2023 (4) TMI 46 - HC - GST

Rule 89(4)(C) of CGST Rules 2017 restricting refund of unutilized input tax credit for zero-rated supplies declared ultra vires and invalid

The Karnataka HC declared Rule 89(4)(C) of CGST Rules, 2017 as amended by Notification 16/2020-CT ultra vires and invalid. The court held that restricting ... Zero-rated supply - Refund of unutilised input tax credit - Rule 89(4)(C) of the CGST Rules - Ultra vires - Manifest arbitrariness / Vagueness - Violation of Article 14 and Article 19(1)(g) of the Constitution - Misuse as a ground for subordinate legislationRule 89(4)(C) of the CGST Rules - Zero-rated supply - Refund of unutilised input tax credit - Ultra vires - Manifest arbitrariness / Vagueness - Violation of Article 14 and Article 19(1)(g) of the Constitution - Misuse as a ground for subordinate legislation - The amended clause in Rule 89(4)(C) restricting refund by reference to domestic supplies and a multiplier of 1.5 is ultra vires and invalid. - HELD THAT: - The Court held that the impugned words inserting a cap - 'or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier' - in Rule 89(4)(C) are inconsistent with the object and scheme of Section 16 of the IGST Act and Section 54 of the CGST Act, which aim to zero-rate exports and permit refund of unutilised input tax credit so that exports are not burdened by tax. The amendment effectively curtails the full refund of input tax credit on exports by importing domestic turnover as a limiting criterion, thereby defeating the zero-rating principle. The Court further found the amendment to be arbitrary and violative of Article 14 and Article 19(1)(g) because it creates a discriminatory and irrational classification between exporters who export under bond/LUT and those who export on payment of IGST; the terms 'like goods' and 'similarly placed supplier' are vague and open-ended and no guidelines are provided for their application; and the amendment was justified merely by a generalized apprehension of misuse without case-specific data, which cannot sustain such a restrictive measure. For these reasons the impugned words were declared ultravires and struck down. [Paras 17, 18, 22, 26, 28]The offending words in Rule 89(4)(C) (introducing the 1.5x domestic-value cap and related comparison) are declared ultra vires, arbitrary, vague and violative of Articles 14 and 19, and are quashed.Quashing of order - Direction to grant refund with interest - Refund of unutilised input tax credit - Zero-rated supply - The departmental order rejecting the petitioner's refund claims dated 30.06.2020 is quashed and the revenue is directed to accept and grant the refund claims with interest. - HELD THAT: - Since the impugned order was founded on the invalid amendment to Rule 89(4)(C), the Court quashed the order rejecting the petitioner's refund applications for the specified tax periods. The Court directed the respondents to accept the petitioner's refund applications (filed on 25.05.2020, 27.05.2020 and 28.05.2020 for the periods May 2018, July 2018, August 2018, November 2018, December 2018 and March 2019) and to grant the refund together with applicable interest, observing that the refund claims relate to periods prior to the impugned amendment and that the denial was therefore unsustainable. [Paras 3, 28, 30]Impugned order dated 30.06.2020 is quashed; respondents directed to accept the petitioner's refund applications and grant refund with interest within three months.Final Conclusion: The amendment to Rule 89(4)(C) introducing a cap linked to domestic supplies is struck down as ultra vires, arbitrary and void; the departmental order rejecting the petitioner's pre-amendment refund claims is quashed and the revenue is directed to accept and pay the refunds with interest within three months. Issues Involved:1. Validity of Rule 89(4)(C) of the CGST Rules as amended by Notification No.16/2020-CT dated 23.03.2020.2. Validity of Explanation to Rule 93 of the CGST Rules.3. Legality of the impugned order dated 30.06.2020 passed by Respondent No. 3.4. Direction to accept refund applications and grant refund of taxes along with interest.Issue-wise Detailed Analysis:1. Validity of Rule 89(4)(C) of the CGST Rules:- Petitioner's Contentions: - The amended Rule 89(4)(C) is ultra vires Section 54 of the CGST Act and Section 16 of the IGST Act, as it restricts the refund of unutilized input tax credit for zero-rated supplies. - The rule violates Articles 14 and 19(1)(g) of the Constitution by creating a discriminatory regime between exporters who export without paying tax under a bond/LUT and those who export after paying tax. - The rule is arbitrary and unreasonable, lacking a rational nexus with the objective of zero-rating exports. - The terms 'like goods' and 'similarly placed supplier' are vague and undefined, making compliance difficult and uncertain. - The rule imposes an undue burden on exporters, affecting their liquidity and competitiveness.- Respondents' Contentions: - The petitioner failed to provide proof that the export turnover is 1.5 times the value of like goods domestically supplied, justifying the rejection of the refund claims.- Court's Analysis: - The court highlighted that the GST regime aims to make the entire supply chain of exports tax-free, both on the input and output sides. - The amended Rule 89(4)(C) contradicts the zero-rating principle by restricting refunds, which is ultra vires the parent legislation. - The rule creates an unreasonable classification, violating Article 14, and imposes undue restrictions on exporters, violating Article 19(1)(g). - The terms 'like goods' and 'similarly placed supplier' are vague, leading to arbitrary application and potential denial of legitimate refunds. - The court found the rule to be arbitrary, unreasonable, and lacking adequate defining principles, making it invalid.2. Validity of Explanation to Rule 93 of the CGST Rules:- Petitioner's Stand: - The petitioner did not press the challenge to the validity of the Explanation to Rule 93 during the proceedings.- Court's Decision: - The issue regarding the validity of the Explanation to Rule 93 was kept open to be dealt with in an appropriate case.3. Legality of the Impugned Order Dated 30.06.2020:- Petitioner's Contentions: - The impugned order rejecting the refund claims was based on the amended Rule 89(4)(C), which is invalid. - The order was passed without proper application of mind and violated principles of natural justice.- Court's Analysis: - Since the amended Rule 89(4)(C) was declared invalid, the impugned order based on this rule was also quashed.4. Direction to Accept Refund Applications and Grant Refund of Taxes Along with Interest:- Petitioner's Request: - The petitioner sought a direction to the respondents to accept the refund applications and grant the refund along with applicable interest.- Court's Order: - The court directed the respondents to accept the refund claims/applications of the petitioner and grant the refund together with applicable interest within three months from the date of receipt of the order.Conclusion:The court allowed the writ petition, declaring the impugned words in Rule 89(4)(C) of the CGST Rules as ultra vires the CGST Act and IGST Act, and violative of Articles 14 and 19 of the Constitution. Consequently, the impugned order rejecting the refund claims was quashed, and the respondents were directed to process the refund applications within a stipulated time frame. The issue regarding the validity of the Explanation to Rule 93 was kept open for future adjudication.