2021 (9) TMI 472 - HC - GST

Court sets aside tax orders, remands for rate evaluation. Emphasizes statutory over circulars.

The court set aside both the Assistant Commissioner's and Joint Commissioner (Appeals)' orders and remanded the matter to the Assistant Commissioner to ... Refund of unutilized input tax credit under Section 54(3)(ii) - conflict between statutory provision and administrative circular - scope of powers under Section 168(1) to issue clarificatory circulars - principles of natural justice in show cause proceedings - remand for factual satisfaction on comparative tax rates of inputs and outputsRefund of unutilized input tax credit under Section 54(3)(ii) - conflict between statutory provision and administrative circular - Whether paragraph 3.2 of Circular No.135/05/2020-GST can negate entitlement to refund under Section 54(3)(ii) where input tax credit accumulated because rate of tax on inputs is higher than on outputs - HELD THAT: - The court found that Section 54(3)(ii) unambiguously permits refund where credit has accumulated because the rate of tax on inputs exceeds the rate on output supplies (except nil or fully exempt supplies). Paragraph 3.2 of Circular No.135/05/2020-GST, which declares that refund would not be available where input and output supplies are the same even if rates differ, is inconsistent with the statutory provision. Where an administrative circular conflicts with an unambiguous statutory provision, the statute prevails and the conflicting portion of the circular must be ignored. Consequently, paragraph 3.2 cannot be applied to deny refund entitlement under Section 54(3)(ii). [Paras 15, 16, 17, 18, 28]Paragraph 3.2 of Circular No.135/05/2020-GST is in conflict with Section 54(3)(ii) and must be ignored; entitlement under Section 54(3)(ii) depends on whether inputs attracted a higher rate than outputs.Principles of natural justice in show cause proceedings - Whether the Assistant Commissioner travelled beyond the scope of the show cause notice and thereby violated principles of natural justice - HELD THAT: - The appellate tribunal (Joint Commissioner (Appeals)) recorded that the Assistant Commissioner based rejection on a ground not contained in the show cause notice, amounting to a breach of natural justice. The High Court accepted that the Assistant Commissioner did rely on the circular to reject the claim on a ground not proposed in the SCN, rendering that rejection unsustainable. However, the court also held that setting aside on natural justice grounds did not obviate the necessity for a factual determination of rate differential before directing refund. [Paras 9, 10, 29]The Assistant Commissioner's rejection for relying on a ground outside the SCN was unsustainable; procedural unfairness vitiated the impugned order but did not entitle the assessee to an unconditional refund without factual determination.Scope of powers under Section 168(1) to issue clarificatory circulars - Whether Circular No.135/05/2020-GST issued under Section 168(1) could be read so as to re interpret or override the clear statutory mandate of Section 54(3)(ii) - HELD THAT: - Section 168(1) empowers the Board to issue orders, instructions or directions to ensure uniformity in implementation; it does not empower the Board to alter or contradict clear statutory provisions by re writing their substantive effect. The court explained that issuing procedural directions and changing the substantive scope of a statutory provision are distinct acts; the Board's power under Section 168(1) cannot be used to negate an unambiguous legislative provision such as Section 54(3)(ii). [Paras 12, 13, 14, 33]Circulars under Section 168(1) cannot be construed to override or contradict an unambiguous provision of the CGST Act; Circular No.135/05/2020-GST cannot be applied to displace the entitlement under Section 54(3)(ii).Remand for factual satisfaction on comparative tax rates of inputs and outputs - Whether the matter should be remitted for fresh adjudication and what is to be determined on remand - HELD THAT: - The court set aside both the Assistant Commissioner's order rejecting the refund and the Joint Commissioner (Appeals)'s order directing refund. The High Court held that the proper course is remand to the Assistant Commissioner to make a reasoned factual determination whether the actual rate of tax on the assessee's input supplies was higher than the actual rate of tax on the output supplies (after applying the partial exemption under Notification No.45/2017). Depending on that factual satisfaction, the Assistant Commissioner must pass a reasoned order either allowing refund under Section 54(3)(ii) or rejecting it. The court directed that this be done within six weeks of receipt of certified copy and that the order's effect be given without further delay. [Paras 25, 31, 32, 34, 35]The matter is remanded to the Assistant Commissioner to determine, on facts, whether the rate on inputs exceeds the rate on outputs and to pass a reasoned order within six weeks; both earlier orders are set aside.Final Conclusion: Both the Assistant Commissioner's order rejecting the refund and the Joint Commissioner (Appeals)'s order allowing refund are set aside. Circular No.135/05/2020-GST cannot be applied to negate entitlement under Section 54(3)(ii); the claim is remitted to the Assistant Commissioner to determine, within six weeks, whether the actual input tax rate exceeded the actual output tax rate and to pass a reasoned order accordingly. Issues Involved:1. Misdeclaration of turnover and rejection of refund claim.2. Applicability of Section 54(3)(ii) of the CGST Act, 2017.3. Validity of Circular No.135/05/2020-GST dated 31.03.2020.4. Violation of principles of natural justice.5. Conflict between statutory provisions and administrative circulars.Issue-wise Detailed Analysis:1. Misdeclaration of Turnover and Rejection of Refund Claim:The assessee, BMG Informatics Pvt. Ltd., submitted a refund claim under FORM-GST-RFD-02, which was acknowledged on 28.02.2020. The department issued a show-cause notice on 10.04.2020, alleging misdeclaration of total turnover for the period October-December 2018. The Assistant Commissioner rejected the refund claim of Rs. 3,92,594/- on 22.05.2020, stating that the input and output supplies being the same, though attracting different tax rates, do not qualify for a refund under Section 54(3)(ii) of the CGST Act, 2017, as supported by Circular No.135/05/2020-GST dated 31.03.2020.2. Applicability of Section 54(3)(ii) of the CGST Act, 2017:The Joint Commissioner (Appeals) overturned the Assistant Commissioner's decision, stating that the rejection was based on a ground not mentioned in the show-cause notice, violating the principles of natural justice. Section 54(3)(ii) allows refunds when the input tax rate is higher than the output tax rate, except for nil-rated or fully exempt supplies. The court emphasized that the input and output supplies in this case were not nil-rated or fully exempt, thus qualifying for a refund under Section 54(3)(ii).3. Validity of Circular No.135/05/2020-GST dated 31.03.2020:The court examined Circular No.135/05/2020-GST, which clarified that refunds under Section 54(3)(ii) are not applicable if input and output supplies are the same, even with different tax rates. The court found this circular to be in conflict with Section 54(3)(ii) of the CGST Act, which explicitly allows refunds when input tax rates are higher than output tax rates. The court held that the circular cannot override the statutory provisions of the Act.4. Violation of Principles of Natural Justice:The Joint Commissioner (Appeals) noted that the Assistant Commissioner rejected the refund on grounds not stated in the show-cause notice, violating principles of natural justice. The court agreed that the Assistant Commissioner should have confined his decision to the grounds mentioned in the show-cause notice.5. Conflict between Statutory Provisions and Administrative Circulars:The court reiterated the legal principle that statutory provisions prevail over conflicting administrative circulars. It held that paragraph 3.2 of Circular No.135/05/2020-GST, which restricts refunds for same input and output supplies, must be ignored as it conflicts with Section 54(3)(ii) of the CGST Act.Conclusion and Remand:Both the Assistant Commissioner's order dated 22.05.2020 and the Joint Commissioner (Appeals)' order dated 29.10.2020 were set aside. The matter was remanded back to the Assistant Commissioner to determine if the input tax rate was higher than the output tax rate and to pass a reasoned order on the refund claim within six weeks. The court emphasized that Section 54(3)(ii) should be applied as per its explicit provisions without being influenced by the conflicting circular. The writ petitions were disposed of accordingly.