2024 (11) TMI 188 - HC - GST

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 ... Validity of Rule 96(10) of the CGST Rules vis-a -vis Section 16 of the IGST Act - ultra vires - manifestly arbitrary - zero-rated supply - refund of IGST and unutilised input tax credit - conditions, safeguards and procedure - limits of delegated rule making - subordinate legislation must be subservient to plenary legislationValidity of Rule 96(10) of the CGST Rules vis-a -vis Section 16 of the IGST Act - ultra vires - zero-rated supply - refund of IGST and unutilised input tax credit - Rule 96(10) of the CGST Rules is ultra vires Section 16 of the IGST Act. - HELD THAT: - The Court examined Section 16 of the IGST Act (pre amendment) and Section 54 of the CGST Act and held that while the plenary legislation contemplates refund of IGST or unutilised input tax credit subject to conditions, those enabling words do not authorise subordinate legislation to impose conditions which operate to take away the statutory right itself. A comparison of the regimes under Rule 89 and Rule 96 demonstrated that Rule 96(10) imposed restrictions and a classification that goes beyond the scope of Section 16 by denying refunds where certain notifications had been availed, without temporal or consignment linkage and even where only part of inputs were so procured. On that basis the subordinate provision was found to travel beyond the plenary statute and thus to be ultra vires. [Paras 7, 11, 13, 14]Rule 96(10) is declared ultra vires Section 16 of the IGST Act and unenforceable.Manifestly arbitrary - conditions, safeguards and procedure - limits of delegated rule making - subordinate legislation must be subservient to plenary legislation - Rule 96(10) is manifestly arbitrary and produces absurd results contrary to principles of Article 14. - HELD THAT: - Applying the test of manifest arbitrariness explained in Shayara Bano and construing the plenary provisions so as to avoid absurdity, the Court found that Rule 96(10) effected hostile discrimination between exporters who use the LUT/bond route (Rule 89) and those who pay IGST and claim refund (Rule 96), with no coherent determinative principle. The Rule denied refunds in entirety even where a small portion of inputs were procured under the notifications, and lacked necessary temporal/consignment identification - features the Court characterised as excessive, disproportionate and arbitrary, warranting strike down. [Paras 13, 14]Rule 96(10) is manifestly arbitrary and consequently invalid.Zero-rated supply - refund of IGST and unutilised input tax credit - remedial relief - quashing, bar on recovery and directions on further proceedings - Reliefs to be granted in consequence of invalidating Rule 96(10). - HELD THAT: - In light of the declaration of invalidity, the Court quashed any show cause notices or orders issued and held that no proceedings shall be taken to recover IGST refunded to the petitioners by application of Rule 96(10) for the period between 23 10 2017 and 08 10 2024. The Court permitted aggrieved parties to file appeals or reply to pending show cause notices on issues other than those arising from Rule 96(10) within prescribed short periods and directed proper officers to adjudicate remaining issues accordingly. [Paras 15]Actions/orders based on Rule 96(10) quashed; no recovery of IGST refunded for the period 23-10-2017 to 08-10-2024; procedural directions given for appeals and replies on collateral issues.Final Conclusion: The Court allowed the writ petitions: Rule 96(10) of the CGST Rules (as inserted w.e.f. 23 10 2017) was declared ultra vires Section 16 of the IGST Act and manifestly arbitrary; consequential show cause notices/orders founded on that provision were quashed; no recovery of IGST refunded pursuant to Rule 96(10) shall be undertaken for the period 23 10 2017 to 08 10 2024; limited procedural directions were given for adjudication or appeals on other issues. 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).