TaxTMI 
TaxTMI 
2021 (9) TMI 626
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....kshmikumaran, AOR Mr. Ankit Yadav, AOR Ms. Veena Kamath, Adv. For the Respondent : Mr. V. Sridharan, Sr. Adv. Mr. Sriram Sridharan, Adv. Mr. Anand Nainavati, Adv. Mr. Aditya Bhattacharya, Adv. Ms. Apeksha Mehta, Adv. Mr. Somesh Jain, Adv. Mr. Nalin Bajaj, Adv. Mr. Kunal Kapoor, Adv. Ms. Mounica Kasturi, Adv. Ms. Charanya Lakshmikumaran, AOR Mr. Arvind Datar, Sr. Adv. Mr. Harish Bindhumadavan, Adv. Mr. Pawan Shree Agrawal, AOR Mr. Rahul Unnikrishnan, Adv. Mr. Ashwini Chandrashekharan, Adv. Ms. Sharyashree Thyagarajan, Adv. Mr. Manoharan Ellappan, Adv. Mr. Uchit Sheth, Adv. Mr. Santosh Krishnan, AOR Mr. Mukesh Kumar Maroria, AOR Mr. Amit Anand Tiwari, AAG Dr. Joseph Aristotle S., Adv. Mr. Saaketh Kasibhatla, Adv. Ms. Preeti Singh, Adv. Mr. Joseph Pookkatt, Adv. Mr. Prashant Kumar, Adv. Mr. Nilesh Sharma, Adv. Mr. Dhawesh Pahuja, Adv. M/s. Ap & J Chambers Dr. Avinash Poddar, Adv. Mr. Anant Kumar Vatsya, Adv. Mr. Ashish Kumar Sinha, Adv. Mr. Devendra Singh, AOR Mr. Naresh Thacker, Adv. Mr. Kumar Visalaksh, Adv. Mr. Hardik Modh, Adv. Mr. Udit Jain, Adv. Mr. Amit Laddha, Adv. Mr. Abhishek Vikas, AOR (Intervenor) Mr. Arvind Datar, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. P.R. Renganath, A....
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......................................................... 113 G.1 The validity of Rule 89(5) of CGST Rules in exercise of the rule-making power under Section 164 of the CGST Act .................................................... 115 G.2 The vires of Rule 89(5) vis-à-vis Section 54(3) of the CGST Act .......... 117 G.3 The validity of the formula prescribed in Rule 89(5) ................................ 122 H Conclusion................................................................................................... 138 A Introduction 1 Parliament while enacting the Central Goods and Services Tax Act 2017, "CGST Act" has incorporated a provision for refund of tax in Section 54. Sub-Section (3) embodies a provision for refund of unutilised input tax credit -"ITC" in cases involving: (i) zero rated supplies made without payment of tax; and (ii) credit accumulation "on account of rate of tax on inputs being higher than rate of tax on output supplies". 2 While envisaging a refund in the latter of the above two situations, Parliament was cognizant of the fact that ITC may accumulate due to a variety of reasons. However, Parliament envisaged a ....
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....ra vires the provision of Section 54(3) of the CGST Act, 2017." The High Court therefore directed the Union Government to allow the claim for refund made by the petitioners before it, considering unutilised ITC on input services as part of "Net ITC" for the purpose of calculating refund in terms of Rule 89(5), in furtherance of Section 54(3). 5 By its judgment dated 21 September 2020, in Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India Writ Petition Nos 8596, 8597, 8602, 8603, 8605 and 8608 of 2019 and connected cases the Division Bench of the Madras High Court came to a contrary conclusion, after having noticed the view of the Gujarat High Court, which it has declined to follow. The Madras High Court has concluded that "63... (1) Section 54(3)(ii) does not infringe Article 14. (2) Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislati....
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....Goods and Services Tax (Second Amendment) Rules 2017- Notification No.10/2017- Central Tax by the Government of India, Ministry of Finance, Department of Revenue, Central Board Indirect tax and Customs which came into force on 1 July 2017. Rule 89(4) and Rule 89(5) were in the following terms: "(4) [...] (B) "Net ITC" means input tax credit availed on inputs and input services during the relevant period; [...] (E) "Adjusted Total turnover" means the turnover in a State or a Union territory, as defined under sub-section (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period; (5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula: - Maximum Refund Amount= {(Turnover of inverted rated supply of goods) x Net ITC / Adjusted Total Turnover} − tax payable on such inverted rated supply of goods Explanation:- For the purposes of this sub rule, the expressions "Net ITC" and "Adjusted Total turnover" shall have the same meanings as assigned to them in sub-rule (4)." ....
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.... (emphasis supplied) The above sequence indicates that the definition of the expression 'Net ITC' in Rule 89(5) originally meant "input tax credit availed on input and inputs services". By the amendment of 18 April 2018, the definition of 'Net ITC' was substituted so as to mean ITC availed on inputs, with prospective effect. On 13 June 2018, this definition was made applicable with retrospective effect from 1 July 2017. 10 Before we proceed to analyse the submissions and formulate the points for consideration, it is necessary to emphasise at the outset that one of the core issues in the present batch of cases would turn upon the interpretation of the expression "inputs" in Section 54(3)(ii) of CGST Act and the definition of "Net ITC" in the amended Rule 89(5). During the course of the submissions, in the interest of maintaining clarity, Counsel on both sides used the expression 'input goods' while dealing with goods that are used as inputs and 'input services' while dealing with services that are used as inputs. We propose to use the same formulation to ensure conceptual clarity while distinguishing between goods which are used as inputs and services which are used as input....
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....) is as follows: (a) The opening clause permits a registered person to claim refund of any unutilised ITC at the end of any tax period. (b) The main clause permits: i. a claim; ii. in the nature of refund; iii. of any unutilized ITC; and iv. at the end of the tax period. (ii) Section 54(3) contains three provisos, out of which the first proviso falls for interpretation in this case. The three provisos share common features which indicate that these provisos are in the nature of restrictions and not conditions (or qualifications); (iii) The provisos to Section 54(3) should be construed as restrictions for the following reasons: (a) The expression employed in the main clause of Section 54(3) is 'claim' whereas the provisos restrict this ambit by the use of the expression 'allowed'. The expression 'allowed' appears in all the three provisos; (b) The main clause of Section 54(3) uses the expression "any unutilised ITC". On the other hand, the expression 'any' is conspicuous by its absence in all the provisos; (c) The main clause of Section 54(3) uses the expression "a registered person ma....
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....uage, which is missing; (d) The expression 'credit' has to be read along with 'inputs' and cannot be read as to extend a refund to input services and capital goods also, which are expressly not referred to in the proviso; (e) 'The credit' in sub clause (ii) can go only with the expression 'inputs' and excludes accumulation of any credit on account of rate of tax on input services or capital goods; (f) When there is an express inclusion limited only to the credit accumulation arising out of 'inputs', it would not be permissible to include input services and capital goods in the face of the statutory provision. What has not been included in the statute should not be included by way of judicial interpretation; (vi) The reason why Parliament has adopted the expression 'unutilised ITC' in the main part of Section 54(3) and the first proviso, but has chosen to employ only the expression 'inputs' is as follows: (a) There is a significant difference between the main provision and the first proviso even in the use of the expression 'unutilized ITC'. The expression 'any' in the main Section is absent in the first proviso with the further limitatio....
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.... restriction and not as a qualification. If the intent of Parliament was to grant a refund arising both out of input goods and input services even in the case of inverted tax structure, it would have defined refund in Explanation-I at par with zero rated supplies and there was no need to limit it only to one situation of the credit accumulation arising on account of 'inputs'. D.1.3. Part III- Legal Propositions (i) Article 265 of the Constitution provides that no tax shall be levied or collected except by authority of law. There being no challenge either to the levy or collection of taxes in these cases, taxes paid into the coffers of the Union Government or the States become the property of the Union/States; (ii) The refund of taxes is neither a fundamental right nor a constitutional right. The Constitution only guarantees that the levy should be legal and that the collection should be in accordance with law. There is no constitutional right to refund. Refund is always a matter of a statutory prescription and can be regulated by the statute subject to conditions and limitations; (iii) Even in the case of an illegal levy or a levy which is unconstituti....
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....ir Singh, learned ASG has adopted the submissions of Mr N Venkataraman, learned ASG. D.2 Assessees 13 Mr V Sridharan, learned Senior Counsel appearing on behalf of the assessee- Appearing in SLP (Civil) No 14801 of 2020 submitted: (i) The assessee is, inter alia, engaged in the manufacture and supply of footwear which attracts output tax (goods and services tax-"GST") at the rate of 5%; (ii) The assessee, inter alia, procures input goods such as synthetic leather, PU Polyol and input services such as job work service, goods transport agency service on payment of applicable GST for use in the course of business and avails ITC on the GST paid thereon. A majority of the input goods and input services attract tax at the rate of 12% or 18%; (iii) The rate of GST paid by the assessee on procurement of input goods and input services is higher than the rate of tax payable on their outward supply of footwear. Therefore, despite utilization of credit for payment of GST on outward supply, there is an accumulation of unutilized ITC in the electronic credit ledger of the assessee; (iv) The assessee applied for refund of such unutilised accumulated ITC u....
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....excise duty, service tax and value added tax legislation provide for taxes on value addition and are destination based-consumption taxes. These are not charges on the business but on the consumer. Though the erstwhile tax legislation, prior to the enforcement of the Constitution (One Hundred and First Amendment) Act 2016, was based on the principle of value addition and consumption tax, there was no seamless flow of credit between Central and State levies. This anomaly was sought to be addressed by the constitutional amendment and by the legislation which has been enacted in pursuance of it; (iii) The purpose of the One Hundred and First Constitutional Amendment was: (a) to replace a number of indirect taxes being levied by the Union Government and the State Governments; (b) to obviate and remove the cascading effect of taxes; and (c) to provide for a common national market for goods and services. (iv) The Statement of Objects and Reasons accompanying the bill introducing the CGST Act also emphasised that there would be a seamless transfer of ITC from one stage to another in the chain of value addition; (v) These principles reaf....
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.... before the GST legislation saw the light of the day; (xii) A near perfect GST legislation provides for refund of ITC in a situation involving an inverted duty structure. The provisions for refund ensure that anomalies in tax rates do not result in distortions to the fundamental features of GST which remains a true consumption tax. ITC may accumulate for a variety of reasons including (a) inverted duty structure, that is, GST on output supplies is less than the GST on the input supplies; (b) stock accumulation; (c) capital goods; and (d) partial reverse charge mechanism for certain services; (xiii) The cascading effect or sticking credit may arise on account of higher taxes paid on input goods or input services. Refund of unutilized ITC will ensure the elimination of the cascading effect of taxes in a true sense; (xiv) Section 54(3) has been enacted to achieve the objective of removing the cascading effect of unutilized ITC. Section 54(3) provides for refund of "any unutilised input tax credit" but the refund is available in only two situations namely, (a) zero rated supplies; and (b) inverted duty structure. The quantum of refund is provided by the main ....
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....nd input services are included; (c) The proviso indicates the 'cases' in which refund will be eligible. The expression 'cases' means situations or circumstances; (d) Clause (ii) of the first proviso commences with the expression "where" which signifies that what follows will be a situation or aspect of something; (e) The statutory provision must be read as a whole and in the context of other provisions. All the three provisos refer to cases in which refund is allowed or, as the case may be, not allowed and do not refer to the quantum of refund; (f) Clause (ii) of the proviso refers to "the credit". The use of the definitive article clearly indicates that the reference is to unutilised ITC already mentioned in the main part of Section 54(3). The expression 'the' signifies one particular sum or credit and any attempt to bifurcate it into credit on input goods and input services will produce anomalous results; (g) The expression 'accumulated' signifies the credit balance which is unutilized after credit has been availed and utilised for making payments on output tax on outward supplies; (h) Clause (ii) of the proviso uses the words....
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....ra vires: (a) Rule 89(5) originally provided for refund of ITC paid both on input goods and input services but it was amended with retrospective effect to restrict refund only to ITC availed on input goods; (b) After the amendment in terms of the formula, the ratio of proportionate turnover is applied only to ITC availed on input goods. However, after arriving at the proportionate value, the entire amount of tax paid on output supplies is deducted. The formula erroneously assumes that the entire output tax will be paid from ITC availed on input goods and the credit on input services will not be utilised for payment of output tax. If the rule took into computation ITC availed on both input goods and input services, both parts of the formula would be comparable and would result in a correct amount of unutilised ITC attributable to an inverted duty structure. The rule is ultra vires Section 54(3) since it restricts the computation of refund only by taking into account the credit availed on input goods. Section 54(3) provides for entitlement to refund, its quantum and the cases in which the refund is to be granted. Section 54(3) being a code in itself, there is no ref....
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.... (e) However, Rule 89(5) in the garb of fixing a formula for determining pro-rata the amount of credit relatable to the inverted duty structure vis-à-vis total turnover has restricted the refund to ITC on input goods by denying it on input services. This has been done by defining 'Net ITC' to mean ITC availed on all 'inputs', thus overlooking ITC relatable to input services. Such a rule cannot be treated as one for carrying out the purpose of the CGST Act; (xxi) A delegated legislation can be struck down as ultra vires of a principal statute. The laying of delegated legislation before Parliament does not confer any validity on such ultra vires rules. The process of laying rules before Parliament and making them subject to modification or annulment cannot be equated with legislation which has the assent of the President, or the Governor, as the case may be. The doctrine of ultra vires will apply even if a resolution is passed by Parliament approving or modifying the rules. Though, the CGST Rules have been laid before Parliament, any part which is ultra vires the CGST Act is liable to be struck down; (xxii) The fact that the rules have been recommended b....
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....input services for the purpose of Section 54(3); (c) in relation to zero rated supplies, the expression refund in Explanation-I to Section 54 is clarificatory though it uses the words "inputs" and "input services"; (d) The right to refund in the case of zero-rated supplies arises in Section 16(3)(a); (e) The provision uses the phrase "refund of unutilised ITC in accordance with Section 54"; and (f) The meaning of the term 'refund' for both export and domestic supplies is one and the same. (iii) The construction of Section 54(3) must be based on the following circumstances: (a) The substantive part deals with the quantum of refund. The proviso is not a restriction but merely prescribes threshold conditions; (b) Threshold conditions are evident from the use of the expression "in cases"; (c) Each of the three provisos lays down (i) situations; and (ii) conditions, as evident from the following table: Situation Condition Proviso reference Export of goods and services i.e. Zero rated supply Supplies made without payment of tax First Proviso, Clause (i) Domestic supplies (a) Accumulation of un....
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.... that such taxes are not a permanent cost to the business and that businesses are pass through entities. The essential character is of an economically neutral tax through a seamless flow of credit; (vi) A contextual interpretation of Section 54(3) must look at the overall scheme of the statute. The substantive part of Section 54(3) deals with the quantum of credit which is amplified by three attributes: (a) it connotes a finite sum and thus a quantum, since a time period is prescribed for identifying such quantum by the use of the phrase "at the end of any period"; (b) Section 54(3) needs to be read contextually with sub-Sections (4), (5) and (6) of Section 49 and Rule 86(3) and Rule 89(3); and (c) Both the GST Council and the Union Government also understood that the quantum of refund was the entire unutilised ITC and not only ITC accumulated on account of input goods. This is evident from Notification No. 5/2017 dated 28 June 2017. If the exception contemplated in clause (ii) of the first proviso to Section 54(3) contemplates denial of the entire basket of unutilised ITC (as argued by the State) a fortiori the first part of clause (ii) should b....
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....antive provision for zero rated supplies and a separate provision for domestic supplies. Since that has not been done, both cases derive their entitlement to refund of unutilised ITC through the substantive provision; (xv) Section 54(3) is not akin to an exemption but is aimed at achieving tax neutrality; (xvi) Reliance on the decision of the nine judge Bench in Mafatlal Industries Limited v. Union of India (supra) is out of context since what is being claimed as a refund is not contrary to the statutory drill, but a refund through an appropriate construction of the statute; (xvii) The main submissions, in summation, are that: (a) The expression 'input' in the proviso if read contextually, and not by the strict statutory definition, would cover both input goods and input services; (b) Grammatically 'input' covers labour and material and is opposite to 'output'; (c) Use of the word "output supplies" as opposed to the defined expression "outward supplies" (Section 2(83)) emphasises the legislative intent to use common parlance words; (d) The substantive part of Section 54(3) should be construed to provide for the quantum ....
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....s of the same class would be a class legislation which is hit by Article 14; iv. To form a part of the same class, the claimant's position should be substantially similar or in like circumstances, and conditions need not be identical; and v. In order to ascertain whether the persons are similarly placed one must look beyond classification and into the purpose of the law. (xx) Goods and services, though defined separately, are treated substantially in a similar manner in several aspects both in the Constitution and in the CGST Act; (xxi) In examining discriminatory treatment, it is the real effect of the provision which must be considered: (a) The real effect of the provision is to create an economy which does not perpetuate a harmonized structure of GST or a harmonized national market for goods and services, which is contrary to the constitutional object of GST as provided in Article 279A(6); and (b) The effect that goods are tangible while services are intangible does not bear any reasonable relation to the object of the legislation or to Article 279A(6). According to the submission, equal laws in respect of refunds of taxes in....
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....eek to harmonise goods and services and remove the cascading effect of taxes. Secondly, the Statement of objects and reasons associated with the constitutional amendment and the Bill introducing the CGST Act emphasised the need to treat goods and services as one combined category. The concept of one nation one tax introduced by GST laws cannot be ignored only at the time of refund; (ii) The proviso to Section 54(3) speaks only of categories of cases where refund would be available. It does not speak of a restriction on the quantum of refund. This is for the following reasons: (a) The quantum is determined by the main sub-section (3), which speaks of "refund of any unutilised input tax credit"; (b) The first proviso employs the word "cases" ["no refund of unutilised input tax credit shall be allowed in cases other than"] thus making it clear that it only lists categories of cases, and does not deal with quantum of credit; (c) The first proviso does not mention "credit to the extent of" or "credit of an amount equal to" or any other such wording indicative of quantum; (d) Where the legislature intended to advert to the quantum, it has used....
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....ble property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract" Clause 6(a) of Schedule II provides: "6. Composite supply The following composite supplies shall be treated as a supply of services, namely:- works contract as defined in clause (119) of section 2." (vii) Further, Article 366(29A) of the Constitution, which provides for tax on sale or purchase of goods and which treats six kinds of supplies as deemed sales of goods, pertains to and is part of the erstwhile Entry 54 of List II which deals only with goods. Article 366(29A) reads as follows: "(29A) tax on the sale or purchase of goods includes (a) a tax on the transfer, otherwise than in pursuance of a contact, of property in any goods for cash, deferred payment or other valuable consideration; (b) a tax on the transfer of property in goods (whether as goods or in some other form) invoked in the execution of a works contract; (c) a tax on the delivery of goods on hire purchase or any system of payment by instalments; (d) a tax on the transfer of the right to use any....
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....d assuming that the words "inputs" means only input goods and not input services, it is stated that even proceeding on the basis that the use of the words "on account of" suggests the requirement of a causal relationship between the higher rate of input goods and the accumulation of credit, once such a relationship is present, then the entire accumulation is available as refund, rather than just the portion relatable to input goods. To elaborate: (a) Parliament did not state "the credit has accumulated solely/only/entirely on account of rate of tax on inputs being higher than the rate of tax on output supplies."; (b) Thus, all that is required is that there is accumulation and that the tax on input goods is higher than the output supplies. If these two criteria are met, it follows logically that at least some portion of the accumulation would be on account of the higher rate of input services; and (c) Thereupon, the entire accumulation would be available as refund in line with the main sub-section (3); and (xi) The impugned notifications/delegated legislation, Notification No. 21/2018-CT (amending Rule 89(5)) dated 18 April 2018 and Notification ....
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....his happens because a discrimination results between assessees who have only inverted rated supplies and those who have other supplies; (ii) ITC is available both on input goods and input services; (iii) At the end of every tax period, it is possible to note how much ITC has arisen from input goods or input services. However, once a credit in the electronic ledger is utilised, it is not possible to bifurcate what remains between input goods and input services; (iv) In the above backdrop, the manufacturer should be allowed to utilise the ITC on input services first for the payment of taxes; and (v) The formula, as it stands, presumes that the outward tax liability is paid out of the ITC accumulated only on account of input goods. Thus, what is granted by the statute in Section 16 is indirectly taken away by the formula prescribed in the rule. Thus, an order of utilization of credit should be provided for payment of taxes to avail of credit on input services. In other words, in the formula in Rule 89(5) the following words should be read in at the end: "after utilising the input tax credit on input services pertaining to such inverted rate supply o....
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.... 54 are fulfilled. There is no legal basis for the artificial dissection of such a balance; (iv) If the rate of tax on inputs is higher than the rate of tax on output supplies, the entire unutilized ITC is "on account" of such circumstance and the entire balance of tax credit is required to be refunded. The expression 'on account of' cannot be read to mean 'to the extent of' particularly when it is not possible to compute the unutilized ITC attributable to input goods or services; (v) There are two different connotations of the term 'input'. The first distinguishes it as goods vis-a-vis services while the second distinguishes it from output. The expression 'input tax' and 'input tax credit' have been defined to include tax in respect of both goods as well as services and there is no phrase called "input service tax credit". The expression 'inputs' in the proviso to Section 54(3) has been used in the second sense to distinguish it from output; and (vi) GST is a destination-based consumption tax and the imposition of the tax is on supply. A supplier is liable to pay tax only to the extent it is payable on the output supply of goods or services and the refun....
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....which duty can be paid out of credit on input goods and input services only and hence the credit of input services will keep on accumulating. Rule 89(5) must allow the taxpayers to utilise and make payment through input services first and then the balance through credit on inputs; and (iii) It is paradoxical that while on the one hand the definition of net ITC has been amended to exclude ITC availed on input services, on the other hand, turnover of inverted supply of services and tax payable on such inverted rated supply of services has been included in the formula for calculating the maximum amount of refund. D.3 Rejoinder by Union of India 22 In response to the submissions of the assessees, Mr N Venkataraman, the learned ASG, has submitted the following propositions: (i) The submission of the respondents that Article 279A(6) of the Constitution mandates a harmonised structure of GST and obligates parity of treatment amongst goods and services is misplaced for the following reasons: (a) Article 279A(6) does not compel parity of treatment between goods and services. In fact, Article 366(12) deals with the definition of 'goods', Article 366(26A) deal....
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.... (v) Prior to the enactment of GST, MODVAT/CENVAT Rules contained formulae to determine the quantum of eligibility of credit. Similarly, to legally dissect the homogenous unutilised ITC, a formula may be resorted to determine eligibility, restrictions, or refunds. E Constitutional Scheme of GST 23 The idea which permeates GST legislation globally is to impose a multi stage tax under which each point in a supply chain is potentially taxed. Suppliers are entitled to avail credit of tax paid at an anterior stage. As a result, GST fulfils the description of a tax which is based on value addition. Value addition is intended to achieve fiscal neutrality and to obviate a cascading effect of taxation which traditional tax regimes were liable to perpetuate. In a sense therefore, the purpose of a tax on value addition is not dependent on the distribution or manufacturing model. The tax which is paid at an anterior stage of the supply chain is adjusted. The fundamental object is to achieve both neutrality and equivalence by the grant of seamless credit of the duties paid at an anterior stage of the supply chain. 24 The State VAT legislation in India represented a significant stage i....
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....t of taxes; and (2) providing for a common national market for goods and services. An extract from the Statement of Objects and Reasons is set out below: "The Constitution is proposed to be amended to introduce the goods and services tax for conferring concurrent taxing powers on the Union as well as the States including Union territory with Legislature to make laws for levying goods and services tax on every transaction of supply of goods or services or both. The goods and services tax shall replace a number of indirect taxes being levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The proposed Central and State goods and services tax will be levied on all transactions involving supply of goods and services, except those which are kept out of the purview of the goods and services tax." 27 Now, it is in this backdrop that it becomes necessary to advert to the constitutional amendment and the resulting legislation. The One Hundred and First Amendment to the Constitution is a watershed moment in the evolution of cooperative federalism. Since its origin, the Cons....
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...., shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the Goods and Services Tax Council." Parliament has the exclusive power to make laws with respect to goods and services tax where the supply of goods or of services, or both takes place in the course of inter-State trade or commerce. With the enactment of the One Hundred and First Constitutional Amendment, Entry 84 of the Union List has been restructured to incorporate duties of excise on the following goods manufactured or produced in India, namely - (a) petroleum crude; (b) high speed diesel; (c) motor spirit (commonly known as petrol); (d) natural gas; (e) aviation turbine fuel; and (f) tobacco and tobacco products. 30 Entry 54 of the State List has been restructured to provide for taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, other than in the course of inter-State trade or commerce. 31 Article 246A has brought about several changes in the constitutional scheme: ....
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....s and Services Tax levied on supplies in the course of inter-State trade or commerce under article 269A and the principles that govern the place of supply; (d) the threshold limit of turnover below which goods and services may be exempted from goods and services tax; (e) the rates including floor rates with bands of goods and services tax; (f) any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster; (g) special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and (h) any other matter relating to the goods and services tax, as the Council may decide." Clause (6) of Article 279A stipulates that: "(6) While discharging the functions conferred by this article, the Goods and Services Tax Council shall be guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services." 34 Article 279A(6) indicates that in the discharge of its functions, the GST Council is ....
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....sion. Thus, the expression 'goods' is defined to mean every kind of movable property other than money and securities. It also includes certain other items incorporated in the inclusive part ("but includes") of the definition. The expression 'goods' is broadly defined. The expression 'services' is defined in Section 2(102) in the following terms: "Section 2(102) "services" means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. Explanation: For the removal of doubts, it is hereby clarified that the expression "services" includes facilitating or arranging transactions in securities." The expression 'services' is thus distinguished from goods since the expression means "anything other than goods". 37 The definition of the expression 'input' is contained in Section 2(59) which reads thus: "2(59) "input" means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of busine....
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....the above definitions there are three other definitions which must be noted at this stage. The expression 'inward supply' is defined in Section 2 (67) in the following terms: "2(67) "inward supply" in relation to a person, shall mean receipt of goods or services or both whether by purchase, acquisition or any other means with or without consideration." 41 The expression 'output tax' is defined in the following terms: "2(82) "output tax" in relation to a taxable person, means the tax chargeable under this Act on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis" The expression 'outward supply' is defined in Section 2(83) thus: "2(83) "outward supply" in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business." 42 Again, as in the case of inward supply, the expression "outward supply" incorporates the supply of goods or services or both. The expression "output tax" in other wor....
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....bed; (aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under Section 37 (b)he has received the goods or services or both. Explanation.-For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services- (i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise; (ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person. (c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and (d) he has furnished t....
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.... fees or any other amount payable under the provisions of the Act or its rules in the manner and subject to conditions and within such time as is prescribed. Similarly, sub-Section (4) of Section 49 stipulates that the amount available in the electronic credit ledger can be used for making payment towards output tax under the CGST Act or under the IGST Act in such manner and subject to the conditions and within such time as is prescribed. Sub-Section (5) of Section 49 spells out the priorities according to which the amount of ITC available in the electronic credit ledger can be utilized. Sub Section (6) of Section 49 is significant and provides as follows: "(6) The balance in the electronic cash ledger or electronic credit ledger after payment of tax, interest, penalty, fee or any other amount payable under this Act or the rules made thereunder may be refunded in accordance with the provisions of Section 54." 48 The provisions of Section 16 and Section 49 indicate the following position: (i) The ITC in the electronic credit ledger may be availed of for making any payment towards output tax under the CGST Act or under the IGST Act; (ii) The amount av....
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....e Government on the recommendations of the Council: Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty: Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies." 50 The submission which was urged by the assessees before the Gujarat and Madras High Courts, as well as this Court, is that under the substantive part of Section 54(3), Parliament has contemplated that the claim of refund may extend to any unutilized ITC. ITC means credit of input tax and since 'input tax' is defined with reference to the tax charged on the supply of goods or services or both, a refund may be claimed not only of the tax charged on input goods but also input services as a whole. According to the Revenue, the first proviso to Section 54(3) is a restriction. On the other hand, assessees have urged that the first proviso sets out only a condition or provision for eligibility and once it is fulfilled, the refund is available on....
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....is defined in Section 2(59) to mean goods other than the capital goods. 'Output supplies' is not defined in the statute. As seen above, Section 16 stipulates the eligibility and conditions for availing ITC. ITC accumulates when the credit cannot be utilized either partly or in whole and this may occur for a variety of reasons. The credit of ITC may accumulate for several reasons. Without spelling out an exhaustive list of circumstances, the accumulation may be due to: (a) an inverted duty structure when the GST on output supplies is less than the GST on inputs; (b) stock accumulation; (c) capital goods; and (d) partial reverse mechanism for certain services. There could be other reasons as well, such as excessive discounts or predatory pricing. 54 The distortion caused by unutilized accumulated ITC was noticed before the advent of the GST regime, in the context of the State VAT legislation under the erstwhile regime. A White Paper on State-level Value Added Tax by the Empowered Committee of State Finance Ministers dated 17 January 2005 contemplated that if any credit remained unutilized in a month, it will be carried forward. If even at the end of second year there is an excess ....
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....mate customer who should bear the burden of taxes. However, the report noticed that there can be cases where there is an accumulation of credit due to an inverted duty structure. The report envisaged that there would fewer rates of taxes and exemptions under GST and hence, the chances of an inverted duty structure would be "minimal". At the same time, it recommended a refund of carried forward ITC in the following terms: "(H) REFUND OF CARRY FORWARD INPUT TAX CREDIT: i) As stated earlier, ITC is allowed to remove cascading and under modern VAT laws, tax is charged on value addition only and tax is not charged on tax. It is for this reason that the ultimate consumer is liable to bear the tax burden. ii) It is noted that the ITC may accumulate on account of the following reasons : a) Inverted Duty Structure i.e. GST on output supplies is less than the GST on the input supplies; b) Stock accumulation; c) Capital goods; and d) Partial Reverse charge mechanism for certain services. iii) As regards the accumulated ITC attributed to accumulation of stock or capital goods, it is recommended that GST Law may provide tha....
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....he first proviso; (iii) The impact of the first proviso is that a refund of unutilized ITC shall be allowed only in cases falling under (i) and (ii). The expression 'only' in the previous sentence is not a judicial addition to statutory language but follows plainly from the expressions "no refund" of unutilized ITC shall be allowed "in cases other than"; (iv) The expression "in cases other than" is a clear indicator that clauses (i) and (ii) are restrictive and not conditions of eligibility. A refund, in other words, can be allowed in the two contingencies spelt out in clauses (i) and (ii) of the first proviso; (v) There is a clear distinction between clause (i) and clause (ii) of the first proviso: (a) in the case of exports, the contingency is zero-rated supplies without any distinction between input goods or input services; (b) in contrast for domestic supplies, clause (ii) relates to the accumulation of credit on account of rate of tax on inputs being higher than the rate of tax on output supplies; (vi) The legislative draftsperson has made a clear distinction between clause (i) and clause (ii) of the first proviso and it was in this context ....
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....rmonized structure of GST and a harmonized national market for goods and services. Clause (12A) of Article 366 provides for the levy of GST on both- goods and services. In this context, it was urged that in any fiscal regime, there are five essential components comprising of (a) taxable events; (b) taxable persons; (c) measure of tax; and (d) rate of tax; and (e) administrative machinery. In all these, it is urged that the CGST makes absolutely no distinction between goods and services. Section 16 which provides for the utilization of ITC makes no distinction between goods and services. The pale of the law, it was urged, applies substantive provisions similarly in the case of goods as well as services except as regard rates. But as regards rates, it was urged that even within the category of goods, the rates may or do vary. The legislature, for the first time, introduced anti-profiteering provisions based on the precept that a reduction in the rate of tax must be passed on to the consumer. When neutrality was not intended, as in the case of Section 17(5), a specific provision has been made by the legislature where the ITC cannot be availed of in those cases. Once the threshold of S....
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....ntant or a broker is an activity undertaken by him based on his performance and skill. This is from the point of view of the professional. However, from the point of view of his client, the chartered accountant/broker is his service provider. The value addition comes in on account of the activity undertaken by the professional like tax planning, advising, consultation, etc. It gives value addition to the goods manufactured or produced or sold. Thus, service tax is imposed every time service is rendered to the customer/client. This is clear from the provisions of Section 65(105)(zm) of the Finance Act, 1994." 58 The above formulation of the doctrine of equivalence dwelt on the economic rationale underlying the enactment of service tax. The economic rationale is based on the equivalence of goods and services, both of which are instruments for the satisfaction of human needs. The principle recognizes that there is, in economic terms, an equivalence between production or manufacture of saleable goods and production of marketable and saleable services. The issue before this Court, however, is whether an a priori equivalence between goods and services for the purpose of bringing both ....
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....fund of excess input tax credit. According to the authors: "II. Treatment of Excess Input Credits -Carry Forward, Offset, or Refund: As was discussed earlier and will be discussed in detail in Chapter 7, most countries define the jurisdictional reach of their VATs under the destination principle. Applying the destination principle, exports are free of tax (zero rated). As a result, exporters commonly report excess input VAT in their periodic VAT returns. In addition, even registered persons making sales taxable at a positive rate may experience occasional excess input VATs, such as when they make capital purchases generating substantial input credits or when they increase their inventory as part of an expansion of their businesses. There is an implicit assumption in VAT systems that registered persons will recover input VAT used in making taxable sales so that the input VAT does not enter into the pricing structure for those sales. To accomplish that goal, a normative or well-structured VAT must grant registered persons the right to recover excess input VATs within a reasonable period of time after incurring the input t(a)x (sic). ... In the EU, ....
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....e Court in the fiscal arena to compel Parliament to go further and to do more by, for instance, expanding the coverage of the legislation (to liquor, stamp duty and petroleum) or to bring in uniformity of rates. This would constitute an impermissible judicial encroachment on legislative power. Likewise, when the first proviso to Section 54(3) has provided for a restriction on the entitlement to refund it would be impermissible for the Court to redraw the boundaries or to expand the provision for refund beyond what the legislature has provided. If the legislature has intended that the equivalence between goods and services should be progressively realized and that for the purpose of determining whether refund should be provided, a restriction of the kind which has been imposed in clause (ii) of the proviso should be enacted, it lies within the realm of policy. 61 The submission which has been urged on behalf of the assessees is that registered persons constitute a class within the meaning of sub-Section (3) of Section 54 and each of them is entitled to claim a refund of unutilized ITC whether its origin lies in input goods or input services. In other words, it has been urged that....
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....GST Act defines the expression 'input' in Section 2(59) by bracketing it with goods other than capital goods, it is true that the plural expression 'inputs' has not been specifically defined. But there is no reason why the ordinary principle of construing the plural in the same plane as the singular should not be applied. To construe 'inputs' so as to include both input goods and input services would do violence to the provisions of Section 54(3) and would run contrary to the terms of Explanation-I which have been noted earlier. Consequently, it is not open to the Court to accept the argument of the assessee that in the process of construing Section 54(3) contextually, the Court should broaden the expression 'inputs' to cover both goods and services. F.4 Construing the proviso 63 Provisos in a statute have multi-faceted personalities. As interpretational principles governing statutes have evolved, certain basic ideas have been recognized, while heeding to the text and context. Justice GP Singh, in his seminal text, Principles of Statutory Interpretation- Justice GP Singh, PRINCIPLES OF STATUTORY INTERPRETATION 215-234, (14th Ed., Lexis Nexis) formulates the governing principl....
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....ot travel beyond the provision to which it is a proviso. "It is a cardinal rule of interpretation", observed BHAGWATI, J., "that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other." Id at p. 221 (iii) Where the substantive provision of a statute lacks clarity, a proviso may shed light on its true meaning: "If the enacting portion of a section is not clear, a proviso appended to it may give an indication as its true meaning. As stated by LORD HERSCHELL: " Of course a proviso may be used to guide you in the selection of one or other of two possible constructions of the words to be found in the enactment, and show when there is doubt about its scope, when it may reasonably admit of doubt as to having this scope or that, which is the proper view to take of it." Id at p. 223 (iv) An effort should be made while construing a statute to give meaning both to the main enactment and its proviso bearing in mind that sometimes a proviso is inserted as a matter of abundant caution: "The general....
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....P (1973) 1 SCC 216 where Justice KS Hegde, speaking for a four judge Bench of this Court observed that while ordinarily, a proviso is in the nature of an exception, the precedents indicate that sometimes a proviso is in the nature of a separate provision, with a life of its own. The Court held: "22... Ordinarily a proviso to a section is intended to take out a part of the main section for special treatment. It is not expected to enlarge the scope of the main section. But cases have arisen in which this Court has held that despite the fact that a provision is called a proviso, it is really a separate provision and the so-called proviso has substantially altered the main section. In CIT v. Bipinchandra Maganlal & Co. Ltd., Bombay [AIR 1961 SC 1040 : (1961) 2 SCR 493 : (1961) 41 ITR 290] this Court held that by the fiction in Section 10(2)(vii) second proviso read with Section 2(6-C) of the Indian Income Tax Act, 1922 what is really not income is, for the purpose of computation of assessable income, made taxable income." Besides the decision in CIT v. Bipinchandra Maganlal AIR 1961 SC 1040, the Court in Hiralal Rattanlal (supra) adverted to the earlier decisions in State o....
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....TC remains unutilized even after setting off of available ITC for the payment of output tax liability. Where there are multiple inputs attracting different rates of tax, in the formula provided in rule 89(5) of the CGST Rules, the term "Net ITC‟ covers the ITC availed on all inputs in the relevant period, irrespective of their rate of tax. b) The calculation of refund of accumulated ITC on account of inverted tax structure, in cases where several inputs are used in supplying the final product/output, can be clearly understood with help of the following example: i. Suppose a manufacturing process involves the use of an input A (attracting 5 per cent GST) and input B (attracting 18 per cent GST) to manufacture output Y (attracting 12 per cent GST). ii. The refund of accumulated ITC in the situation at (i) above, will be available under section 54(3) of the CGST Act read with rule 89(5) of the CGST Rules, which prescribes the formula for the maximum refund amount permissible in such situations. iii. Further assume that the claimant supplies the output Y having value of Rs. 3,000/- during the relevant period for which the refund is being claime....
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.... first proviso, (where the credit is accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies), input services must be read into the term "inputs". The assessees argue that the Departmental understanding, as reflected in the circular, should be the basis of interpreting a statutory provision. Such an exercise would be impermissible, when its effect is to expand the area of refund contemplated by the first proviso to cover input services in addition to input goods despite statutory language to the contrary. Sub-Section (3) of Section 54 begins, in its main part, with the stipulation that a registered person may claim refund of any 'unutilised ITC at the end of any tax period'. Whether we construe the first proviso as an exception or in the nature of a fresh enactment, the clear intent of Parliament was to confine the grant of refund to the two categories spelt out in clauses (i) and (ii) of the first proviso. That clauses (i) and (ii) are the only two situations in which a refund can be granted is evident from the opening words of the first proviso which stipulates that "no refund of unutilised input tax credit shall be allowed in cases ot....
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....ised ITC has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies, Parliament has confined the refund in the manner which we have described above. While recognising an entitlement to refund, it is open to the legislature to define the circumstances in which a refund can be claimed. The proviso to Section 54(3) is not a condition of eligibility (as the assessees' Counsel submitted) but a restriction which must govern the grant of refund under Section 54(3). We therefore, accept the submission which has been urged by Mr N Venkataraman, learned ASG. F.5 Constitutional validity: The ultra vires doctrine 71 The submission which has been urged on behalf of the assessees is that if Section 54(3) is construed to confine a refund of unutilised ITC only to the extent that the accumulation arises on account of the rate of tax on inputs (meaning input goods) exceeding the rate of tax on outward supplies, the principles underlying Article 14 of the Constitution would be attracted and the statutory provision would suffer from the vice of arbitrariness. The submission is that this has become an incident of a class legislation: the class co....
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....de refunds on input services and it is not open to the Court to conjure up a reason. In support of the above submissions on constitutional validity, which have been urged by Mr Sujit Ghosh, learned Counsel, Mr Arvind Datar, learned Senior Counsel has urged that it would be paradoxical to posit on the one hand that goods and services are pari materia for the purpose of levy, collection and penalty but, that a distinction will be made between them for the purpose of refund. 75 As a matter of first principle, it is not possible to accept the premise that the guiding principles which impart a measure of flexibility to the legislature in designing appropriate classifications for the purpose of a fiscal regime should be confined only to the revenue harvesting measures of a statute. The precedents of this Court provide abundant justification for the fundamental principle that a discriminatory provision under tax legislation is not per se invalid. A cause of invalidity arises where equals are treated as unequally and unequals are treated as equals. Both under the Constitution and the CGST Act, goods and services and input goods and input services are not treated as one and the same and ....
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....s phraseology, but the real effect of its provisions. A legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory. Decisions of this Court on the matter have permitted the legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. 47. But, with all this latitude certain irreducible desiderata of equality shall govern classifications for differential treatment in taxation laws as well. The classification must be rational and based on some qualities and characteristics which are to be found in all the persons grouped together and absent in the others left out of the class. But this alone is not sufficient. Differentia must have a rational nexus with the object sought to be achieved by the law. The State, in the exercise of its governmental power, has, of necessity, to make laws operating differently in relation to different groups or classes of persons to attain certain ends and must, therefore, possess the....
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....nherent in every taxing statute as it has to draw a line somewhere and some cases necessarily fall on the other side of the line." 77 The principles governing a benefit, by way of a refund of tax paid, may well be construed on an analogous frame with an exemption from the payment of tax or a reduction in liability (Assistant Commissioner of Commercial Tax (Asst.) v. Dharmendra Trading Company (1988) 3 SCC 570). 78 In Elel Hotels and Investments Limited and Others v. Union of India (1989) 3 SCC 698, Justice MN Venkatachaliah (as the learned Chief Justice then was) held that: "20...It is now well settled that a very wide latitude is available to the legislature in the matter of classification of objects, persons and things for purposes of taxation. It must need to be so, having regard to the complexities involved in the formulation of a taxation policy. Taxation is not now a mere source of raising money to defray expenses of Government. It is a recognised fiscal tool to achieve fiscal and social objectives. The differentia of classification presupposes and proceeds on the premise that it distinguishes and keeps apart as a distinct class hotels with higher economic stat....
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....st sense proportional in their effect on those who are to bear the public charges that courts can interpose and arrest the course of legislation by declaring such enactments void." "Perfectly equal taxation", it has been said, "will remain an unattainable good as long as laws and government and man are imperfect." 'Perfect uniformity and perfect equality of taxation', in all the aspects in which the human mind can view it, is a baseless dream." 81 Parliament while enacting the provisions of Section 54(3), legislated within the fold of the GST regime to prescribe a refund. While doing so, it has confined the grant of refund in terms of the first proviso to Section 54(3) to the two categories which are governed by clauses (i) and (ii). A claim to refund is governed by statute. There is no constitutional entitlement to seek a refund. Parliament has in clause (i) of the first proviso allowed a refund of the unutilized ITC in the case of zero-rated supplies made without payment of tax. Under clause (ii) of the first proviso, Parliament has envisaged a refund of unutilized ITC, where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax o....
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.... Explanation- For the purposes of this sub-rule, the expressions- (a) Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and (b) Adjusted Total turnover shall have the same meaning as assigned to them in sub-rule (4)." G.1 The validity of Rule 89(5) of CGST Rules in exercise of the rule-making power under Section 164 of the CGST Act 84 A preliminary submission which has been urged by Mr V Sridharan, learned Senior Counsel is that the rule-making power under Section 164 of the CGST Act can only be used if specific authority for making the rule is granted by the particular section of the CGST Act. Elaborating on this submission, Mr V Sridharan has submitted that under the CGST Act, various sections expressly employ the word "prescribed" to indicate that rules may be formulated by way of delegated legislation for that particular section. As an instance, Mr Sridharan points out that Section 9 provides that the manner in which tax is to be collected may be 'prescribed'; Section 16(1) provides for conditions and restrictions for a....
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....e rule making authority to make rules for carrying out the provisions of the Act. G.2 The vires of Rule 89(5) vis-à-vis Section 54(3) of the CGST Act 86 The next submission which has been urged by Mr V Sridharan, learned Senior Counsel is that Rule 89(5) is not in line with Section 54(3). The rule, as retrospectively amended, is asserted to be ultra vires Section 54(3) in as much as it restricts the computation of refund by taking into account only the credit availed on input goods. Moreover, under Section 54(1), the CGST Rules can provide only the form and manner in which an application for refund can be made and the substantive provisions of the CGST Act cannot, it is urged, be curtailed by making a contrary rule. The above submission which seeks to apply the doctrine of ultra vires is based on the hypothesis that the rule is not in line with Section 54(3). The submission, in other words, is based on the assumption that Section 54(3) allows for a refund of unutilized ITC as a result of an inverted duty structure due to input goods as well as input services. 87 The second limb of Mr Sridharan's submission is that any rules framed under Section 164 of the CGST Act m....
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....irly concedes in his written note that a formula maybe required for bifurcating the accumulated ITC for the purpose of refund. According to the illustration which has been furnished by Mr Sridharan in his written note, where an assessee has supplies which fall under an inverted duty structure and supplies which do not, a refund of unutilized ITC can be availed of only related to the former but not the latter. A formula would be required to compute the ITC attributable to the two categories so that a refund is granted to the former and not the latter. Rule 89(5) estimates the refund attributable to the inverted duty structure by adopting a proportionate turnover basis, that is by dividing the turnover of inverted duty structure supplies by the adjusted total turnover and multiplying it with the 'Net ITC'. The submission proceeds to concede that the need and rationale for the formula contained in Rule 89(5) in considering the turnover of supplies relating to inverted duty structure vis-à-vis overall turnover is "understandable and reasonable". 90 The grievance however is that Rule 89(5) goes beyond the "provisions of the Act" when in the garb of fixing a formula, it restric....
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....this judgment, Clause (ii) of the first proviso is not merely a condition of eligibility for availing of a refund but a substantive restriction under which a refund of unutilized ITC can be availed of only when the accumulation is relatable to an inverted duty structure, namely the tax on input goods being higher than the rate of tax on output supplies. There is therefore no disharmony between Rule 89(5) on the one hand and Section 54(3) particularly Clause (ii) of its first proviso on the other hand. 93 For the sake of clarity, it is necessary to reproduce para 24.6 and para 24.7 of the written submissions of Mr V Sridharan: "24.5 Similarly, this... court has in several cases extended the benefit of exemption/ lower rate in case where such denial to a particular case was ultra vires or unconstitutional, thereby enlarging the scope of beneficial provision. 24.6 In the present case, challenge to the vires of Rule 89(5) is only because of definition of Net ITC in Explanation to the said rule which defines "Net ITC" as under: "Net ITC" shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for whic....
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....the formula prescribed under Rule 89(5) is not construed in the above manner, it is alleged that it will lead to inequality between taxpayers dealing with outward supplies involving only an inverted rate structure (single line of goods) and taxpayers dealing with outward supplies having both an inverted rate structure and those not having inverted rate structure. Thus, it has been submitted that the Court should read down the formula prescribed in Rule 89(5) to the effect that while calculating the refund entitlement as the difference between Net ITC and tax payable on such supplies having inverted rate structure, it is presumed that the ITC accumulated on account of input services be allowed to be used for payment of tax payable on inverted goods and services, and the remaining balance of tax, which is paid out of accumulated ITC on account of input goods, is deducted from Net ITC in the formula. 97 Mr G Natarajan's submission indicates an aberration where a registered person with a single product with an inverted duty structure is neither able to use the unutilized ITC for the payment of tax on output supply nor is allowed a refund. On the other hand, a registered person with ....
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....ply of goods and services" takes into account the entire tax payable on output supplies. In reality, the tax payable on output supplies would have been discharged by utilising the ITC on input goods and input services. However, the formula under Rule 89(5) presumes that nothing has been utilised from the ITC on input services and the entire tax on output supplies is discharged by utilising ITC on input goods. It was urged that although the stated objective of the formula is to grant refund of unutilised ITC accumulated on account of input goods, by deducting the entire sum of tax payable on output supplies, the quantum of such refund is reduced and the cascading effect of taxes is maximised. As a solution to the said anomaly, Mr Sridharan has proposed that for the purposes of Rule 89(5), an assumption must be made that ITC accumulated on account of input services, which is not refundable under Section 54(3), is used for discharging the output tax payable on inverted rate supply of goods and services. The remaining balance of output tax, must be then presumed to have been discharged from the ITC accumulated on account of input goods and it is only this remaining balance that should ....
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....m of eligibility of credit. Another instance is Rule 42 and 43 of the CGST Rules 2017 which provide specific formulae in restricting the ITC when a registered supplier uses input goods, input services and capital goods for purpose of business and other than business purposes. 102 The ASG, having justified the need for a formula, has then argued that a formula prescribed by delegated legislation may not be perfect and may have certain aberrations. However, a wide discretion is given to the policy makers in this regard and only if the formula is arbitrary and violative of Article 14 of the Constitution, can it be struck down. For this, the ASG has relied on the decision of a Constitution Bench of this Court in RK Garg v. Union of India (1981) 4 SCC 675, where it was observed that economic legislation ought not to be measured by abstract symmetry, since it is essentially empirical in nature and is based on experimentation. We note however, that the ASG has not refuted the anomalies point out by the Counsel for the assessees. 103 In our view, the justification of the formula under Rule 89(5) given by the ASG to create a legal bifurcation is valid. In this context, it would be mat....
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....he anomalies in the formula. In our view, the submission of Mr Sujit Ghosh, that the formula creates a distinction between suppliers having a higher component of input goods than those having a higher component of input services, and must be read down accordingly, must be rejected. The purpose of the formula in Rule 89(5) is to give effect to Section 54(3)(ii) which makes a distinction between input goods and input services for grant of refund. Once the principle behind Section 54(3)(ii) of the CGST Act is upheld, the formula cannot be struck down merely for giving effect to the same. 105 The aberrations which have been pointed out by the Mr Sridharan and Mr G Natarajan certainly indicate that the formula is not perfect. The formula makes a presumption that the output tax payable on supplies has been entirely discharged from the ITC accumulated on account of input goods and there has been no utilisation of the ITC on input services. While a similar formula is provided in Rule 89(4) with regard to zero rated supplies, in that case, the 'Net ITC' includes input goods and input services and thus, there is no imbalance between the different components of the formula. The formula pre....
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....as this admonition been more felicitously expressed than in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J., said in his inimitable style: "In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events - self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability." The Court must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry"; "that exact wisdom and nice adaption of remedy are not always possible" and that "judgment is largely....
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....at the formula may be read down as was done by this Court in Lakshmi Machine Works (supra). In this case, the Court was faced with a question of whether excise duty and sales tax were to be included in the 'total turnover', which was a denominator in the formula prescribed under Section 80-HHC(3) of the Income Tax Act 1961 for the purpose of arriving at the deduction from profits retained for export business. In order to arrive at the deduction, the formula apportioned business profits by the ratio of export turnover to total turnover. Various amendments had been made by the legislature to the formula in Section 80-HHC(3) to make the formula workable. The Court, speaking through Justice SH Kapadia (as the learned Chief Justice then was), observed that "21. According to The Law and Practice of Income Tax by Kanga and Palkhivala, the word "profits" in Section 28 should be understood in normal and proper sense. However, subject to special requirements of the income tax, profits have got to be assessed provided they are real profits. Such profits have got to be ascertained on ordinary principles of commercial trading and accounting. However, the Income Tax Act has laid down ce....
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....echnologies Limited (2018) 16 SCC 709, a two judge Bench of this Court considered whether, while calculating 'export profit' for the deduction under Section 10-A of the Income Tax Act 1961, software development charges are to be excluded from the definition of 'total turnover'. For calculating the export profit, the total profits of the business were apportioned by the ratio of export turnover to total turnover. The issue was complicated as these charges were allowed to be deducted from export turnover, which was a component of the total turnover and the numerator in the formula. However, the Revenue had denied the deduction from the total turnover, the denominator. The Court interpreted and revised the formula as otherwise it would lead to undesirable results. In doing so, Justice RK Agrawal observed that "16. The respondent Company has claimed deduction under Section 10-A as per certificates filed on Form 56-F. The respondent, while computing the deduction, has taken the same figure of export turnover as of total turnover. [...] 17. In the above backdrop, we are of the opinion that the definition of total turnover given under Sections 80-HHC and 80-HHE cannot be....
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....e not applicable. An argument was raised to "read down" the Rule by introducing the principle of audi alteram partem. Rejecting this argument, the Court, speaking through Justice CK Thakker, noted that "55. The doctrine of "reading down" is well known in the field of constitutional law. Colin Howard in his well-known work Australian Federal Constitutional Law states: Reading down puts into operation the principle that so far as it is reasonably possible to do so, legislation should be construed as being within power. It has the practical effect that where an Act is expressed in language of a generality which makes it capable, if read literally, of applying to matters beyond the relevant legislative power, the Court will construe it in a more limited sense so as to keep it within power." The Court after reviewing the judicial precedents on this point observed: "61. But it is equally well settled that if the provision of law is explicitly clear, language unambiguous and interpretation leaves no room for more than one construction, it has to be read as it is. In that case, the provision of law has to be tested on the touchstone of the relevant provisions ....
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....re, which is impermissible. Accordingly, we shall refrain from replacing the wisdom of the legislature or its delegate with our own in such a case. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same. H Conclusion 112 Having devoted our attention to the submissions at the Bar, we have come to the conclusion that the judgment of the Madras High Court needs to be affirmed by dismissing the appeals challenging that verdict while the appeals against the judgment of the Gujarat High Court by the Union of India should be allowed. 113 The Division Bench of the Gujarat High Court having examined the provisions of Section 54(3) and Rule 89(5) held that the latter was ultra vires. In its decision in VKC Footsteps India Pvt. Ltd. (supra), the Gujarat High Court held that by prescribing a formula in sub-Rule (5) of Rule 89 of the CGST Rules to execute refund of unutilized ITC accumulated on account of input services, the delegate of the legislature had acted contrary to the provisions of sub-Section (3) of Section 54 of the CGST Act which provides for a claim of refund of an....