No refund of ITC on input services on account of inverted duty structure in GST : Says Madras High Court while dismissing bunch of writ petitions.

A very crucial and detailed judgement passed by Madras High Court in contradiction of judgement passed by Gujrat High Court in the case of VKC Footsteps India Pvt Ltd.

Following principles emerged out of this judgement.

a) Rule 89(5) of CGST Rules is in confirmity with with Section 54(3)(ii).

b) Rule 89(5) is not ultra vires.

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

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

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

FACTS OF CASES

All the Petitioners are engaged in businesses wherein the rate of tax on input goods and/or input services exceeds the rate of tax on output supplies. This contingency is referred to as an inverted duty structure. As a result, the registered person is unable to adjust the available input tax credit fully against the tax payable on output supplies; consequently, there is an accumulation of unutilised input tax credit. 

The case of the Petitioners is that they are entitled to a refund of the entire unutilised input tax credit, irrespective of whether such credit accumulated on account of procurement of input goods and/or input services by paying tax at a higher rate than that paid on output supplies. 

On the contrary, the case of the Union of India and the Tax Department, both at the Central and State level, is that refund of unutilised input tax credit is permissible only in respect of the quantum of credit that has accumulated due to the procurement of input goods at a higher rate than that paid on output supplies, and that credit accumulation on account of procuring input services at a rate of tax higher than that paid on output supplies is liable to be disregarded for refund purposes.

At the heart of this batch of writ petitions is the question whether the Petitioners are entitled to a refund of the entire unutilised input tax credit that each of them has accumulated on account of being subjected to an inverted duty structure. In certain cases, the constitutional validity of Section 54(3)(ii) of the CGST Act is impugned, whereas, in others, a declaration is prayed for that the amended Rule 89(5) of the CGST Rules is ultra vires Section 54 of the CGST Act and the Constitution of India. 

One of the issues that takes centre-stage in these cases is the correct meaning to be ascribed to the word “inputs” in Section 54(3)(ii) of the CGST Act and in the definition of “Net ITC” in the amended Rule 89(5) of the CGST Rules. Therefore, except while dealing with the text of Section 54 and Rule 89 where the word “inputs” is used, for the sake of clarity, the words 'input goods' is used while dealing with goods that are used as inputs, and 'input services' is used while dealing with services that are used as inputs.

QUESTIONS FOR CONSIDERATION

The contentions, including notes on submissions, of the learned counsel for the respective parties were duly considered and they raise several questions for the consideration of this Court. The said questions are as under:

(1) Whether Section 54(3)(ii) infringes Article 14 of the Constitution?

(2) Whether it is necessary to read the word “inputs” in Section 54(3)(ii) as encompassing both goods and services so as to ensure that the said provision is not struck down?

(3) Whether the words input services may be read into the word “inputs” by resorting to the interpretive principle of reading down the statute?

(4) Whether the words input services may be read into Section 54(3)(ii) as an exception to the general rule of casus omissus?

(5) Whether the proviso to Section 54(3) qualifies and curtails the scope of the principal clause to the limited extent of specifying the two cases in which registered persons become eligible for a refund of the unutilised input tax credit?

(6) Whether sub-clause (ii) of the proviso merely stipulates the eligibility conditions for claiming a refund of the unutilised input tax credit or whether it also curtails the entitlement to refund to unutilised input tax credit from a particular source, namely, input goods and excludes input services?

(7) Whether the rule making power under Section 164 empowers the Central Government to make Rule 89(5) as amended?

(8) Whether Rule 89(5) of the CGST Rules, as amended, is ultra vires Section 54(3) of the CGST Act?

(9) Whether the definition of the term Net ITC, as contained in Rule 89(5), is liable to be read as encompassing both input goods and input services?

HELD BY HIGH COURT

The subject matter of controversy is the entitlement to refund of unutilised input tax credit and not the availing of input tax credit.

Under Section 54(3)(ii), Parliament has provided the right of refund only in respect of unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies. Given the fact that we have concluded that Section 54(3)(ii), on a plain reading, does not violate Article 14, it is not necessary to draw definitive conclusions on the scope of reading down or to examine if the casus omissus rule should be deviated from in this case.

We arrive at the following conclusions:

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

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

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

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

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

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

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

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

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

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

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