Rule 96(10) of CGST Rules declared ultra vires Section 16 of IGST Act for exceeding statutory authority and being manifestly arbitrary

Kerala HC declared Rule 96(10) of CGST Rules, 2017 ultra vires Section 16 of IGST Act, 2017 and manifestly arbitrary. The court held that while Parliament can impose restrictions on refund rights per VKC Footsteps SC judgment, Rule 96(10) exceeded statutory authority and produced absurd results not intended by Legislature. All proceedings against petitioners based on this rule were quashed, and no recovery action shall be taken for IGST refunds granted between 23-10-2017 and 08-10-2024. The challenge succeeded on grounds of constitutional violation under Articles 14, 19(1)(g) and 265.

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Issues Involved:

1. Whether Rule 96(10) of the CGST Rules is ultra vires the provisions of Section 16 of the IGST Act.
2. Whether the introduction of conditions in Rule 96(10) has taken away the vested right of exporters to claim a refund of IGST paid on export of goods.
3. Whether Rule 96(10) violates Articles 14, 19(1)(g), and 265 of the Constitution of India and/or is 'manifestly arbitrary' as understood in Shayara Bano v. Union of India.

Issue-wise Detailed Analysis:

1. Ultra Vires of Rule 96(10) with respect to Section 16 of the IGST Act:

The primary contention raised by the petitioners is that Rule 96(10) of the CGST Rules imposes restrictions that are not contemplated by Section 16 of the IGST Act. Section 16 provides for zero-rated supply and allows exporters to claim a refund of IGST paid on exports or tax paid on input services or goods used in exports. The petitioners argue that Rule 96(10) effectively takes away this right by imposing conditions that are not authorized by the substantive provisions of the IGST Act. The court observed that the subordinate legislation must be subservient to the plenary legislation, and any restriction imposed by Rule 96(10) should be explicitly contemplated by the IGST Act. The court found that Rule 96(10) travels beyond the scope of Section 16 of the IGST Act, rendering it ultra vires.

2. Vested Right to Claim Refund:

The petitioners argued that the introduction of conditions in Rule 96(10) has taken away their vested right to claim a refund of IGST paid on exports, which is a right granted by Section 16 of the IGST Act. The court noted that Section 16, both before and after its amendment, does not restrict the right of an exporter to claim a refund of IGST paid on exports. The court found that Rule 96(10) creates an unreasonable classification among exporters, leading to a situation where exporters opting for different refund methodologies are treated differently without any statutory basis. This classification was deemed unjustified and not authorized by the statute, thereby affecting the vested right of the petitioners.

3. Violation of Constitutional Provisions and Manifest Arbitrariness:

The petitioners contended that Rule 96(10) violates Articles 14, 19(1)(g), and 265 of the Constitution of India and is 'manifestly arbitrary' as per the Shayara Bano judgment. The court examined the comparative analysis of Rule 89 and Rule 96 and found that Rule 96(10) results in hostile discrimination among exporters. The court referred to the principle laid down in Shayara Bano, where manifest arbitrariness is considered a ground for invalidating legislation. The court concluded that Rule 96(10) is manifestly arbitrary as it imposes excessive and disproportionate restrictions not intended by the Legislature, thus violating Article 14 of the Constitution.

Conclusion:

The court declared Rule 96(10) of the CGST Rules as ultra vires the provisions of Section 16 of the IGST Act and unenforceable on account of being manifestly arbitrary. The court quashed any actions initiated based on Rule 96(10) and directed that no proceedings shall be taken to recover any IGST refunded to the petitioners under this rule for the period between 23-10-2017 and 08-10-2024. The judgment also provided directions for dealing with cases where orders have been issued or show cause notices have been served on issues other than those arising from the application of Rule 96(10).

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