In landmark judgement of Union of India and Ors Vs VKC Footsteps India Pvt Ltd, the Hon’ble SC has upheld the validity of provisions of Rule 89(5), CGST Rules 2017 by setting aside the judgement of Hon’ble Gujrat High Court which held that Rule 89(5) of the CGST Rules, 2017 are ultra vires of the Section 54(3) of the CGST, Act 2017. By upholding the validity, Hon’ble SC has affirmed the view taken by the Madras High Court in case of Tvl. Transtonnelstory Afcons Joint Venture.
In the present case the appellant was denied refund of unutilized ITC on input services in cases of inverted duty structure. Refund in cases of inverted duty structure is laid down in Section 54(3) of the CGST Act, 2017 (hereinafter referred as “the Act”) read with Rule 89(5) of the CGST Rules, 2017(hereinafter referred as “the Rules”).
The appellant in the present case challenged the vires of the Rule 89(5) of the Rules on the grounds that it is inconsistent with the Section 54(3) of the Act, to the extent it denies refund of input tax credit relatable to input services.
A bench of Justices D.Y. Chandrachud and M.R. Shah discussed the case at length and it was held that Section 54(3) of the Act excludes unutilised ITC that accumulated on account of input services.
The Ld. ASG submitted that refund of taxes is neither a fundamental right nor a constitutional right. Further, the Constitution of India only guarantees that levy should be legal and that the collection should be in accordance with law and refund is always a matter of statutory prescription and can be regulated by state subject to conditions and limitations, and there are no constitutional rights with respect to refund.
While pronouncing the judgement, the Hon’ble Supreme Court noted the following;
• It is clearly an area of law where judicial interpretation cannot be ahead of policy making.
• Fiscal policy ought not be dictated through the judgments of the High Courts or this Court and it is not the function of the Court in the fiscal arena to compel Parliament to go further and to do more. This would constitute an impermissible judicial encroachment on legislative power.
• 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.
• The practical effect of the formula might result in certain equities, but in the field of taxation, the court can only intervene to read down or to interpret a formula only if the same leads to absurdity or it is unworkable. However, in the instant case, the formula is not ambiguous in nature or unworkable, nor it is opposed to the intent of the legislature. Recrafting this formula or prescribing any formula by the judiciary would lead to stepping into the shoes of the executive or legislature, which is impermissible.
• Anomalies pointed out by the assessee in the formula shall be reconsidered by the GST council and policy decision shall be taken in this respect.
Though the apex court has removed the doubts that arose after the contradictory views by the high courts of Madras and Gujarat, the judgement will lead to a situation wherein the impacted industries will have working capitalIn landmark judgement of Union of India and Ors Vs VKC Footsteps India Pvt Ltd, the Hon’ble SC has upheld the validity of provisions of Rule 89(5), CGST Rules 2017 by setting aside the judgement of Hon’ble Gujrat High Court which held that Rule 89(5) of the CGST Rules, 2017 are ultra vires of the Section 54(3) of the CGST, Act 2017. By upholding the validity, Hon’ble SC has affirmed the view taken by the Madras High Court in case of Tvl. Transtonnelstory Afcons Joint Venture.
In the present case the appellant was denied refund of unutilized ITC on input services in cases of inverted duty structure. Refund in cases of inverted duty structure is laid down in Section 54(3) of the CGST Act, 2017 (hereinafter referred as “the Act”) read with Rule 89(5) of the CGST Rules, 2017(hereinafter referred as “the Rules”).
The appellant in the present case challenged the vires of the Rule 89(5) of the Rules on the grounds that it is inconsistent with the Section 54(3) of the Act, to the extent it denies refund of input tax credit relatable to input services.
A bench of Justices D.Y. Chandrachud and M.R. Shah discussed the case at length and it was held that Section 54(3) of the Act excludes unutilised ITC that accumulated on account of input services.
The Ld. ASG submitted that refund of taxes is neither a fundamental right nor a constitutional right. Further, the Constitution of India only guarantees that levy should be legal and that the collection should be in accordance with law and refund is always a matter of statutory prescription and can be regulated by state subject to conditions and limitations, and there are no constitutional rights with respect to refund.
While pronouncing the judgement, the Hon’ble Supreme Court noted the following;
• It is clearly an area of law where judicial interpretation cannot be ahead of policy making.
• Fiscal policy ought not be dictated through the judgments of the High Courts or this Court and it is not the function of the Court in the fiscal arena to compel Parliament to go further and to do more. This would constitute an impermissible judicial encroachment on legislative power.
• 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.
• The practical effect of the formula might result in certain equities, but in the field of taxation, the court can only intervene to read down or to interpret a formula only if the same leads to absurdity or it is unworkable. However, in the instant case, the formula is not ambiguous in nature or unworkable, nor it is opposed to the intent of the legislature. Recrafting this formula or prescribing any formula by the judiciary would lead to stepping into the shoes of the executive or legislature, which is impermissible.
• Anomalies pointed out by the assessee in the formula shall be reconsidered by the GST council and policy decision shall be taken in this respect.
Though the apex court has removed the doubts that arose after the contradictory views by the high courts of Madras and Gujarat, the judgement will lead to a situation wherein the impacted industries will have working capital issues on account of blockage of credit.
GST Law India is a blog on GST and allied commercial laws managed by members of the law firm ALA Legal.