2020 (9) TMI 931 - HC - GST

Refund of unutilised Input Tax Credit - accumulation on account of being subjected to an inverted duty structure - constitutional validity of Section 54(3)(ii) of the Central Goods and Services Tax Act, 2017 - constitutional validity of amended Rule 89(5) of the Central Goods and Services Tax Rules, 2017 - ultra vires of Section 54 of the CGST Act and the Constitution of India - Whether it is necessary to read the word inputs in Section 54(3)(ii) as encompassing both goods and services so as to ensure that the said provision is not struck down? - Whether the words input services may be read into Section 54(3)(ii) as an exception to the general rule of casus omissus ? - Whether the proviso to Section 54(3) qualifies and curtails the scope of the principal clause to the limited extent of specifying the two cases in which registered persons become eligible for a refund of the unutilised input tax credit? - Whether sub-clause (ii) of the proviso merely stipulates the eligibility conditions for claiming a refund of the unutilised input tax credit or whether it also curtails the entitlement to refund to unutilised input tax credit from a particular source, namely, input goods and excludes input services? - Whether the rule making power under Section 164 empowers the Central Government to make Rule 89(5) as amended? - Whether Rule 89(5) of the CGST Rules, as amended, is ultra vires Section 54(3) of the CGST Act? - Whether the definition of the term Net ITC, as contained in Rule 89(5), is liable to be read as encompassing both input goods and input services? HELD THAT - If the intention of Parliament was to curtail the quantity of unutilised input tax credit in respect of which a refund claim may be made, it would have been indicated in Section 54(3) by qualifying the words used therein. However, no such qualification is contained therein. As regards the proviso thereto, according to the learned counsel, they set out the two cases in which a registered person may claim a refund of the unutilised input tax credit. The first of these cases relates to zero-rated supplies made without payment of tax. This case pertains to exporters. Even among exporters, only those who make zero-rated supplies without payment of tax by executing a bond or undertaking would be entitled to a refund under Section 54(3). The exporters who undertake supplies upon payment of tax can claim a refund under Section 54(1) but not under Section 54(3). The second case pertains to registered persons who accumulate input tax credit on account of the rate of tax on input goods being higher than the rate of tax on output supplies. Keeping in mind the scope, function and role of a proviso as adumbrated above, we closely examined the text of Section 54(3)(ii) in order to test the tenability of the rival contentions. We find that Section 54(3) undoubtedly enables a registered person to claim refund of any unutilised input tax credit. However, the principal or enacting clause is qualified by the proviso which states that provided that no refund of unutilised input tax credit shall be allowed in cases other than - Parliament has used a double negative in this proviso thereby making it abundantly clear that unless a registered person meets the requirements of clause (i) or (ii) of Sub-section 3, no refund would be allowed. On further examining sub-clause (ii), we find that it uses the phrase where the credit accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies . Given the fact that we concluded that Section 54(3)(ii) enables a registered person to claim a refund of unutilised input tax credit only to the extent that such credit has accumulated on account of the rate of tax on input goods being higher than the rate of tax on output supplies, it remains to be considered whether Rule 89(5) is ultra vires the rule making power and Section 54(3). Keeping in mind that Section 164 confers power on the Central Government to frame rules for carrying out the provisions of the CGST Act and no fetters are discernible therein except that the rules should be in furtherance of the purposes of the CGST Act - Rule 89(5) would be intra vires the CGST Act and the rule making power if it is in line with Section 54(3)(ii) and ultra vires both Sections 54(3)(ii) and 164 if it is not. Rule 89(5) of the CGST Rules, as amended, is intra vires both the general rule making power and Section 54(3) of the CGST Act. There is no dispute as regards the power to amend with retrospective effect either as such power is conferred under Section 164 of the CGST Act, albeit subject to the limitation that it cannot pre-date the date of entry into force of the CGST Act. Constitutional Challenge - meaning of inputs - HELD THAT - Explanation to Section 54 uses the terms inputs and input services separately and distinctively, thereby indicating the legislative intent to distinguish one from the other - we are unable to countenance Mr.Ghosh's submission that the word ''inputs'' should be read so as to include ''input services'' merely because the undefined word ''output supplies'' is used in Section 54(3)(ii) - it is concluded that both the statutory definition and the context point in the same direction, namely, that the word inputs encompasses all input goods, other than capital goods, and excludes input services. Nature of Refund - HELD THAT - Although there is a constitutional challenge in this case, the challenge is to a refund provision and this is not a refund claim arising out of a successful challenge to a provision under a tax statute that had imposed a liability. This issue can be approached from another perspective would a registered person be entitled to such refund but for the statutory prescription in Section 54(3)(i) (ii)? The answer is a resounding 'no'. Validity of Classification - HELD THAT - There is a classification of sources of unutilised input tax credit into sources that give rise to a right to refund, i.e. input goods, and those that do not, i.e. input services. As a corollary, registered persons may be entitled to full, partial or nil refund as regards unutilised input tax credit accumulating on account of being subject to an inverted duty structure - There is no doubt that the object and purpose of the present GST laws is to avoid the cascading of taxes and to impose a tax on consumption, be it goods or services. Thus, the long term objective appears to be to treat goods and services, as far as possible, similarly. Nonetheless, it must be borne in mind that this is an evolutionary process. By way of illustration, we may draw reference to the fact that the concept of input tax credit was not originally available under sales tax law and central excise law. It was first introduced in the form of MODVAT credit. MODVAT credit was initially available only in respect of goods. After the introduction of service tax through the Finance Act, CENVAT credit was introduced and made available both in respect of goods and services. However, refund of unutilised input tax credit was not provided - Thereafter, the GST laws have been introduced which enable registered persons to avail input tax credit both on goods and services but there are restrictions as regards refund. When viewed objectively and holistically, we find that, under the GST laws, goods and services are treated similarly in certain respects but differently in other respects. Even with regard to rate of tax, almost all services attract a uniform rate of 18%, whereas goods are taxed at rates that vary considerably. Entitlement to refund of unutilised input tax credit and not the availing of input tax credit - HELD THAT - Under Section 54(3)(ii), Parliament has provided the right of refund only in respect of unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies. Goods and services have been treated differently from time immemorial, as reflected in the use of the expressions, quantum valebant, as regards the measure of payment for goods, and quantum meruit, as regards the measure of payment for services, supplied non-gratuitously and without a formal contract. While there has been a legislative trend towards a more uniform treatment as between goods and services, the distinction has certainly not been obliterated as is evident on perusal of the CGST Act, including provisions such as Sections 12 13, etc., which are specifically targeted at goods and services - Given the fact that we have concluded that Section 54(3)(ii), on a plain reading, does not violate Article 14, it is not necessary to draw definitive conclusions on the scope of reading down or to examine if the casus omissus rule should be deviated from in this case. Nonetheless, extensive submissions were advanced as regards reading down. Following conclusions are reached at (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 legislative power. (3) Therefore, there is no necessity to adopt the interpretive device of reading down so as to save the constitutionality of Section 54(3)(ii). (4) Section 54(3)(ii) curtails a refund claim to the unutilised credit that accumulates only on account of the rate of tax on input goods being higher than the rate of tax on output supplies. In other words, it qualifies and curtails not only the class of registered persons who are entitled to refund but also the imposes a source-based restriction on refund entitlement and, consequently, the quantum thereof. (5) As a corollary, Rule 89(5) of the CGST Rules, as amended, is in conformity with Section 54(3)(ii). Consequently, it is not necessary to interpret Rule 89(5) and, in particular, the definition of Net ITC therein so as to include the words input services. All the writ petitions challenging the constitutional validity of Section 54(3)(ii) are dismissed.

Summary

Issues Involved:
1. Entitlement to refund of unutilised input tax credit under an inverted duty structure.
2. Constitutional validity of Section 54(3)(ii) of the CGST Act.
3. Validity of amended Rule 89(5) of the CGST Rules.
4. Interpretation of the term "inputs" in Section 54(3)(ii).
5. Whether the proviso to Section 54(3) limits the entitlement to refund.
6. Rule-making power under Section 164 of the CGST Act.
7. The principle of reading down statutes.

Detailed Analysis:

1. Entitlement to Refund of Unutilised Input Tax Credit:
The core issue is whether the petitioners are entitled to a refund of the entire unutilised input tax credit accumulated due to an inverted duty structure. The petitioners argue that they should receive refunds irrespective of whether the credit accumulated from input goods or input services. The respondents contend that refunds are permissible only for credit accumulated from input goods.

2. Constitutional Validity of Section 54(3)(ii) of the CGST Act:
The petitioners argue that Section 54(3)(ii) violates Article 14 of the Constitution by discriminating between those who avail input goods and those who avail input services. The court concludes that the classification is valid, non-arbitrary, and has a rational nexus with the object of the legislation. The court emphasizes that economic legislations are given a wider latitude in classification.

3. Validity of Amended Rule 89(5) of the CGST Rules:
The petitioners challenge the amended Rule 89(5) as ultra vires Section 54(3) of the CGST Act. The court finds that the amended Rule 89(5) is in conformity with Section 54(3)(ii), which limits refunds to credit accumulated from input goods. The court holds that the rule-making power under Section 164 is broad and encompasses the amended Rule 89(5).

4. Interpretation of the Term "Inputs" in Section 54(3)(ii):
The petitioners argue that "inputs" should include both input goods and input services. The court holds that the term "inputs" as defined in Section 2(59) of the CGST Act refers only to goods and not services. The court reasons that the context and statutory definitions support this interpretation.

5. Whether the Proviso to Section 54(3) Limits the Entitlement to Refund:
The court concludes that the proviso to Section 54(3) does not merely set out eligibility conditions but also limits the entitlement to refunds to credit accumulated from input goods. The court emphasizes that the proviso qualifies the main clause by restricting the source and quantity of unutilised input tax credit eligible for refund.

6. Rule-Making Power Under Section 164 of the CGST Act:
The court finds that the rule-making power under Section 164 is broad and allows for the prescription of rules to carry out the provisions of the CGST Act. The court holds that Rule 89(5), as amended, is within the scope of this rule-making power.

7. The Principle of Reading Down Statutes:
The petitioners argue for reading down Section 54(3)(ii) to include input services. The court holds that reading down is not necessary as the provision does not violate Article 14. The court also notes that reading down is typically used to curtail the scope of a provision, not to expand it.

Conclusions:
1. Section 54(3)(ii) does not infringe Article 14.
2. Refund is a statutory right, and limiting it to credit accumulated from input goods is a valid classification.
3. There is no need to read down Section 54(3)(ii).
4. Section 54(3)(ii) limits refunds to credit accumulated from input goods.
5. Rule 89(5) of the CGST Rules, as amended, is in conformity with Section 54(3)(ii).

Final Orders:
All writ petitions challenging the constitutional validity of Section 54(3)(ii) and the validity of Rule 89(5) are dismissed. All connected miscellaneous petitions are closed, with no order as to costs.