITC in respect of capital goods attracting the provisions of sub-Section (1) of Section 17, used partly for business and partly for other purposes or pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted. We are equally cognizant of the fact that the proposed solution, that is prescribing an order of utilisation of the ITC accumulated on input services and input goods, may tilt the balance entirely in favour of the assessee as that would make a contrary assumption that the output tax is discharged by the ITC accumulated on account of input services entirely. Another possible solution could be that the Rule itself provides for a statutory assumption or a deeming fiction of utilisation of a certain percentage of ITC on input services towards the payment of output tax for the purpose of calculation of refund. 106 While we are alive to the anomalies of the formula, an anomaly per se cannot result in the invalidation of a fiscal rule which has been framed in exercise of the power of delegated legislation. In RK Garg (supra), Justice P N Bhagwati (as the learned Chief Justice then was) speaking for the Constitution Bench underscored the importance of the rationale for viewing laws relating to economic activities with greater latitude than laws touching civil rights. The Court held: 8. Another rule of equal importance is that laws relating to economic activities should be vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Roig Refining Company [94 L Ed 381 : 338 US 604 (1950)] be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible expressly under the Act, unless such expenses are expressly disallowed by the Act (see p. 455 of The Law and Practice of Income Tax by Kanga and Palkhivala). Therefore, schematic interpretation for making the formula in Section 80-HHC workable cannot be ruled out. Similarly, purposeful interpretation of Section 80-HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the legislature intended to exclude items like commission and interest from deduction on the ground that they did not possess any element of turnover even though commission and interest emanated from exports. We have to read the words total turnover in Section 80-HHC as part of the formula which sought to segregate the export profits from the business profits . Therefore, we have to read the formula in entirety. In that formula the entire business profit is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover total turnover which constitutes Section 80-HHC concession (deduction). Income in the nature of business profits was, therefore, apportioned. The above formula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to all the provisions wherein the same term appears. As the term total turnover has been defined in the Explanation to Sections 80-HHC and 80-HHE, wherein it has been clearly stated that for the purposes of this section only , it would be applicable only for the purposes of those sections and not for the purpose of Section 10-A. If denominator includes certain amount of certain type which numerator does not include, the formula would render undesirable results. [ ] 22. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10-A of the IT Act are allowed only in export turnover but not from the total turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the respondent which could have never been the intention of the legislature. 23. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciple and phraseology in Rule 3, the rule-making authority provided an opportunity to the assessee to satisfy the assessing officer that the rent sought to be recovered from the employee could not be said to be concession as it was fair rent , reasonable rent , market rent or standard rent'. When the rule is amended and the concept of fair rental value has been done away with and the only method which has been adopted is to calculate the rent on the basis of population of the city in question, it cannot be successfully contended that the intention of the rule-making authority was to afford an opportunity to the assessee to convince the assessing officer that the rent recovered by the employer from his employee was not in the nature of concession. Nor a court of law would, by interpretative process, grant such opportunity to the assessee so as to enable him to convince the assessing officer that the rent fixed was not covered by Section 17(2)(ii) of the Act and therefore was not a perquisite . We are, therefore, unable to accept the argument of Mr Salve and allow import of the principles of natural justice in Rule 3. (emphasis supplied) 111 The above judicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o have been taken into consideration in VKC Footsteps India Pvt. Ltd. (supra) except for a brief reference. Having considered this batch of appeals, and for the reasons which have been adduced in this judgment, we affirm the view of the Madras High Court and disapprove of the view of the Gujarat High Court. We accordingly order and direct that: (i) The appeals SLP (Civil) No 14801 of 2020; SLP (Civil) No 16003 of 2020; SLP (Civil) No 1340 of 2021; SLP (Civil) No 16032 of 2020; SLP (Civil) No 677 of 2021; SLP (Civil) No 1868 of 2021; SLP (Civil) No 2951 of 2021; SLP (Civil) No 2456 of 2021; SLP (Civil) No 2973 of 2021 filed by the Union of India against the judgment of the Gujarat High Court dated 4 July 2020 in VKC Footsteps India Pvt. Ltd. (supra) and connected cases are allowed and the judgment shall be set aside; (ii) The appeals- SLP (Civil) No 589 of 2021; SLP (Civil) No 1418 of 2021; SLP (Civil) Nos 1742-1748 of 2021; SLP (Civil) Nos 1552-1557 of 2021; SLP (Civil) Nos 8008-8009 of 202 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 dismi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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