2021 (9) TMI 626 - SC - GST

Supreme Court validates Rule 89(5) restricting GST refunds to input goods only, excluding services from eligibility

Union of India & Ors. Versus VKC Footsteps India Pvt Ltd.

Union of India & Ors. Versus VKC Footsteps India Pvt Ltd. - 2021 (52) G. S. T. L. 513 (SC), (2022) 2 SCC 603 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in this judgment are:(i) Whether the expression 'inputs' in Section 54(3)(ii) of the Central Goods and Services Tax Act, 2017 ('CGST Act') includes both input goods and input services or only input goods;(ii) Whether Rule 89(5) of the CGST Rules, which defines 'Net ITC' as input tax credit availed only on inputs (i.e., input goods) and excludes input services for the purpose of refund calculation under an inverted duty structure, is ultra vires Section 54(3) of the CGST Act;(iii) The proper interpretation of the proviso to Section 54(3), specifically whether it imposes a restriction on refund entitlement or merely a condition of eligibility;(iv) Whether the classification excluding input services from refund under an inverted duty structure violates constitutional principles of equality under Article 14 of the Constitution;(v) The scope and validity of the rule-making power under Section 164 of the CGST Act, particularly in framing Rule 89(5) and its retrospective amendments;(vi) The validity and practical efficacy of the formula prescribed in Rule 89(5) for computing refund of unutilised input tax credit ('ITC') in cases of inverted duty structure;(vii) Whether the refund of unutilised ITC includes credit on capital goods;(viii) The applicability of the doctrine of equivalence and neutrality between goods and services in the context of refund of ITC under GST.2. ISSUE-WISE DETAILED ANALYSISIssue (i): Interpretation of 'inputs' in Section 54(3)(ii)The Court examined the statutory definitions under the CGST Act and the constitutional definitions under Article 366. Section 2(59) defines 'input' as goods other than capital goods used or intended to be used in business, while Section 2(60) defines 'input service' as any service used or intended to be used in business. Constitutionally, 'goods' and 'services' are distinct categories under Articles 366(12) and 366(26A).The Court noted that the plural term 'inputs' in Section 54(3)(ii) is not separately defined but should be construed in line with the singular 'input' as per ordinary principles of statutory interpretation. Hence, 'inputs' refers only to input goods and excludes input services.Explanation-I to Section 54(3) clarifies that refund of tax paid on zero-rated supplies includes both inputs and input services, but for domestic supplies under the inverted duty structure, refund is limited to credit accumulated on inputs (goods) alone. This distinction underlines the legislative intent to restrict refund in inverted duty cases to input goods.The Court rejected the assessees' argument that 'inputs' should be read to include input services based on economic equivalence or the doctrine of neutrality, emphasizing that the plain language and legislative scheme must prevail.Issue (ii): Validity of Rule 89(5) excluding input services from 'Net ITC'Rule 89(5) prescribes a formula for refund of ITC on account of inverted duty structure, defining 'Net ITC' as input tax credit availed on inputs (goods) only, excluding input services. The rule was amended retrospectively to this effect.The Court held that Rule 89(5) is intra vires Section 54(3) because the proviso to Section 54(3) restricts refund of unutilised ITC in inverted duty structure cases to credit accumulated on inputs (goods) alone. Thus, the rule faithfully implements the statutory restriction.The argument that Section 54(3) is a complete code and does not envisage rule-making for refund quantum was rejected. The Court recognized that rules may fill gaps and provide procedural or formulaic details consistent with the statute.The Court also noted that the retrospective amendment is permissible under Section 164(3) of the CGST Act, which allows rules to be made retrospectively from the date the Act came into force.Issue (iii): Nature of the proviso to Section 54(3)The Court analyzed the language and structure of Section 54(3) and its provisos. The main provision allows a registered person to claim refund of any unutilised ITC at the end of any tax period. The first proviso, introduced by 'no refund shall be allowed in cases other than', restricts refund to two specific cases: (i) zero-rated supplies without payment of tax, and (ii) credit accumulated on account of rate of tax on inputs being higher than rate of tax on output supplies.The Court held that the proviso is a substantive restriction on refund entitlement, not merely a condition of eligibility. It carves out exceptions to the general refund provision and must be strictly construed.The Court rejected the assessees' submission that the proviso only lays down threshold conditions and that the refund quantum includes ITC on input services. The language 'no refund shall be allowed in cases other than' indicates a clear limitation on refund cases.Issue (iv): Constitutional validity under Article 14The assessees argued that excluding input services from refund under inverted duty structure violates equality under Article 14, as goods and services are treated differently despite similar treatment for ITC availment and utilization.The Court reaffirmed the wide latitude of the legislature in fiscal matters and held that goods and services are distinct constitutional and statutory categories. Classification excluding input services from refund is rationally connected to the object of the legislation and is not arbitrary.The Court observed that the CGST regime is still evolving with multiple tax rates and exemptions, and the legislature is entitled to make policy choices to deal with complexities. The exclusion of input services from refund in inverted duty structure cases is a valid legislative classification.The Court also noted that refund is a statutory concession, not a constitutional right, and must be strictly construed.Issue (v): Rule-making power under Section 164 and validity of Rule 89(5)The Court held that Section 164 confers broad rule-making power on the Central Government to carry out the provisions of the CGST Act, including retrospective rules. The absence of express 'may be prescribed' language in Section 54(3) does not preclude rule-making.Rule 89(5) prescribing the refund formula is valid as it carries out the provisions of the Act, including providing a method to compute refund where supplies involve both inverted and non-inverted duty structures.The Court rejected the assessees' contention that Rule 89(5) is ultra vires because it restricts refund to input goods, since this restriction is consistent with the proviso to Section 54(3).Issue (vi): Validity and anomalies in the formula prescribed in Rule 89(5)The Court acknowledged that the formula in Rule 89(5) is not perfect and may cause anomalies. Specifically, the formula assumes that the entire output tax payable is discharged from ITC on input goods, ignoring ITC on input services, which may reduce the refund amount and increase cascading effect.The assessees proposed reading down the formula to allow utilization of ITC on input services first for payment of output tax, with refund calculation adjusted accordingly.The Court declined to read down or rewrite the formula, emphasizing that judicial review should not encroach on legislative or executive policy choices. However, the Court urged the GST Council to reconsider and address the anomalies in the formula.Issue (vii): Inclusion of capital goods in refundThe Court noted that capital goods are excluded from the definition of 'inputs' under Section 2(59) and are treated separately under the CGST Act. Refund of ITC on capital goods is not covered under Section 54(3)(ii) and is outside the scope of the present dispute.Issue (viii): Doctrine of equivalence and neutrality between goods and servicesThe assessees invoked the doctrine of equivalence and neutrality, arguing that since GST is a unified tax on goods and services, input goods and input services should be treated equally for refund purposes.The Court recognized the economic rationale but held that such policy considerations cannot override the plain language of the statute. The constitutional scheme and statutory definitions maintain a distinction between goods and services, and the legislature's policy choices in refund provisions must be respected.3. SIGNIFICANT HOLDINGS'The provisos under Section 54(3) have to be read and interpreted as restrictions and not as qualifications.''The expression 'inputs' in the proviso to Section 54(3)(ii) refers to input goods and does not include input services.''Rule 89(5) of the CGST Rules, in defining 'Net ITC' as input tax credit availed on inputs (goods) alone, is intra vires Section 54(3) of the CGST Act.''Refund of unutilised ITC is a matter of statutory concession and not a constitutional right.''Classification excluding input services from refund under inverted duty structure is a valid legislative classification and does not violate Article 14.''The formula prescribed in Rule 89(5) for refund computation is valid, notwithstanding its imperfections and anomalies, which should be addressed by the GST Council.''The rule-making power under Section 164 is broad and includes power to make rules with retrospective effect from the date of commencement of the CGST Act.''The Court cannot rewrite or read down statutory provisions or delegated legislation to enlarge the scope of refund beyond what Parliament has provided.'Final determinations:(i) The appeals challenging the judgment of the Gujarat High Court holding Rule 89(5) ultra vires are allowed; the Gujarat High Court judgment is set aside.(ii) The appeals challenging the Madras High Court judgment upholding Rule 89(5) are dismissed.(iii) The GST Council is urged to consider the anomalies in the refund formula and take appropriate policy decisions.