2019 (11) TMI 162 - AAR - GST

Refund denied for input tax credit on inverted duty structure due to retrospective rule change.

The application seeking a refund of accumulated input tax credit on both inputs and input services under an inverted duty structure was rejected. The ... Refund of unutilized input tax credit - Inverted duty structure - Applicability of a notification - Substitution of Rule 89(5) with retrospective effect - Scope and maintainability of Advance Ruling under Section 97 - Adjudicating authority and availability of appellate remedyScope and maintainability of Advance Ruling under Section 97 - Applicability of a notification - Maintainability of the applicant's advance ruling application seeking a determination on refund of ITC relating to input services and on the vires/applicability of Notifications amending Rule 89(5). - HELD THAT: - The Authority examined Section 97(2), which permits advance rulings on the applicability of a notification. However, the applicant's refund claim for unutilized ITC relatable to services had already been rejected by the jurisdictional refunding authority. Remedies against orders of an adjudicating authority lie by way of appeal under Section 107. The Authority for Advance Ruling is not an appellate forum for decisions of the adjudicating authority and cannot adjudicate matters which are the subject of an appeal or which effectively challenge the vires of rules/notifications. Consequently the application, which in substance sought to re-open an adjudicated refund order and to question the vires/applicability of the amending Notifications, was held not maintainable before the AAR. [Paras 20]Application rejected as not maintainable because the subject matter is the subject of adjudication by the jurisdictional authority with an available appellate remedy, and the AAR cannot entertain challenges to the vires of rules/notifications in this context.Substitution of Rule 89(5) with retrospective effect - Refund of unutilized input tax credit - Inverted duty structure - Whether the amendment substituting Rule 89(5) (by Notification No. 26/2018 as amending Rule 89(5)) is effective from 1 July 2017 and applicable to the applicant. - HELD THAT: - The Authority noted that Notification No. 26/2018 (Central Tax) amends the Central Goods and Services Tax Rules by substituting sub-rule (5) of Rule 89 and expressly provides that the substitution is with effect from 1st July, 2017. The substituted provision redefines 'Net ITC' to mean input tax credit availed on inputs (excluding input services) for the purposes of refund in case of inverted duty structure. There is no exclusion in the amendment rules; therefore, the amended Rule 89(5) as notified is applicable from the stated retrospective date and thus applicable to the applicant. [Paras 20]The substituted Rule 89(5) is operative with effect from 1 July 2017 and is applicable to the applicant.Final Conclusion: The Authority rejected the advance ruling application as not maintainable because the applicant's refund claim had been adjudicated by the jurisdictional authority with an available appellate remedy and because the AAR cannot determine the vires of the amending rules; separately, the Authority recorded that the substitution of Rule 89(5) by the amendment is effective from 1 July 2017 and applies to the applicant. Issues Involved:1. Eligibility to claim refund of accumulated input tax credit (ITC) on both inputs and input services under an inverted duty structure.2. Applicability of Notification No. 21/2018-Central Tax dated April 18, 2018, and Notification No. 26/2018-Central Tax dated June 13, 2018.Issue-wise Detailed Analysis:1. Eligibility to Claim Refund of Accumulated ITC on Both Inputs and Input Services:- The applicant, a manufacturer of incense sticks and related products, contended that they are eligible to claim a refund of unutilized ITC on both inputs and input services due to an inverted duty structure.- The applicant highlighted Section 54(3)(ii) of the GST Act, which allows for a refund of unutilized ITC when the tax rate on inputs is higher than the output supplies, except for notified supplies.- The applicant argued that Rule 89 of the CGST Rules prescribes the method for seeking refunds in such scenarios, and initially, the definition of 'Net ITC' included both inputs and input services.- However, Notification No. 21/2018-Central Tax dated April 18, 2018, amended Rule 89(5) to define 'Net ITC' as only the ITC availed on inputs, excluding input services. This amendment was made retrospective from July 1, 2017, by Notification No. 26/2018-Central Tax dated June 13, 2018.- The applicant argued that this amendment placed an unreasonable restriction on claiming refunds for input services, which was not the intention of the lawmakers, and thus, Rule 89(5) is ultra-vires to Section 54(3) of the CGST Act.2. Applicability of Notification No. 21/2018-Central Tax and Notification No. 26/2018-Central Tax:- The applicant sought clarification on whether these notifications apply to their case, given that their refund claims for input services were rejected by the jurisdictional authority based on these notifications.- The applicant argued that the term 'inputs' in Section 54(3) should include both inputs and input services. They also questioned whether the retrospective amendment could apply to supplies made before the amendment.- The applicant contended that Section 97(2)(b) of the CGST Act allows for seeking advance rulings on the applicability of notifications, and thus their application should be considered admissible.Findings and Discussion:- The authority considered the submissions and noted that the application primarily concerns the applicability of the notifications.- Notification No. 26/2018-Central Tax amended Rule 89(5) to exclude input services from the definition of 'Net ITC,' effective from July 1, 2017.- Section 97(2) of the CGST Act lists the questions on which advance rulings can be sought, including the applicability of notifications.- The authority noted that the applicant's refund claims for input services were already rejected by the jurisdictional authority, making the issue appealable under Section 107 of the CGST Act.- The authority for advance ruling is not the appropriate forum for questioning the vires of the rules or for issues that are appealable under the Act.Ruling:- The application was rejected as it was not maintainable for the reasons cited, including the fact that the issue was already adjudicated by the jurisdictional authority and is appealable under the CGST Act.