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

M/s. Tonbo Imaging India Pvt. Ltd. Versus Union Of India Central Board Of Indirect Taxes And Customs, Deputy Commissioner Of Central Tax., Commissioner Of Central Tax

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 ... Constitutional Validity of provision of Rule 89(4) (C) of the CGST Rules, as amended vide Para 8 of Notification 16/2020-CT dated 23.03.2020 and Explanation to Rule 93 of the CGST Rule - refund of unutilized input tax credit - zero rated supply of goods - HELD THAT:- The entire concept of refund of unutilized input tax credit relating to zero-rated supply would be obliterated in case the respondents are permitted to put any limitation and condition that takes away petitioner’s right to claim refund of all the taxes paid on the domestic purchases used for the purpose of zero-rated supplies. The incentive given to the exporters would lose its meaning and this would cause grave hardship to the exporters, who are earning valuable foreign exchange for the country. It should be noted that exporters would have factored in such incentives in the pricing mechanism when they quote and therefore, the restriction of the same would be highly unreasonable, given the objective of the Government that exports should be zero rated and taxes should not be exported - It is also well settled that if the government perceives that there could be a possibility of abuse of a provision, it should adopt measures to keep a check on the same; however, the law cannot be amended on the premise of distrust. It is also relevant to note that in the GST Council Meeting, it was stated that the FOB value of exports will not be changed, which would mean that there is no doubt about the valuation of the goods; therefore, if there is no doubt about the value of the goods, the artificial restriction of refunds by taking the value of domestic supplies seems irrational. Further, the policy of the Government itself will have to satisfy the test of rationality and must be free from arbitrariness and discrimination. In DEPUTY COMMISSIONER OF INCOME TAX & ANR. VERSUS M/S. PEPSI FOODS LTD. (NOW PEPSICO INDIA HOLDINGS PVT. LTD.) [2021 (4) TMI 369 - SUPREME COURT], the Apex Court held that the expression “permissible” policy of taxation would refer to a policy that is constitutionally permissible. If the policy is itself arbitrary and discriminatory, such policy will have to be struck down. As rightly contended by the learned Senior counsel for the petitioner, the impugned Rule 89(4)(C) is arbitrary and unreasonable, in as much as the possibility of taking undue benefit by inflating the value of the zero-rated supply of goods, cannot be a ground to amend the Rule, which deserves to be declared invalid on this ground also. Thus, the impugned Rule 89(4)(C) of the CGST Rules, 2017 as amended vide Para 8 of the Notification No.16/2020-Central Tax dated 23.03.2020 deserves to be declared ultra vires and invalid and consequently deserves to be quashed - petition allowed. 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.