Formula for Refund of ITC u/s 89(5) is not ultra vires. Supreme Court urges GST Council to reconsider formula and take a policy decision
ABCAUS Case Law Citation
ABCAUS 3550 (2021) (09) SC
Important case law relied referred:
VKC Footsteps India Pvt. Ltd
Tvl. Transtonnelstroy Afcons Joint Venture
Section 54 of the CGST Act 2017 contains provisions regarding refund of tax. Sub clause (3) of the section 54 provides for refund of unutilised input tax credit (ITC) in cases involving: zero rated supplies made without payment of tax; and credit accumulation on account of rate of tax on inputs being higher than rate of tax on output supplies.
The Central Goods and Services Tax (4th Amendment) Rules 2018 were notified amending Rule 89(5) to provide a formula for Maximum Refund Amount.
Rule 89(5) of the Central Goods and Service Tax Rules 2017 provides a formula for the refund of ITC, in a case of refund on account of inverted duty structure. The said formula uses the term “Net ITC”. In defining the expression “Net ITC”, Rule 89(5) speaks of “input tax credit availed on inputs”.
A division bench of Gujarat High Court held that Explanation (a) to Rule 89(5) which denies the refund of “unutilised input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act.
On the other hand, a Division Bench of the Madras High Court came to a contrary conclusion.
In this backdrop, several Writ petitions under Article 226 of the Constitution were instituted before the High Court of Gujarat and the High Court of Judicature at Madras.
The petitioners submitted inter alia that Section 54(3) nowhere restrict the entitlement of refund only to unutilised ITC which is accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies.
It was contended that while Section 54(3) allows for a refund of ITC originating in inputs as well as input services, Rule 89(5) is ultra vires in so far as it excludes tax on input services from the purview of the formula.
Thus, If Section 54(3) is interpreted as a restriction against claim for refund of accumulated ITC by confining it only to tax on inputs, it would be unconstitutional as it would lead to discrimination between inputs and input services.
Before the Hon’ble Supreme Court one of the core issues was 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).
Formula for Refund of ITC u/s 89(5) is not ultra vires
The Hon’ble Supreme Court observed that 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 to provide that refund of unutilized ITC can only be availed on input goods.
The Union explained that in order to bifurcate the unutilised ITC into input goods and input services for the purpose of granting refund in accordance with Section 54(3)(ii) on ITC on inputs, Rule 89(5)3 has resorted to prescribing a formula to legally dissect the unutilised ITC. The Govt urged that the prescription of formulae to artificially determine refund or utilisation is a common practice in the field of taxation and was used prior to the enactment of the CGST Act in MODVAT/CENVAT Rules for determining quantum of eligibility of credit.
The Hon’ble Supreme Court agreed with the above explanation of the Union of India with respect to formula under Rule 89(5) read with Rule 42.
The Hon’ble Supreme Court stated that 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.
The Hon’ble Supreme Court opined that while the Court was alive to the anomalies of the formula, an anomaly per se can not result in the invalidation of a fiscal rule which has been framed in exercise of the power of delegated legislation.
The Hon’ble Supreme Court stated that it has only intervened to read down or interpret a formula if the formula leads to absurd results or is unworkable.
The Hon’ble Supreme Court stated that in the instant 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 Hon’ble Supreme Court said that the reading down of the formula as proposed by the Petitioners by prescribing an order of utilisation would result the Court recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible.
However, in view of the anomalies pointed out by the assessees, it strongly urged the GST Council to reconsider the formula and take a policy decision regarding the same.
The Hon’ble Supreme Court affirmed the judgment of the Madras High Court by dismissing the appeals challenging the verdict while the appeals against the judgment of the Gujarat High Court by the Union of India were allowed.
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