Central Goods and Services Tax Act, 2017 – ss. 54(3) and s.164 – Central Goods and Services Tax Rules, 2017 – r.89(5) – Writ petitions were filed in the High Court of Gujarat and High Court of Madras, challenging the validity of r.89(5) on the ground that it is ultra vires s.54(3) – The High Court of Gujarat in VKC Footsteps India Pvt. Ltd. v. Union of India (R/Special Civil Application No.2792 of 2019) having examined the provisions of s.54(3) and r.89(5) held that latter was ultra vires – However, the Madras High Court in Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India (Writ Petition Nos. 8596-97, 8602 etc. of 2019) came to a contrary conclusion – On appeal, held: Clause (ii) of the first proviso to s.54(3) is not merely a condition of eligibility for availing of a refund but a substantive restriction under which a refund of unutilized ITC can be availed of only when the accumulation is relatable to an inverted duty structure, namely the tax on input goods being higher than the rate of tax on output supplies – Therefore, there is no disharmony between r.89(5) on one hand and s.54(3) particularly clause (ii) of its first proviso on the other hand – The decision passed by the Madras High Court is affirmed. Central Goods and Services Tax Act, 2017 – s.54(3) – Central Goods and Services Tax Rules, 2017 – r.89(5) – Claim of refund – Constitutional right or not – Held: 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 – While recognising an entitlement to refund, it is open to the legislature to define the circumstances in which a refund can be claimed – The proviso to s.54(3) is not a condition of eligibility but a restriction which must govern the grant of refund u/s. 54(3). Central Goods and Services Tax Rules, 2017 – r.89(5) – Validity of formula prescribed in r.89(5) – Held: The formula is not ambiguous in nature or unworkable, nor it is opposed to the intent of the legislature in granting limited refund on accumulation of unutilized ITC – It is merely the case that the practical effect of the formula might result in certain inequities – Given the anomalies pointed out by the assesses, GST Council to reconsider the formula and take policy decision regarding the same.
Disposing of the appeals, the Court
HELD: Construing the Proviso
1. Sub-Section (3) of Section 54 begins, in its main part, with the stipulation that a registered person may claim refund of any ‘unutilised ITC at the end of any tax period’. Whether we construe the first proviso as an exception or in the nature of a fresh enactment, the clear intent of Parliament was to confine the grant of refund to the two categories spelt out in clauses (i) and (ii) of the first proviso. That clauses (i) and (ii) are the only two situations in which a refund can be granted is evident from the opening words of the first proviso which stipulates that “no refund of unutilised input tax credit shall be allowed in cases other than”. What follows is clauses (i) and (ii). The intent of Parliament is evident by the use of a double – negative format by employing the expression “no refund” as well as the expression “in cases other than”. In other words, a refund is contemplated in the situations provided in clauses (i) and (ii) and no other. To put it differently, the first proviso can be recast, without altering its meaning to read that a refund of unutilised ITC shall be allowed only in the cases governed by clauses (i) and (ii). Clause (i) deals with zero rated supplies without payment of tax. Explanation-1 to Section 54 clarifies that the expression ‘refund’ includes refund of tax paid on zero rated supplies on goods or services or both, or on inputs or input services used in making such zero-rated supplies. On the other hand, in the case of deemed exports, Explanation-1 refers to a refund of tax on the supply of goods. Likewise in regard to domestic supplies, governed by 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. [Para 69][253-G-H; 254-A-F]
2. This Court 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 whether refunds should be allowed of unutilised ITC tracing its origin both to input goods and input services or, as it has legislated, input goods alone. By its clear stipulation that a refund would be admissible only where the unutilised ITC has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies, Parliament has confined the refund in the manner which we have described above. While recognising an entitlement to refund, it is open to the legislature to define the circumstances in which a refund can be claimed. The proviso to Section 54(3) is not a condition of eligibility (as the assessees’ Counsel submitted) but a restriction which must govern the grant of refund under Section 54(3). [Para 70][254-GH; 255-A-B]
Constitutional Validity of s.54(3)
2. Parliament while enacting the provisions of Section 54(3), legislated within the fold of the GST regime to prescribe a refund. While doing so, it has confined the grant of refund in terms of the first proviso to Section 54(3) to the two categories which are governed by clauses (i) and (ii). A claim to refund is governed by statute. There is no constitutional entitlement to seek a refund. Parliament has in clause (i) of the first proviso allowed a refund of the unutilized ITC in the case of zero-rated supplies made without payment of tax. Under clause (ii) of the first proviso, Parliament has envisaged a refund of unutilized ITC, where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. When there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted. Such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions. If the judiciary were to do so, it would run the risk of encroaching upon legislative choices, and on policy decisions which are the prerogative of the executive. Many of the considerations which underlie these choices are based on complex balances drawn between political, economic and social needs and aspirations and are a result of careful analysis of the data and information regarding the levy of taxes and their collection. That is precisely the reason why courts are averse to entering the area of policy matters on fiscal issues. This Court is therefore unable to accept the challenge to the constitutional validity of Section 54(3). [Para 81][261-E-H; 262A-B] Validity of Rule 89(5) of CGST Rules in exercise of the rule making power u/s.164 of the CGST Act
3. Under Section 164(1), confers an express power on the Central Government to make rules for carrying out the provisions of the CGST Act on the recommendations of the GST Council. It may be true that in certain specific statutory provisions, the 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 assessee has hypothesised, were to be acceptable, it would render the provisions of Section 164 otiose. Thus, this Court finds that the absence of the words “as may be prescribed” in Section 54(3) does not deprive the rule making authority to make rules for carrying out the provisions of the Act. [Para 85][263-F-H; 264A-C]
The Vires of Rule 89(5) vis-à-vis Section 54(3) of the CGST Act
4. The grievance however is that Rule 89(5) goes beyond the “provisions of the Act” when in the garb of fixing a formula, it restricts the refund of ITC to input goods by denying ITC of input services. This is done by defining ‘Net ITC’ to mean ITC availed of inputs. The gravamen of the challenge is that this consequently ignores ITC relatable to input services. In other words, the submission is that Rule 89(5) cannot be construed to be a rule for carrying out the “provisions of the Act”. [Para 90][266-B-C]
5. 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 assessee 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 ground that it is ultra vires Clause (ii) of the first proviso to Section 54(3) is therefore lacking in substance. As reasoned in the earlier part of this judgment, Clause (ii) of the first proviso is not merely a condition of eligibility for availing of a refund but a substantive restriction under which a refund of unutilized ITC can be availed of only when the accumulation is relatable to an inverted duty structure, namely the tax on input goods being higher than the rate of tax on output supplies. There is therefore no disharmony between Rule 89(5) on the one hand and Section 54(3) particularly Clause (ii) of its first proviso on the other hand. [Para 92][266-F-G; 267-A-B]
The Validity of the Formula prescribed in Rule 89(5)
6. In view of this Court, the justification of the formula under Rule 89(5) given by the ASG to create a legal bifurcation is valid. In this context, it would be material to advert to the provisions of Rule 42. Rule 42(1) provides that the ITC in respect of input goods or input services which attract the provisions of sub-Section
(1) or sub-Section (2) of Section 17 being partly used for the purpose of business and partly for other purposes or partly used for affecting taxable supplies including zero rated supplies and partly for effecting exempts supplies shall be attributed for the purposes of business or for effecting taxable supplies in the manner which is indicated in the Rule. Sub-Section (1) of Section
17 provides that where the goods and services or both are used by a registered person partly for the purposes of any business and partly for any other purpose, the amount of credit shall be restricted to so much of the input tax as is attributable to the purpose of its business. 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 partly for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies would be attracted to the purpose of business or for effecting taxable supplies. Both Rules 42 and 43 provide for a formula for attribution. Rule 86 provides for the maintenance of an electronic credit ledger. Rule 89(5) provides for a refund. In both sets of rule clusters, Rules 42 and 43 on the one hand and Rule 89(5) on the other hand, a formula is used for the purpose of attribution in a post assimilated scenario. The use of such formulae is a familiar terrain in fiscal legislation including delegated legislation under parent norms and is neither untoward nor ultra vires. [Para 103][271-G; 272-A-F]
7. The aberrations which have been pointed out, certainly indicate that the formula is not perfect. The formula makes a presumption that the output tax payable on supplies has been entirely discharged from the ITC accumulated on account of input goods and there has been no utilisation of the ITC on input services. While a similar formula is provided in Rule 89(4) with regard to zero rated supplies, in that case, the ‘Net ITC’ includes input goods and input services and thus, there is no imbalance between the different components of the formula. The formula prescribed in Rule 89(5) however, seeks to deduct the total output tax from only one component of the ITC, namely ITC on input goods. This in our view is at odds with reality, where the ITC on both input goods and input services is accumulated in the electronic ledger and is then utilised for the payment of output tax. In making such an assumption, the formula tilts the balance in favour of the Revenue by reducing the refund granted. 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. [Para 105][273-A-E]
8. The above judicial precedents indicate that in the field of taxation, this Court has only intervened to read down or interpret a formula if the formula leads to absurd results or is unworkable. In the present case however, the formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on accumulation of unutilised ITC. It is merely the case that the practical effect of the formula might result in certain inequities. The reading down of the formula as proposed by prescribing an order of utilisation would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Accordingly, we shall refrain from replacing the wisdom of the legislature or its delegate with our own in such a case. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same. [Para 111][280-D-F] VKC Footsteps India Pvt. Ltd. v. Union of India R/Special Civil Application No 2792 of 2019 –
disapproved.
Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India Writ Petition Nos 8596, 8597, 8602, 8603, 8605 and 8608 of 2019 – affirmed.
Assistant Commissioner of Urban Land Tax v.
Buckingham and Carnatic Co. Ltd. (1969) 2 SCC 55 : [1970] 1 SCR 268; Federation of Hotel & Restaurant Association of India v. Union of India (1989) 3 SCC
634 : [1989] 2 SCR 918; RK Garg v. Union of India (1981) 4 SCC 675 : [1982] 1 SCR 947 – followed.
S Sundaram Pillai v. V R Pattabiraman (1958) 1 SCC 591; Hiralal Rattanlal v. State of UP (1973) 1 SCC 216 : [1973] 2 SCR 502; Union of India v. NITDIP Textile Processors Private Limited (2012) 1 SCC 226 : [2011]
13 SCR 26; Elel Hotels and Investments Limited and Others v. Union of India (1989) 3 SCC 698 : [1989] 2 SCR 880; Spences Hotel Pvt Ltd. v. State of West Bengal (1991) 2 SCC 154 : [1991] 1 SCR 429; Commissioner of Income Tax v. HCL Technologies Limited (2018) 16 SCC 709 : [2018] 7 SCR 1079; Arun Kumar and Others v. Union of India (2007) 1 SCC 732 : [2006] 6 Suppl. SCR 290 – relied on.
Mafatlal Industries Limited v. Union of India (1997) 5 SCC 536 : [1996] 10 Suppl. SCR 585; All India
Federation of Tax Practitioners v. Union of India (2007)
7 SCC 527 : [2007] 9 SCR 147; Association of Leasing and Financial Service Companies v. Union of India (2011) 2 SCC 352 : [2010] 13 SCR 381; CIT v.
Bipinchandra Maganlal AIR 1961 SC 1040 : [1961] SCR 493; State of Rajasthan v. Leela Jain AIR 1965 SC 1296 : [1965] SCR 276; Bihar Cooperative
Development Cane Marketing Union Ltd. v. Bank of Bihar AIR 1967 SC 389 : [1967] SCR 848; State of Jammu & Kashmir v. Triloki Nath Khosa (1974) 1 SCC
19 : [1974] 1 SCR 771; Re The Special Courts Bill 1978 (1979) 1 SCC 380 : [1979] 2 SCR 476; Assistant Commissioner of Commercial Tax (Asst.) v. Dharmendra Trading Company (1988) 3 SCC 570 : [1988] 3 SCR 946; Kerala State Electricity Board v. Indian Alluvium Co. Ltd. (1976) 1 SCC 466 : [1976] 1 SCR 552; Bharat Hari Singhania v. Commissioner of Wealth Tax (Central) (1994) 3 Suppl. SCC 46 : [1994] 1 SCR 1033;
Commissioner of Income Tax, Coimbatore v. Lakshmi Machine Works (2007) 11 SCC 126 : [2007] 5 SCR
622 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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