The Hon’ble Supreme Court in SLP (C) 16003/2020 along with other batches of SLP (C) filed by the Union of India against the Hon’ble Gujarat High Court judgement of VKC Footsteps v. UOI 2020 (7) TMI 726 and filed by Assessees against the Hon’ble Madras High Court judgement in TVL. Transtonnelstroy Afcons Joint Venture V. UOI, 2020 (9) TMI 931, has fixed the matter for final hearing on 28.04.2021.
It is important to note here that earlier the Hon’ble Gujarat High Court, in the case of VKC Footsteps, has held Rule 89(5) of the CGST Rules as ultra vires of the provisions of Section 54(3) of the CGST Act, as Rule 89(5) denies the refund of ‘unutilised input tax’ paid on ‘input services’ as part of ‘input tax credit’ accumulated on account of inverted duty structure. The Hon’ble High Court has noticed that the main provision of Section 54(3) provides for claim of refund of “any unutilised input tax credit” and it does not restrict the refund of “unutilised input tax credit” on input services accumulated on account of inverted duty structure*.
Whereas the Hon’ble Madras High Court, by taking the contrary view, has upheld the validity of Rule 89(5) of the CGST Rules, thus upholding the denial of refund of ‘unutilised input tax’ paid on ‘input services’ as part of ‘input tax credit’ accumulated on account of inverted duty structure. The Hon’ble Madras High Court has noted that proviso to Section 54(3) performs the function of limiting the entitlement of refund to credit that accumulates as a result of the rate of tax on input goods being higher than the rate of tax on output supplies. Upholding the validity of Rule 89(5) of the CGST Rules, the Hon’ble High Court held the Rule 89(5) is in the line of the provisions of Section 54(3) and is not ultra vires the main provisions.
The department in the former case and the assessee in the latter case, has approached the Hon’ble Supreme Court against the respective decisions of the respective Gujarat High Court and Madras High Court.
The matter is of high importance since two Constitutional Benches of different jurisdiction has taken a total opposite view to each other. The matter is pending for final decision before the Hon’ble Supreme Court. If decided in favour of assessee, there will be a huge relief for certain sectors which majorly includes mobile phones, fertilizers, footwear, fabric, wagon industry and man-made yarn, as due to denial of refund on Input Services under inverted duty has resulted in cascading effect and has increased the cost of manufacturing.
Stay Tuned! Update will be shared.
Read the order of the of the Hon’ble Supreme Court at: 27244_2020_36_2_27404_Order_08-Apr-2021
*The term “Inverted Duty Structure” refers to the scenario where due to various Tax Slab Rates, the Rate of Tax on Inputs procured for manufacturing of a final product is higher than the Rate of Tax on Output. In such a situation, the ITC received by the taxpayer remains unutilized and if the same is not refunded to the taxpayer then it would increase the cost of production and would result in cascading effect. In order to claim the refund of such unutilized ITC which has been accumulated on account of Inverted Duty Structure, the taxpayer derives substantive right to claim the refund from Section 54(3)(ii) of the CGST Act.
Yuvraj is an advocate and has completed his B.A. LL.B(Hons) from RGNUL-Punjab. He is a practicing advocate and has been involved in matters pertaining to GST and other indirect taxes as well as Direct Tax. He is active in Writ Courts and has involvement in a few landmark judgments like Pitambra Books Pvt. Ltd. V. Union of India (W.P.C. No. 627 of 2020), and represented Sales Tax Bar Association (Delhi) to resolve GST issues and glitches.