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2020 (7) TMI 726 - HC - GSTRefund of ITC in case of inverted duty structure - Not allowing refund of unutilized input tax credit relatable to input services - Validity of amended Rule 89(5) of the CGST Rule, 2017 - Circular no.79/53/2018-GST dated 31.12.2018 - HELD THAT - Rule 89(5) and more particularly explanation (a) thereof, provides that Net Input Tax Credit 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-rule (4A) or (4B) or both. Therefore, the grievance of the petitioner is that only the inputs is referred to in explanation (a) to sub-rule 5 of Rule 89 of CGST Rules 2017 and therefore, input tax credit on input services are not eligible for calculation of the amount of refund by applying Rule 89(5). Thus, it results into violation of provision of sub-section 3 of Section 54 of the CGST Act, 2017, which entitles any registered person to claim refund of any unutilised input tax credit. Sub-clause (ii) of the proviso to sub-section 3 of Section 54 negates the claim of refund of unutilized input tax credit other than where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies, except supplies of goods or services or both as may be notified by the Government on the recommendations of the GST Council. The provision of section 7 provides that scope of supply includes all forms of supply of goods or services. Therefore, for the purpose of calculation of refund of accumulated input tax credit of input services and capital goods arising on account of inverted duty structure is not included into inputs which is explained by the Circular No. 79/53/2018-GST dated 31.12.2018, wherein it is stated that the intent of law is not to allow refund of tax paid on input services as part of unutilised input tax credit . Therefore, it is required to consider whether the refund of unutilised input tax credit arising due to inverted duty structure can be denied or not. Section 66 levies service tax at a particular rate on the value of taxable services. Section 67 (1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66. This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else. There is thus in built mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67 - Rule 5 (1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider in the course of providing taxable service . What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld. By prescribing the formula in Sub-rule 5 of Rule 89 of the CGGST Rules,2017 to exclude refund of tax paid on input service as part of the refund of unutilised input tax credit is contrary to the provisions of Sub-section 3 of Section 54 of the CGST Act,2017 which provides for claim of refund of any unutilised input tax credit - as per provision of sub-section 3 of Section 54 of the CGST Act,2017, the legislature has provided that registered person may claim refund of any unutilised input tax , therefore, by way of Rule 89(5)of the CGST Rules,2017, such claim of the refund cannot be restricted only to input excluding the input services from the purview of Input tax credit . Moreover, clause (ii) of proviso to Sub-section 3 of Section 54 also refers to both supply of goods or services and not only supply of goods as per amended Rule 89(5) of the CGST, Rules 2017. In view of the above analysis of the provisions of the Act and Rules keeping in mind scheme and object of the CGST Act, the intent of the Government by framing the Rule restricting the statutory provision cannot be the intent of law as interpreted in the Circular No.79/53/2018GST dated 31.12.2018 to deny the registered person refund of tax paid on input services as part of refund of unutilised input tax credit. Explanation (a) to Rule 89(5) which denies the refund of unutilised input tax paid on input services as part of input tax credit accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017. Explanation (a) to the Rule 89(5) is read down to the extent that Explanation (a) which defines Net Input Tax Credit means input tax credit only. The said explanation (a) of Rule 89(5) of the CGST Rules is held to be contrary to the provisions of Section 54(3) of the CGST Act. In fact the Net ITC should mean input tax credit availed on inputs and input services as defined under the Act - respondents are therefore, directed to allow the claim of the refund made by the petitioners considering the unutilised input tax credit of input services as part of the net input tax credit (Net ITC) for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules,2017 for claiming refund under Sub-section 3 of Section 54 CGST Act,2017. Petition allowed.
Issues Involved:
1. Constitutionality of amended Rule 8 of the CGST Rules. 2. Constitutionality of amended Rule 89 of the CGST Rules. 3. Constitutionality of Section 164(3) of the CGST Act. 4. Retrospective application of the amendment to Rule 89. 5. Validity of refund withholding orders. Issue-wise Detailed Analysis: 1. Constitutionality of Amended Rule 8 of the CGST Rules: The petitioner challenged the amended Rule 8 of the CGST Rules, arguing it was ultra vires Section 54(5) because Section 54(3) provides for the refund of 'any unutilized input tax credit accumulated on account of inverted duty structure,' thereby covering credit of both 'inputs' and 'input services.' The court examined the fundamental principle of GST laws, which is based on value addition and ensures that the tax burden is ultimately borne by the final consumer. The court noted that effective taxation should occur at the stage of supply to the final consumer, and any unutilized input tax credit should be refundable to achieve this objective. The court found that Rule 89(5) of the CGST Rules, 2017, as amended, excluded input services from the scope of 'net input tax credit' for the computation of the refund amount, which was contrary to the provisions of Section 54(3) of the CGST Act. Therefore, the court held that the amended Rule 8 was ultra vires to the extent it denied the refund of input tax credit on input services. 2. Constitutionality of Amended Rule 89 of the CGST Rules: The petitioner argued that the amended Rule 89 of the CGST Rules was violative of Article 14 of the Constitution of India as it treated dealers with accumulated credit on inputs and dealers with accumulated credit on input services differently. The court noted that Section 54(3) of the CGST Act provides for the refund of any unutilized input tax credit, which includes both inputs and input services. The court found that the exclusion of input services from the refund formula in Rule 89(5) was contrary to the statutory provisions and the intent of the GST law. The court held that the amended Rule 89 was unconstitutional to the extent it denied the refund of input tax credit on input services. 3. Constitutionality of Section 164(3) of the CGST Act: The petitioner contended that Section 164(3) was unconstitutional as it suffered from excessive delegation. The court examined the rule-making power conferred by Section 164 of the CGST Act, which allows the government to make rules for carrying out the provisions of the Act. The court noted that the rule-making power is broad and includes the power to give retrospective effect to the rules. However, the court found that the rule-making power cannot be used to curtail or whittle down the provisions of the Act. The court held that Section 164(3) was constitutional, but the rules made under it must be consistent with the provisions of the Act. 4. Retrospective Application of the Amendment to Rule 89: The petitioner argued that the amendment to Rule 89 should not be given retrospective application. The court noted that the government has the power to make rules with retrospective effect under Section 164(3) of the CGST Act. However, the court found that the retrospective application of the amended Rule 89, which excluded input services from the refund formula, was contrary to the provisions of Section 54(3) of the CGST Act. The court held that the retrospective application of the amendment to Rule 89 was invalid to the extent it denied the refund of input tax credit on input services. 5. Validity of Refund Withholding Orders: The petitioner sought the quashing of refund withholding orders dated 14.06.2018 and the letter dated 11.06.2018 issued by Respondent No. 3. The court found that the withholding of refunds on the ground that input services were excluded from the refund formula was contrary to the provisions of Section 54(3) of the CGST Act. The court held that the refund withholding orders were invalid to the extent they denied the refund of input tax credit on input services. Conclusion: The court held that the amended Rule 8 and Rule 89 of the CGST Rules, 2017, were ultra vires to the extent they denied the refund of input tax credit on input services. The court also held that the retrospective application of the amendment to Rule 89 was invalid to the extent it denied the refund of input tax credit on input services. The court directed the respondents to allow the refund claims considering the unutilized input tax credit of input services as part of the net input tax credit for the purpose of calculating the refund. The refund withholding orders were quashed to the extent they denied the refund of input tax credit on input services.
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