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TMI Blog2020 (7) TMI 726X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices 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. - R/SPECIAL CIVIL APPLICATION NO. 2792 of 2019, 14980 of 2018, 12483 of 2019, 13120 of 2019, 14148 of 2019, 14155 of 2018, 16269 of 2019, CIVIL APPLICATION (FOR DIRECTION) NO. 1 of 2019,16276 of 2019, 653 of 2019 - - - Dated:- 24-7-2020 - H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use in the course of business and avails input tax credit of the GST paid thereon. Majority of the inputs and input services attract GST at the rate of 12% or 18%. Thus, GST rate paid by the Petitioner on procurement of input is higher than the rate of tax payable on their outward supply of footwear. Therefore, in spite of utilization of credit for payment of GST on outward supply, there is accumulation of unutilized credit in electronic credit ledger of the Petitioners. 5. The fundamental feature of the GST is that effective taxation of the goods takes place at the stage of supply to the final consumer only and all taxes paid at the anterior stages should be fully absorbed in the tax on outward supply. Where it is not so, refund of accumulated unutilized credit can alone achieve the object of effective taxation only at the stage of supply to final consumer. Sub-section 3 of Section 54 of the Central Goods and Service Tax Act,2017 (for short CGST Act ) is inspired by this principle as it provides for refund of unutilized input tax credit where the credit is accumulated on the account of tax rate on inputs being higher than the tax rate on output supplies. Such situation has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 21 /2018-CT dated 18.4.2018 prescribing a revised formula for determining the refund on account of inverted duty structure which was given retrospective effect from 1.7.2017 vide Notification No. 26/2018-CT dated 13.6.2018. The revised formula inter alia excluded input services from the scope of net input tax credit for computation of the refund amount under the Rule. Thus, the substituted Rule 89(5) of the CGST Rules,2017 denied refund on the input tax credit availed on input services and allow relief of refund of input tax credit availed on inputs alone. 8. Thus, in the present case, Respondents are allowing refund of accumulated input tax credit of tax paid on inputs such as synthetic leather, PU Polyol, etc. However, refund of accumulated credit of tax paid on procurement of input services such as job work service, goods transport agency service, etc. is being denied. 9. The Petitioners have therefore challenged validity of amended Rule 89(5) of the CGST Rule,2017 to the extent it denies refund of input tax credit relatable to input services. 10. It is significant that it is not the case of the Respondents that credit for the tax paid on input services is not avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid difficulties, all the above mentioned taxes are proposed to be subsumed in a single tax called the goods and services tax which will be levied on sac o! of goods or services or both at each stage of supply chain starting from manufacture or import till the last retail level. 4. The proposed legislation will simplify and harmonise the indirect tax regime in the country. It is expected to reduce cost of production and inflation in the economy, thereby making the Indian trade and industry more competitive, domestically as well as internationally. Due to seamless transfer of input tax credit from one stage to another in the chain of value addition there is an in-built mechanism in the design of goods and services tax that would incentivise tax compliance by taxpayers. ...... emphasis supplied 11.4 It was submitted that the Frequently Asked Questions (FAQs ) on GST issued by the Central Board of Excise and Customs on 21.6.2016 updated from time to time, explains GST as under: Q 1. What is Goods and Services Tax (GST)? Ans . It is a destination based tax on consumption of goods and services. It is proposed to be levied at all stages right from manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic of neutrality in the value chain and towards international trade. CHAPTER I BASIC PRINCIPLES I.A. INTRODUCTION 1. There are many differences in the way value added taxes are implemented around the world and across OECD countries. Nevertheless, there are some common core features that can be described as follows: Value added taxes are taxes on consumption, paid, ultimately, by final consumers. The tax is levied on a broad base (as opposed to e.g., excise duties that cover specific products); In principle, business should not bear the burden of the tax itself since there are mechanisms in place that allow for a refund of the tax levied on intermediate transactions between firms. The system is based on tax collection in a staged process, with successive tax payers entitled to deduct input tax on purchases and account for output tax on sales. Each business in the supply chain takes part in the process of controlling and collecting the tax, remitting the proportion of tax corresponding to its margin i.e. on the difference between the VAT paid out to suppliers and the VAT charged to customers. in general, OECD countries with value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above economic necessities and realities, the GST law is enacted by various countries world over including India to achieve the principle of value added destination based consumption tax. 11.10. It was submitted that if, Steel supplied by A is used to manufacture body of vehicle by B which is in turn used to manufacture a car by C . The GST rate applicable on steel is 18%, vehicle body is 28%, and car is 28%. A Supplies the steel at ₹ 150 (basic value of steel) + ₹ 27 (amount of GST at 18% on ₹ 150) to B, a manufacturer of vehicle body. A will remit ₹ 27 as GST to the government. B manufacturers the vehicle body and supplies the vehicle body at ₹ 200 (value of supply) + ₹ 56 (amount of GST at 28% on ₹ 200) to C . B collects GST of ₹ 56 from C , subtracts the GST paid on steel of ₹ 27 and deposits the net amount of ₹ 29 to the Government in cash. C supplies the car at ₹ 300 (value of supply) + ₹ 84 (amount of GST at 28% on ₹ 300) to the ultimate consumer. C collects from the customer ₹ 84, subtracts the GST paid on vehicle body at ₹ 56 and deposits the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... output tax and suggested that refund be provided of the accumulated input tax credit. The relevant portion of the paper which was relied upon, is reproduced as under: (vi) Ideally, the problem related to credit accumulation on account of refund of GST should be avoided by both the Centre and the States except in the cases such as exports, purchase of capital goods Input tax at higher rate than output tax etc where, again refund/adjustment should be completed in a time bound manner. 11.13 It was submitted that accordingly the legislature was alive to reality/ this aberration / anomaly (namely inverted duty structure) and hence provided for refund of unutilised input tax credit, by enacting Section 54(3)(ii) of the CGST Act, 2017. It was submitted that the Proviso (ii) to Section 54(3) enacts the condition precedent to be fulfilled for grant of refund, namely inverted duty structure. Thus, it sets out the only circumstance when refund can be granted. It was submitted that the main Section 54(3) itself stipulates what would be refunded. Main Section 54(3) refers any unutilised input tax credit . It was submitted that the expression input tax credit as defined under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut tax credit attributable to exports while simultaneously, not being entitled for cash refund of input tax credit relatable to domestic supplies. In such cases, where assessee makes both domestic supplies as well as export, one has to estimate input tax credit relatable to exports so that, such credit alone is refunded to the assessee. It was therefore, submitted that broadly speaking, Rule 89(4) provides for computation of the amount refundable as (export turnover divided by total turnover) multiplied by total input tax credit and hence the purpose of formula in Rule 89(4) is only to estimate the input tax credit relatable to export on proportionate basis, where assessee effects both export sales and domestic sales, while in law refund is due only for export. 11.16 It was therefore submitted that similarly need for providing formula in Rule 89(5) is that if assessee has output supplies having inverted duty structure and also has output supplies not having inverted duty structure, refund is to be given only for the former supplies and refund is not to be given for latter supplies and proportionate formula is provided to confine refund to inverted duty structure Supplies only wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54(3) and proviso (ii) thereto and therefore to this extent Rule 89(5) is ultra vires. It was submitted that main Section 54(3) categorically provides that a person may claim refund of any unutilised input tax credit and there are no words either in main section 54(3) or under proviso (ii) to Section 54(3) whatsoever that the refund in question would only be limited to credit of tax paid on inputs only. It was submitted that moreover, Explanation (a) to Section 54 defines refund to include refund of unutilised input tax as provided under subsection (3) and as per Section 2(63) input tax credit means the credit of input tax, where as the term input tax is defined under Section 2(62) as under (relevant portion only): input tax in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes- XXXX It was therefore, submitted that Explanation (a) to Rule 89(5) has narrowed down Section 54(3) by employing the expression input tax credit availed on inputs in Rule 89(5), thus, Rule 89(5) has the effect of granting refund only on inputs and not o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... builder or contractor for any deficiency in respect of such property. The answer to all this shall depend on understanding of the word 'service . The term has variety of meanings. It may mean any benefit or any act resulting in promoting interest or happiness. It may be contractual, professional, public, domestic, legal, statutory etc. The concept of service thus is very wide. How it should be understood and what it means depends on the context in which it has been used in an enactment. Clause (o) of the definition section defines it as under: service' means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service; It is in three parts. The main part is followed by inclusive clause and ends by exclusionary clause. The main clause itself is very wide. It applies to any service m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whom complaint is made is a statutory body but whether the nature of the duty and function performed by it is service or even facility. It was submitted that thus, what is to be refunded is unutilised input tax credit and is so stated in main Section 54(3) itself. Therefore, Rule 89(5) is ultra vires to that extent. 11.21 It was submitted that Section 164(1) of the CGST Act confers a general rule making power on the Government as under: 164. (1) The Government may, on the recommendation of the Council, by notification, make rules for carrying out the provisions of this Act. It was submitted that thus, the government can make rules only for the purpose of carrying out the provisions of the Act whereas Rule 89(5) provides a proportionate formula for determining the pro-rata amount of credit relatable to inverted duty structure vis-a-vis total turnover which is needed in case where the assessee is making supplies involving inverted duty structure as well as supplies not involving inverted duty structure as Section 54(3) provides for refund only in case of inverted duty structure and hence, to this extent, Rule 89(5) can be said to be a rule made for carrying cut the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t GST was introduced with the intention of removing the cascading effect of taxes by providing for input tax credit on all inputs and input services, which can be used for payment of output tax. [See Statement of Objects and Reasons of the Constitution (122nd Amendment) Act and Statement of Objects and Reasons of the CGST Act. 12.2. It was submitted that the scheme of the CGST Act makes this object very clear since Sections 16 and 49 clearly provide for input tax credit on any supply of goods or services used or intended to be used in the course of furtherance of business which can be used for payment of tax. Section 49(6) provides for refund of the balance in the electronic credit ledger after payment of tax, interest, penalty, fees, etc in accordance with Section 54 which pertains to refund of tax and Sub-section (3) of Section 54 stipulates that a registered person can claim refund of ANY unutilised input tax credit at the end of any tax period. Reference was made to Notes on Clauses of Section 54 to point out that it does not restrict refund of tax paid on inputs nor does it create a distinction between zero rated supplies and inverted tax structure for the purposes of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned interpretation. (iii) It was submitted that assuming that the interpretation of the department is applicable, then also once the rate of tax on inputs is higher than the rate of tax on output supplies, the registered person would meet the threshold eligibility for claiming refund and would thereafter be entitled to all/ANY unutilised input tax credit lying in the electronic credit ledger. No restriction can thereafter be placed by way of rules on refund of any part of the unutilised input tax credit lying in the electronic credit ledger. 12.3. It was submitted that amended Rule 89(5) results in perpetual retention / appropriation of unutilised input tax credit on services by the Government contrary to the intention of the legislature as evidenced from the object and scheme of the Act which would therefore amount to indirect levy of tax without authority of law under Article 265 of the Constitution of India. 12.4. It was submitted that amended Rule 89(5) violates Article 14 of the Constitution of India as it is manifestly arbitrary and irrational because; (i) It denies a crystallised and vested right created by the statute by virtue of the statutory entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded while other manufacturers of identical goods which do not use job work services would get refund of entire unutilised input tax credit. 12.6. It was further submitted that the statement of object and reasons of the CGST Bill 2017 are required to be considered for the purpose of analysis as to whether Rule 89(5) of the CGST rules is ultra vires or not. Statements of objects and reasons of the Act reads thus: STATEMENT OF OBJECTS AND REASONS Presently, the Central Government levies tax on, manufacture of certain goods in the form of Central Excise duty, provision of certain services in the form of service tax, inter-State sale of goods in the form of Central Sales tax. Similarly, the State Governments levy tax on and on retail sales in the form of value added tax, entry of goods in the State in the form of entry tax, luxury tax and purchase tax, etc. Accordingly, there is multiplicity of taxes which are being levied on the same supply chain. 2. The present tax system on goods and services is facing certain difficulties as under- (i) there is cascading of taxes as taxes levied by the Central Government are not available as set off against the taxes being l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds and Services Tax Bill, 2017, inter alia, provides for the following, namely:- (a) to levy tax on all intra-State supplies of goods or services or both except supply of alcoholic liquor for human consumption at a rate to be notified, not exceeding twenty per cent. as recommended by the Goods and Services Tax Council (the Council); (b) to broad base the input tax credit by making it available in respect of taxes paid on any supply of goods or services or both used or intended to be used in the course or furtherance of business; (c) to impose obligation on electroniccommerce operators to collect tax at source, at such rate not exceeding one per cent. of net value of taxable supplies, out of payments to suppliers supplying goods or services through their portals; (d) to provide for self-assessment of the taxes payable by the registered person; (e) to provide for conduct of audit of registered persons in order to verify compliance with the provisions of the Act; (f) to provide for recovery of arrears of tax using various modes including detaining and sale of goods, movable and immovable property of defaulting taxable person; (g) to provide for power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the intimate connection of newsprint with the freedom of the press, the tests for determining the vires of a statute taxing newsprint have, therefore, to be different from the tests usually adopted for testing the vires of other taxing statutes. In the case of ordinary taxing statutes, 8 (1962) 3 SCR 842: AIR 1962 SC 305 9 (1972) 2 SCC 788 10 (1985) 1 SCC 641 :1985 SCC (Tax) 121 the laws may be questioned only if they are either openly confiscatory or a colourable device to confiscate. On the other hand, in the case of a tax on newsprint, it may be sufficient to show a distinct and noticeable burdensomeness, clearly and directly attributable to the tax. 18. Now coming back to the amendment of the definition of goods in Section 2(d) of the Central Sales Tax Act, the said amendment, brought in with a view to bring the said definition in accord with the amendments brought in by the Constitution Sixth (Amendment) Act (referred to hereinbefore) was actuated by the very same concern, viz., to exempt the sale of newspapers from the levy of Central Sales Tax. The amendment was not intended to create a burden which was not there but to remove the burden, if any alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position was the State could not levy tax on intra-State sale of newspapers; the Parliament could but it did not and Entry 92-A of List I bars the Parliament from imposing tax on inter-State sale of newspapers; as a result of the above provisions, while the newspapers were not paying any tax on their sale, they were enjoying the benefit of Section 8(3)(b) read with Section 8(1)(b) and paying tax only @ 4% on nondeclared goods which they required for printing and publishing newspapers. Their position could not be worse after the amendment which would be the case if we accept the contention of the Revenue. If the contention of the Revenue is accepted, the newspapers would now become liable to pay tax Co) 10% on nondeclared goods as prescribed in Section 8(2). This would be the necessary consequence of the acceptance of Revenue's submission inasmuch as the newspapers would be deprived of the benefit of Section 8(3)(b) read with Section 8(1)(b). We do not think that such was the intention behind the amendment of definition of the expression goods by the 1958 (Amendment) Act. Even apart from the opening words in Section 2 referred to above, it is well settled that where the contex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent submitted that the petitions are not maintainable as Rule 89(5) of the CGST Rules only provides the mode of calculation of refund available to the assessee on account of inverted duty structure and the same is not contrary to the provisions of Sub-section 3 of Section 54 of the CGST Act in any manner because Sub-section 3 of Section 54 only provides that subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period and Proviso to Sub-section 3 of Section 54 of the CGST Act makes an embargo on the claim of the refund of unutilised input tax credit as it shall be allowed in cases other than- zero-rated supplies made without payment of tax and 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. 14.1 It was submitted that Section 164 of the GST empowered the Central Government to make rules on the recommendations of the Council, by notification, for carrying out the provisions of this Act. It was submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by notification, could make rules for carrying out the provisions of the Act . This rule making power is thus couched in the widest possible manner empowering the Government to make the rules for carrying out the provisions of the Act. Subsection [2] to Section 164 is equally widely worded, when it provides that, without prejudice to the generality of the provisions of subsection (1), the Government may make rules for all or any of the matters which by this Act are required to be, or may be, prescribed or in respect of which provisions are to be, or may be made by the rules. Subsection [3] of Section 164, to which we are not directly concerned, nevertheless provides that the power to make rules conferred in the said section would include the power to give retrospective effect to such rules. 25. Section 140 of the Act envisages certain benefits to be carried forward during the regime change. As is well settled, the reduced rate of duty or concession in payment of duty are in the nature of an exemption and is always open for the legislature to grant as well as to withdraw such exemption. As noted in case of Jayam Company [Supra], the Supreme Court had observed that input t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under Article 226 has to be exercised to effectuate the rule of law and not for abrogating it. The said enactments including Section 11B of the Central Excises and Salt Act and Section 27 of the Customs Act do constitute law within the meaning of Article 265 of the Constitution of India and hence, any tax collected, retained or not refunded in accordance with the said provisions must be held to be collected, retained or not refunded, as the case may be, under the authority of law. Both the enactments are self-contained enactments providing for levy, assessment, recovery and refund of duties imposed there under. Section 11B of the Central Excises and Salt Act and Section 27 of the Customs Act, both before and after the 1991 [Amendment] Act are constitutionally valid and have to be followed and given effect to. Section 72 of the Contract Act has no application to such a claim of refund and cannot form a basis for maintaining a suit or a writ petition. All refund claims except those mentioned under Proposition (ii) below have to be and must be filed and adjudicated under the provisions of the Central Excise and Sale Act or the Customs Act, as the case may be. It is necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fight his own battle and must succeed or fail in such proceedings. Once the assessment or levy has become final in his case, he cannot seek to reopen it nor can he claim refund without reopening such assessment/order on the ground of a decision in another person s case. Any proposition to the contrary not only results in substantial prejudice to public interest but is offensive to several well established principles of law. It also leads to grave public mischief. Section 72 of the Contract Act, or for that matter Section 17 [1](c) of the Limitation Act, 1963, has no application to such a claim for refund. [v] Article 265 of the Constitution has to be construed in the light of the goal and the ideals set out in the Preamble to the Constitution and in Articles 38 and 39 thereof. The concept of economic justice demands that in the case of indirect taxes like Central Excises duties and Customs duties, the tax collected without the authority of law shall not be refunded to the petitioner plaintiff unless he alleges and establishes that he has not passed on the burden of duty to a third party and that he has himself borne the burden of the said duty. [vi] xx xx xx xx [vii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osition to the contrary not only results in substantial prejudice to the public interest, but is offensive to several well established principles of law. It also leads to grave public mischief. In this context, it was also observed that while examining the claims for refund, the financial chaos which would result in the administration of the State by allowing such claims would not be an irrelevant consideration. In case of large claims, the same may result in financial chaos in the administration of the affairs of the State. The decision in the case of STO vs. Kanhaiya Lal Mukundlal Saraf [Supra] to the extent it lays down or is understood to have laid down proposition contrary to these propositions was held to have been wrongly decided. 32. Thus, in the economic matters of such vast scale, the wider considerations of the State exchequer, while interpreting a statutory provisions cannot be kept out of purview. Quite apart from independently finding that the time limit provisions contained in sub-rule (1) of Rule 117 of the CGST Rules is not ultra vires the Act or the powers of the rule making authority, interpreting such powers as merely directory would give rise to unending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive State Goods and Services Tax Act; or (e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy; (63) ―input tax credit means the credit of input tax; SECTION 54. Refund of tax.-( 1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed: Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49, may claim such refund in the return furnished under section 39 in such manner as may be prescribed. (2) xxxxx (3) Subject to the provisions of subsection (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period: Provided that no refund of unutilised input tax credit shall be allowed in cases other than (i) zero rated supplies made without payment of tax; (ii) where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to a penalty not exceeding ten thousand rupees. (ii) Section 16 of the Integrated Goods and Services Tax Act, 2017 reads as under: SECTION 16. Zero rated supply.- (1) zero rated supply means any of the following supplies of goods or services or both, namely: (a) export of goods or services or both; or (b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit. (2) Subject to the provisions of subsection (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply. (3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely: (a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or (b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of sub-section (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), refund of input tax credit shall be granted as per the following formula Refund Amount = (Turnover of zerorated supply of goods + Turnover of zero rated supply of services) x Net ITC Adjusted Total Turnover Where, - (A) Refund amount means the maximum refund that is admissible; (B) Net ITC means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; (C) Turnover of zero-rated supply of goods means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both; (D) Turnover of zero-rated supply of services means the value of zerorated supply of services made without payment of tax under bond or letter of undertaking, calculated in the following manner, namely:- Zero-rated supply of services is the aggregate of the payments received during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply of goods and services. 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 it in sub-rule (4). ; (v) Notification No.26/2018-C.T. dated 13.06.2018 read as under: Central Goods and Services Tax Rules, 2017-Fifth Amendment of 2018 2. In the Central Goods and Services Tax Rules, 2017, - (i) in rule 37, in sub-rule (1), after the proviso, the following proviso shall be inserted, namely:- Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of subsection (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to subsection (2) of section 16. ; (ii) in rule 83, in sub-rule (3), in the second proviso, for the words one year , the words eighteen months shall be substituted; (iii) with effect from 01st July, 2017, in rule 89, for sub-rule (5), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be worked out whereby the harmonious rate structure along with the need for further modification could be upheld, if necessary with a collectively agreed Constitutional Amendment. Salient features of the proposed model are as follows: (i) The GST shall have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). Rates for Central GST and State GST would be prescribed appropriately, reflecting revenue considerations and acceptability. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable. (ii) The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods may be kept at ₹ 1.5 crore and the threshold for Central GST for services may also be appropriately high. It may be mentioned that even now there is a separate threshold of services (₹ 10 lakh) and goods (₹ 1.5 crore) in the Service Tax and CENVAT. 17. Reference is also required to be made to the International VAT/GST Guidelines, published on February 2006, which read as under: INTERNATIONAL VAT/GST GUIDELINES PREFACE 1. The spread of Value Added Tax (alsocalled Goods and Services Tax GST) has been the most important development in taxation over the last half-century. Limited to less than ten countries in the late 1960s it has now been implemented by about 136 countries; and in these countries (including OECD member countries) it typically accounts for one-fifth of total tax revenue. The recognised capacity of VAT to raise revenue in a neutral and transparent manner drew all OECD member countries (except the United States) to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... although most countries have adopted similar principles for the operation of their value added tax system, there remain many differences in the way it is implemented, including between OECD member countries. These differences result not only from the continued existence of exemptions and special arrangements to meet specific policy objectives, but also from differences of approaches in the definition of the jurisdiction of consumption and therefore of taxation. In addition, there are a number of variations in the application of value added taxes, and other consumption taxes, including different interpretation of the same or similar concepts; different approaches to time of supply and its interaction with place of supply; different definitions of services and intangibles and inconsistent treatment of mixed supplies. 6. Since the late 1990s, work led by the OECD s Committee on Fiscal Affairs (CFA) in cooperation with business, revealed that the current international consumption taxes environment, especially with respect to trade in services and intangibles, is creating obstacles to business activity, hindering economic growth and distorting competition. The CFA recognised that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such an environment may also favour tax fraud and evasion. 9. The OECD has long held a lead position in dealing with the international aspects of direct taxes. The Organisation has developed internationally recognised instruments such as the Model Tax Convention on Income and on Capital and the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Until now, no such instrument was available in the field of consumption taxes. Only the Ottawa Framework Conditions (1998), the Guidelines on Consumption Taxation of Cross-Border Services and Intangible Property in the Context of E-commerce (2001) and Consumption Tax Guidance Series (2003) have been published. The Committee on Fiscal Affairs therefore began work on a set of framework principles on the application of consumption taxes to the trade in international services and intangibles. These principles form the first part of the OECD VAT/GST Guidelines. These principles will be developed in order that countries (both OECD and non-OECD) can implement them in legislation. The table of contents will evolve in the light of experience and will be amended and completed over time. The basic principles as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voluntary non-taxation, and uncertainties for both business and tax administrations. 1 Germany expressed its reservation on these principles. Luxembourg expressed its reservation on the first principle referred in paragraph 14 ( For consumption tax purposes internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption ). 4. Sales tax systems, although they work differently in practice, also set out to tax consumption of goods, and to some extent services, within the jurisdiction of consumption. To this end, their implementation also aims at keeping it neutral towards international trade. However, in most sales tax systems, businesses do incur irrecoverable sales tax and, if they subsequently export goods, there will be an element of sales tax embedded in the price. Chapter Nineteen of the explanations given for Input Tax Credit Mechanism in GST as under: Chapter Nineteen Input Tax Credit Mechanism in GST Uninterrupted and seamless chain of input tax credit (hereinafter referred to as, ITC ) is one of the key features of Goods and Services Tax. ITC is a mechanism to avoid cascading of taxes. Cascad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n i.e. ₹ 20/- but also on tax i.e. ₹ 2/. Goods and Services Tax (GST) would mitigate such cascading of taxes. Under this new system most of the indirect taxes levied by Central and the State Governments on supply of goods or services or both would be combined together under a single levy. The major taxes/levies which are going to be clubbed together or subsumed in the GST 18. Central Board of Excise Customs, New Delhi issued frequently asked questions on Goods and Services Tax Act (GST)in 2nd Edition No. 31.03.2017 is as under: 1. Overview of Goods and Services Tax (GST) Q 1. What is Goods and Services Tax (GST)? Ans . It is a destination based tax on consumption of goods and services. It is proposed to be levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff. In a nutshell, only value addition will be taxed and burden of tax is to be borne by the final consumer. Q 2. What exactly is the concept of destination based tax on consumption? Ans. The tax would accrue to the taxing authority which has jurisdiction over the place of consumption which is also term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ₹ 3,000/- during the relevant period for which the refund is being claimed. Therefore, the turnover of inverted rated supply of goods and services will be ₹ 3,000/-. Since the claimant has no other outward supplies, his adjusted total turnover will also be ₹ 3,000/-. iv. If we assume that Input A, having value of ₹ 500/- and Input B, having value of ₹ 2,000/-, have been purchased in the relevant period for the manufacture of Y, then Net ITC shall be equal to ₹ 385/- (₹ 25/- and ₹ 360/- on Input A and Input B respectively). v. Therefore, multiplying Net ITC by the ratio of turnover of inverted rated supply of goods and services to the adjusted total turnover will give the figure of ₹ 385/-. vi. From this, if we deduct the tax payable on such inverted rated supply of goods or services, which is ₹ 360/-, we get the maximum refund amount, as per rule 89(5) of the CGST Rules which is ₹ 25/-. The above Circular also pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. Thus, inputs do not include services or capital goods. Therefore, clearly, the intent of the law is not to allow refund of tax paid on input services or capital goods as part of refund of unutilized input tax credit. Accordingly, in order to align the CGST Rules with the CGST Act, notification No. 26/2018-Central Tax dated 13.06.2018 was issued wherein it was stated that the term Net ITC, as used in the formula for calculating the maximum refund amount under rule 89(5) of the CGST Rules, 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. In view of the above, it is clarified that both the law and the related rules clearly prevent the refund of tax paid on input services and capital goods as part of refund of input tax credit accumulated on account of inverted duty structure. 20. On perusal of the aforesaid provisions of the Act, Rules and various notifications, it appears that Rule 89(5) and more particularly explanation (a) thereof, provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount 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. 21. The Delhi High Court in case of Intercontinental Consultants Technocrats Pvt. Ltd. Vs. Union Bank of India reported in 2013 (29) S.T.R. (Del.) has held that the Rule which goes beyond the statute is ultra vires and thus liable to be struck down by referring to various decisions of the Supreme Court as under: 12. There is ample authority for the proposition that the rules cannot override or overreach the provisions of the main enactment. In Central Bank of India v. Their Workmen, AIR 1960 SC 12, a Constitution Bench of the Supreme Court was concerned with the Banking Companies Act, 1949. Section 10 of the Act prohibit the grant of industrial bonus to bank employees in as much as such bonus is remuneration which takes the form of a share in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that though the language of Rule 102 of the Displaced Persons (Compensation and Rehabilitation) Rules, 1955 was wider in its ambit and covered the properties comprised in the compensation bill and entrusted to a managing officer for management, but obviously the said rule has to be construed in the light of the parent Section and it cannot be construed as enlarging the scope of Section 19 itself. It is a well settled canon of construction that the Rules made under a statute must be treated exactly as if they were in the Act and are of the same effect as if contained in the Act. There is another principle equally fundamental to the rules of construction, namely, that the Rules shall be consistent with the provisions of the Act. Hence, Rule 102 has to be construed in conformity with the scope and ambit of Section 19 and it must be ignored to the extent it appears to be inconsistent with provisions of Section 19 . In making these observations, the learned single Judge referred to and followed the judgment of the Supreme Court in State of Uttar Pradesh v. Babu Ram Upadhyay, AIR 1961 SC 751. 15. In the tax jurisprudence the position is no different and it has been held in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax had to be paid within 7 days of the demand. The regulations did not provide for any appeal or for taking up the decision of the Commissioners to any Court of law. The validity of the regulation came up for consideration before the Court. Sachs J., observed as follows: - To my mind a Court is bound before reaching a decision on the question whether a regulation is intra vires to examine the nature, objects, and scheme of the piece of legislation as a whole, and in the light of that examination to consider exactly what is the area over which powers are given by the section under which the competent authority is purporting to act. It was ultimately held by the Court that Regulation 12 was ultra vires on three grounds. One of the grounds, which is relevant for our purpose, was that the regulation rendered the subject liable to pay such tax as the Commissioner believed to be due whereas the charging Section imposed a liability to pay such tax as in law was due. 18. 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in conformity with Section 40 of the Act. Thus Section 94 (4) does not add any greater force to the Rules than what they ordinarily have as species of subordinate legislation. 19. For the above reasons we quash the impugned show-cause notice and allow the writ petition with no order as to costs. The above decision is also affirmed by the Supreme Court vide 2018 (10) GSTL 401 (SC), which read as under : 24) In this hue, the expression such occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what the gross amount is charged for providing such taxable services. As a fortiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such taxable service . That according to us is the plain meaning which is to be attached to Section 67 (unamended i.e., prior to May 01, 2006) or after its amendment, with effect from, May 01, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. Thus, only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost would also form part of valuation of taxable services for charging service tax. Though, it was not argued by the learned counsel for the Department that Section 67 is a declaratory provision, nor could it be argued so, as we find that this is a substantive change brought about with the amendment to Section 67 and, therefore, has to be prospective in nature. On this aspect of the matter, we may usefully refer to the Constitution Bench judgment in the case of Commissioner of Income Tax (Central)I, New Delhi v. Vatika Township Private Limited wherein it was observed as under: 27. A legislation, be it a statutory Act or a statutory rule or a statutory notification, may physically consists of words printed on papers. However, conceptually it is a great deal more than an ordinary prose. There is a special peculiarity in the mode of verbal communication by a legislation. A legislation is not just a series of statements, such as o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early emerges from the various decisions and this legal position was conceded by the counsel for the parties. In any case, we shall refer to few judgments containing this dicta, a little later. 22. Further, in the case of Lohara Steel Industries Ltd. v. State of A.P. reported in (1997) 2 SCC 37, the Supreme Court has held that the offending portion which is severable can be struck down. Para 10 of the said order read as under : 10. It was, however, contended before us by the department that the exemption notification must be read as a whole and, therefore, if we find the exemption notification to be violative of Article 304(a) the entire exemption notification will have to be struck down and not just a portion of it which is discriminatory as contended by the appellants. This question in relation to a taking statute has been considered by this Court as far back as in 1953 in the case of The State of Bombay and Anr. v. The United Motors (India) Ltd. and Ors. ([1953] SCR 1069 at 1097). If the taxing statute imposes tax on subjects which are divisible in their nature and if the covered subjects which are exempted by the Constitution are wrongly taxed, the entire taxing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means any service used or intended to be used by a supplier. Whereas input tax as defined in section 2(62) means the tax charged on any supply of goods or services or both made to any registered person. Thus input and input service are both part of the input tax and input tax credit . Therefore, 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. 24. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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