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TMI Blog2020 (9) TMI 931X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules, 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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igher 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 unutilis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are entitled to a refund of the entire unutilised input tax credit that each of them has accumulated on account of being subjected to an inverted duty structure. In certain cases, the constitutional validity of Section 54(3)(ii) of the Central Goods and Services Tax Act, 2017(the CGST Act) is impugned, whereas, in others, a declaration is prayed for that the amended Rule 89(5) of the Central Goods and Services Tax Rules,2017(the CGST Rules) is ultra vires Section 54 of the CGST Act and the Constitution of India. As a corollary, a declaration of entitlement to refund is also prayed for in some cases. 2. One of the issues that takes centre-stage in these cases is the correct meaning to be ascribed to the word inputs in Section 54(3)(ii) of the CGST Act and in the definition of Net ITC in the amended Rule 89(5) of the CGST Rules. Therefore, except while dealing with the text of Section 54 and Rule 89 where the word inputs is used, for the sake of clarity, the words 'input goods' is used while dealing with goods that are used as inputs, and 'input services' is used while dealing with services that are used as inputs. All the Petitioners are engaged in busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cept supplies of goods or services or both as may be notified by the Government on the recommendations of the Council: Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty: Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails drawback in respect of central tax or claims refund of the integrated tax paid on such supplies. Rule 89(5) of the CGST Rules deals with applications for refund of tax, interest, penalty, fees or any other amount. Sub-rule 5 thereof, as amended on 13.06.2018, with effect from 01.07.2017, reads as under: (5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:- Maximum Refund Amount= {(Turnover of inverted rated supply of goods and services) x Net ITC Adjusted Total Turnover} tax payable on such inverted rated 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 rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntral tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes- (a) the integrated goods and services tax charged on import of goods; (b) the tax payable under the provisions of sub-sections (3) and (4) of section 9; (c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act; (d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective 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; (83) outward supply in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business; (94) registered person means a person who is registered under Section 25 but d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32308, 32316, 32314, 32317 and 32327 of 2019. CONTENTIONS ON BEHALF OF THE PETITIONERS 5. Mr.Sujit Ghosh opened the submissions on behalf of the Petitioners. He pointed out that the Petitioner is a contractor providing services to the Chennai Metro Rail Limited and that in the course of business, the Petitioner uses both input goods and input services in its output supplies. Both the input goods and, particularly, the input services are subjected to a higher rate of tax than the rate of tax on output supplies of the Petitioner. Consequently, there is substantial accumulation of unutilised input tax credit. Mr.Ghosh contends that Section 54 of the CGST Act was designed for the purpose of enabling persons such as his client to obtain a refund of any unutilised input tax credit. He further submits that the object and purpose of the GST laws, in general, and the CGST Act, in particular, is to consolidate the indirect tax legislations and provide for a common regime that deals with both goods and services. Besides, the GST laws are intended to avoid the cascading of taxes so as to ensure that double taxation is completely eliminated. 6. With the above introduction, M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inputs in Section 54(3)(ii) should be construed as per common parlance. If construed as per common parlance, the word inputs would mean both input goods and input services. He further submits that the meaning ascribed to the word input in Section 2(59) of the CGST Act should not be adopted to for the purpose of interpreting Section 54(3)(ii). In support of this contention, he points out that Section 54 (3)(ii) uses the words output supplies in juxtaposition with the word inputs . The words output supplies are not defined in the CGST Act, whereas the words outward supplies are defined. Therefore, he contends that the intention of Parliament was to deploy the words inputs and output supplies as per their meaning in common parlance. In support of this contention, he pointed out that Section 2 of the CGST Act opens with the words unless the context otherwise requires. By referring to the judgment of the Hon'ble Supreme Court in Whirlpool Corporation v. Registrar of Trade Marks (1998) 8 SCC 1 (Whirlpool Corporation) , he pointed out that while dealing with statutory definitions, the Court should first examine the context; if the context indicates that the mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons who are similarly situated by making an invidious classification. For this proposition, he relied upon the judgment of the Hon'ble Supreme Court in Government of Andhra Pradesh and others v. Lakshmi Devi (2008) 4 SCC 720 (Lakshmi Devi). Therefore, he submitted that the word inputs in Section 54(3)(ii) should be interpreted in its wide, common parlance meaning so as to uphold the constitutional validity of the said provision. 9. The next contention of Mr.Ghosh was that the validity of the provision may also be upheld by resorting to reading down. For this purpose, he relied upon the judgment of the Hon'ble Supreme Court in Delhi Transport Corporation v. Mazdoor Congress and others 1991 (Supplement) 1 SCC 600 (Delhi Transport Corporation) wherein, at paragraph 255, the Hon'ble Supreme Court held that reading down can be resorted to either to save a statute from being struck down on account of its unconstitutionality or where provisions of the statute are vague and ambiguous and it is not possible to gather the intention of the legislature from the object and context. In the case at hand, unless the word inputs is read down, there would be a violation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 54(3). Instead, he contended that Section 54(3) sets out the general rule as to entitlement to refund in respect of any unutilised tax credit. The proviso thereto qualifies the principal sub-section by setting out the eligible classes and, in each class, the criteria for claiming refund. As per the proviso, the two classes of registered persons who are entitled to refund are those who have zero rated supplies, namely, exporters, and those who have accumulated credit on account of the fact that the rate of tax on the inputs procured by them is greater than the rate of tax on their output supplies . Mr.Parthasarathy contends that his clients satisfy the condition or entry barrier, i.e. they have accumulated credit because the rate of tax on the input goods procured by them exceeds the rate of tax on their output supplies. According to him, once this entry barrier or threshold is crossed, the entitlement to refund would be governed by Section 54(3) and not by the proviso. To put it differently, the proviso does not curtail the entitlement to refund of the entire unutilised input tax credit and merely sets out the eligibility conditions for claiming such refund. 12. Wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efund of unutilised input tax credit and not to curtail the quantum or type of unutilised input tax credit in respect of which refund may be claimed. He further contended that when the statute does not curtail the quantum of refund, it cannot be curtailed by amending the relevant rules. He further submitted that the quantum is indicated under Section 54(3) itself by specifying that registered persons would be entitled to a refund of any unutilised input tax credit. CONTENTIONS ON BEHALF OF THE RESPONDENTS 14. Mr.Mohammed Shaffiq made submissions, in response, on behalf of the State Tax Department. He pointed out that he would first deal with the question as to whether Section 54(3)(ii) violates Article 14 of the Constitution. On this question, his first contention was that if the Court construes Section 54(3)(ii) as infringing Article 14, the consequence would be to strike down the said provision and not to expand it so as to include the person who is discriminated against. For this proposition, he relied upon the judgment of the Hon'ble Supreme Court in Jain Exports Pvt. Ltd. v. Union of India 1996 (86) E.L.T. 478(S.C.). With regard to whether reading down could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he only limitation is that the rules should be for fulfilling the purposes of the CGST Act. In that context, he also submitted that no restriction should be read into the rule making power. He relied upon the judgment in K. Damodarasamy Naidu v. State of Tamil Nadu and another 2000(1) SCC 521 wherein, in the context of a composite supply, the Hon'ble Supreme Court concluded that the differentiation between goods and service is valid. Thus, he contended that Rule 89(5) merely supplements Section 54(3)(ii) and that it fulfills the purpose of eliminating arbitrariness in determining the entitlement to refund on the basis of Section 54(3)(ii). 18. Mr.Shaffiq's fifth contention was that both the CGST Act as well as the Constitution clearly differentiate between goods and services. As regards the Constitution, he referred to Article 366(12), which defines goods and Article 366(26)(A) which defines services. He also referred to paragraph 76 of Federation of Hotel to reiterate that wide latitude is provided to Parliament/legislatures in classifying the subjects of taxation. On the issue of latitude in methods of valuation for tax purposes, he also relied upon the judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilised input tax credit accumulated as a result of availing input services. This is an absurd and anomalous situation, which Parliament did not intend to create while enacting Section 54 and the proviso thereto. Therefore, Mr.Shaffiq contended that Section 54(3)(ii) is intended to curtail not only the class of persons who are entitled to a refund of unutilised input tax credit but also the type, on the basis of source, of eligible unutilised credit and the quantum thereof. To put it differently, the expression where the credit has accumulated on account of rate of tax on inputs qualifies and curtails the expression refund of any unutilised input tax credit in Section 54(3) in multiple respects as narrated above. With regard to the meaning of the expression on account of , he referred to the judgment of the U.S. Supreme Court in Kelly M. O'Gilvie v. United States 519 U.S. 79, 136 L.Ed. 2d 454 , wherein, by the majority opinion, the U.S Supreme Court concluded that the expression on account of indicates a strong causal connection. According to Mr.Shaffiq, the use of the words on account of in Section 54(3)(ii) underscores the fact that only unutilised input tax credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal Agency (1981) 1 SCC 51 (Para 14). The next contention of Mr.Shaffiq was that the Central Government is entitled to retrospectively amend the rules so as to bring the rules in line with Section 54(3). On this issue, he relied upon the judgment of the Hon'ble Supreme Court in Assistant Commissioner of Urban Land Tax and others v. Buckingham and Carnatic Co. Ltd. (1969) 2 SCC 55. 22. With regard to the nature of input tax credit, he relied upon the judgment of the Hon'ble Supreme Court in Jayam and Co. v. AC (CT) (2016) 15 SCC 125 (Jayam) , wherein input tax credit was equated with a concession and, therefore, it was held that the terms and conditions relating to availing such concession should be strictly complied with. For the same proposition, he also relied upon the judgment in ALD Automotive Pvt. Ltd. v. AC (CT) 2018 SCC Online SC 1945 (ALD Automotive). With regard to the judgment of the Gujarat High Court, he pointed out that the Gujarat High Court examined Section 54(3) and Rule 89(5) but failed to consider the proviso to Section 54(3). Consequently, the fact that the ambit and scope of the expression any unutilised input tax credit in Section 54(3) is cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who avail input services. With this background, he turned his attention to Section 54 and pointed out that Section 54(3)(i) deals with zero-rated supplies made without payment of tax. This clause excludes registered persons who make zero-rated supplies after payment of tax. By way of explanation, he pointed out that exporters of goods and services fall under two categories, namely, those who make such supplies upon payment of tax and those who provide a bond or undertaking and make the supply without payment of tax. Out of the said two categories, only those who make supplies without payment of tax are entitled to refund under Section 54(3)(i). In order to substantiate the contention that Parliament has consciously and intentionally excluded input services in Section 54(3)(ii), he referred to the explanation to Section 54 and pointed out that the definitions of both refund and relevant date use the words inputs or input services with the same meaning ascribed to those words in Section 2. For example, he pointed out that, as regards exporters, it is clear that they are entitled to a refund both in respect of input goods and input services. By contrast, as regards deemed exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acted clause. In fact, the proviso may even take the shape of a substantive provision. On the interpretation of provisos, he referred to the judgment of the Hon'ble Supreme Court in S.Sundaram Pillai and others v. V.R.Pattabiraman and others (1985) 1 SCC 591. In particular, he referred to paragraphs 30, 37 and 43 thereof. He also referred to the judgment in the case of Laxminarayanan R. Bhattad v. State of Maharashtra (2003) 5 SCC 413. By relying upon the aforesaid judgments, he reiterated that the proviso to Section 54(3) has the effect of curtailing the refund of unutilised input tax credit to the credit accumulated on account of the difference between the rate of tax on input goods and the rate of tax on output supplies. The next contention of Mr.Sankaranarayanan was that the Central Government is entitled to give retrospective effect to Rule 89(5). On this issue, he referred to the judgment of the Hon'ble Supreme Court in P . Kannadasan v. State of T.N. (1995) 5 SCC 670 , wherein it was held that Parliament's power to impose a tax with retrospective effect cannot be curtailed or restricted in any manner provided the intention to impose the tax retrospective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut supply, a claim for refund cannot be made. Similarly, if the registered person procures only input services, even if there is unutilised input tax credit because the rate of tax is higher on such input services as compared to the rate of tax on output supplies of such registered person, refund cannot be claimed. On the other hand, if a person procures both input goods and input services, such person can claim a refund provided the rate of tax on input goods procured by such person is higher than the rate of tax on the output supplies. By drawing reference to the aforesaid chart, Mr.Parthasarathy reiterated that Section 54(3)(ii) only specifies the cases wherein a registered person is entitled to refund. Once it is established that a registered person is entitled to refund on account of clearing the barrier or threshold in Section 54(3)(ii), the quantum of refund would be determined only by Section 54(3) and not by the proviso thereto. With regard to the case of zero-rated supply, he referred to Section 16 of the Integrated Goods and Services Tax Act so as to contend that a zero-rated supplier who effected supply upon payment of tax would be entitled to a refund under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic Service Commission, Hyderabad, AIR 1963 SC 268 ( paragraphs 7,10 and 11). His next illustration was in the context of debts. While debts may be classified as debts due to the Government and private debts, in the specific context of debts due to a Jagir, as compared to debts due to the Government, the Hon'ble Supreme Court held that the classification is invalid. The third illustration was with regard to medicines. In Ayurveda Pharmacy and another v. State of Tamil Nadu (1989) 2 SCC 285, the Hon'ble Supreme Court held that the imposition of a higher rate of tax on certain Ayurveda medicines on the basis of alcohol content was in violation of Article 14. Similarly, in State of Uttar Pradesh and others v. Deepak Fertilizers and Petrochemical Limited (2007) 10 SCC 342, the classification was held as bad. The fourth illustration was based on the judgment in S.K.Devi, AIR 1969 SC 658, in paras 13 to 15. By relying upon the aforesaid judgments, Mr.Ghosh contended that the validity or invalidity of classification would depend on the frame of reference. 30. As regards the GST laws, he pointed out that the GST laws represent a paradigm shift from a tax regime that taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... burden of proof is on the Tax Department to establish validity, as held in Government of Andhra Pradesh v. Lakshmi Devi, and that the Tax Department had failed miserably in discharging this burden. By drawing reference to the judgment of the Hon'ble Supreme Court in C.B.Gautam v. Union of India (1993) 1 SCC 78 (C.B. Gautam), he contended that the Court struck down, read down, and interpreted provisions of the Income Tax Act in the said judgment. For this purpose, he referred to paragraph 6,14,19,22,25,26,28, etc. of the said judgment. 32. He rebutted the contention that a tax statute should always be construed strictly by drawing reference to the judgment in Dilip Kumar . In particular, he pointed out that strict interpretation may be defined in multiple ways such as literal interpretation, narrow interpretation, etc. He further submitted that the Dilip Kumar case is distinguishable inasmuch as it dealt with the interpretation of an exemption notification. He submitted that a refund is not akin to an exemption. On this issue, he also referred to the judgment of the Hon'ble Supreme Court in Ramnath . By drawing specific reference to paragraph 75 thereof, he point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to Mr.Ghosh's contention on severability, he relied upon paragraph 22.6 of the judgment in RMD Chaumbargwala v. Union of India, A IR 1957 SC 628, so as to contend that words cannot be added while resorting to the principle of severability. With regard to reading down, he relied upon the judgment of the Hon'ble Supreme Court in B.R.Kapur v. State of T.N. (2001) 7 SCC 231 (Para 39) and contended that the Hon'ble Supreme Court held categorically that reading-up is not permitted while resorting to the principle of reading-down. He further submitted that this is a judgment of a Constitution Bench and would therefore prevail over judgments of smaller benches to the contrary. On this issue, he also relied upon the judgment of the Hon'ble Supreme Court in Cellular Operators Association v. TRAI (2016) 7 SCC 703 and, in particular, paragraphs 51 and 52 thereof. His next contention was regard to the interpretation of the expression 'inputs . On this issue, he contended that if a definition of a term is contained in the statute, the Court would first consider and apply such definition, and only in the absence of a statutory definition the Court would consider th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and Customs v. Rank Group EU C-259/10 . He also relied upon the judgment of the Hon'ble Supreme Court in Jindal Stainless Limited and another v. State of Haryana and others (2017) 12 SCC 1 (Para 28). He concluded his submissions by contending that on account of the differing nature of goods and services, tax evasion is for easier in respect of services. This is borne out by the available data and statistics and justifies the differential treatment as between goods and services when it comes to refund. Mr.Sujit Ghosh rebutted this contention by pointing out that tax evasion cannot be the basis to treat goods and services differently and that Section 132 of the CGST Act, which deals with evasion, applies equally to goods and services. He also relied upon Coca Cola India Pvt. Ltd. v. CCE Pune, 2009 (242) ELT 168 (Bom.) on this issue. QUESTIONS FOR CONSIDERATION 38. The contentions, including notes on submissions, of the learned counsel for the respective parties were duly considered and they raise several questions for the consideration of this Court. The said questions are as under: (1) Whether Section 54(3)(ii) infringes Article 14 of the Constitution? (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 subsection 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.(emphasis added). 25. We are of the opinion that 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. 26. In view of the above, Explanation (a) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o cases specified in sub clauses (i) and (ii). We propose to examine Section 54(3) from a fair reading perspective, i.e. by subjecting it to both a textual and contextual analysis. Both Mr.Parthasarathy and Mr.P.B.Harish contended that Section 54(3) quantifies the amount of input tax credit, which may be claimed by way of refund by the registered person. Because Section 54(3) uses the words a registered person may claim refund of any unutilised input tax credit at the end of any tax period , the learned counsel contended that the entitlement to a refund of the entire unutilised input tax credit is recognized and provided for in Section 54(3). According to them, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome in presentior in futuro for purposes in or outside the taxable territories, as the case may be, is the necessary condition for invoking either the substantive part of the clause or the proviso thereto.'' As is evident from the above, in H.E.H. Nizam, the Supreme Court held that a proviso performs the function of qualifying the substantive clause. In S. Sundaram Pillai v. V.R. Pattabiraman, (1985) 1 SCC 591(Sundaram Pillai), the Supreme Court delineated the multiple roles that a proviso could play and held that a proviso could even acquire the tenor and colour of a substantive enactment. Paragraphs 27 and 43 of the said judgment are extracted below: ''27. The next question that arises for consideration is as to what is the scope of a proviso and what is the ambit of an Explanation either to a proviso or to any other statutory provision. We shall first take up the question of the nature, scope and extent of a proviso. The well established rule of interpretation of a proviso is that a proviso may have three separate functions. Normally, a proviso is meant to be an exception to something within the main enactment or to qualify something enacted therein w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of a proviso and that it should be interpreted based on the text of the proviso and its context. To the contrary, Mr. Sujit Ghosh contended that a proviso, as a rule, performs a qualifying function by relying on ICFAI. 42. 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 . If the interpretation canvassed by Mr.Parthasarathy and Mr.P.B.Harish i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n furtherance of the purposes of the CGST Act, as held by this Court in P.R. Mani Electronics v. Union of India, W.P. No.8890 of 2020, Order dated 13.07.2020, 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. Hence, that issue should be examined. We note that Section 54(1) empowers the prescription of the form and manner of a claim for refund and Section 54(4) contains procedural requirements as regards the application for refund. Rule 89 deals with applications for refund of tax, interest, penalty, fees or any other amount. Sub-Rule 5 thereof was amended on two occasions. In the amended Rule 89(5), the expression Net ITC has been defined as meaning input tax credit availed on inputs during the relevant period. On the contrary, the expression Net ITC in Rule 89(5), as it stood between 01.07.2017 and 18.04.2018, defined the term the Net ITC as per the meaning in sub Rule 4 thereof. Sub Rule 4 defines Net ITC as input tax credit availed on ''inputs and input services during the relevant period. 44. When Rule 89(5), as it stands today ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used therein, is read in such a manner as to include input services. This contention is premised on the ground that the classification of registered persons for purposes of entitlement to refund into two classes, namely, those who avail input tax credit on input goods and those who avail input tax credit on input services is an arbitrary and invidious classification. Mr. Ghosh contended that the word inputs in Section 54(3)(ii) should be read in its common parlance meaning so as to avert the eventuality of the provision being struck down as violative of Article 14. Although the word input is defined in Section 2(59) as means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business , Mr. Ghosh contended that Section 2 opens with the words unless the context otherwise requires and, therefore, in the context of Section 54(3)(ii), the word inputs should be understood as per its common parlance meaning. On the contrary, Mr.Shaffiq contended that terms defined in a statute should be construed per statutory definition and Mr. Srinivas contended that the trade parlance meaning and statutory definition correspond perf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the contrary, the proceeding concerned is pending before the Registrar, the latter will be treated as Tribunal . 30.. Since Tribunal is defined in Section 2 which, in its opening part, uses the phrase Unless the context otherwise requires , the definition, obviously, cannot be read in isolation. The phrase Unless the context otherwise requires is meant to prevent a person from falling into the whirlpool of definitions and not to look to other provisions of the Act which, necessarily, has to be done as the meaning ascribed to a definition can be adopted only if the context does not otherwise require. 47.Thus, it is clear that Whirlpool Corporation dealt with the Trade Marks Act, 1958, which defined the word tribunal expansively so as to cover both the Registrar and the High Court depending on context and the last sentence of paragraph 30 thereof cannot be construed as laying down a general proposition that one turns to the context first before examining the statutory definition. Another judgment that supports a contextual interpretation even in light of a statutory definition is Vanguard Fire and General Insurance Co. Ltd. v. Fraser and Ross, AIR 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, in the context of tax statutes, in Bakelite Hylam v. CCE, 1998 5 SCC 621, it was held as under: 7. The said finding recorded by the Tribunal has been assailed by Shri J. Vellapally, the learned Senior Counsel appearing for the appellant. Shri Vellapally has invoked the common parlance test and has submitted that in common parlance Prepeg-F cannot be regarded as cotton fabric. The learned counsel has placed reliance on the decision of this Court in Purewal Associates Ltd. v. CCE [(1996) 10 SCC 752] . We do not find any substance in the said contention of Shri Vellapally. In Purewal Associates Ltd. [(1996) 10 SCC 752] this Court has taken note of the earlier decision in Plasmac Machine Mfg. Co. (P) Ltd. v. CCE [1991 Supp (1) SCC 57] wherein it was held that where definition of a word has not been given, it must be construed in its popular sense . So also in Indo International Industries v. CST [(1981) 2 SCC 528 : 1981 SCC (Tax) 130] it has been held that: (SCC p. 530, para 4) If any term or expression has been defined in the enactment then it must be understood in the sense in which it is defined but in the absence of any definition being given in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be used by a supplier in the course or furtherance of business . Does the context indicate a departure from the meaning per definition and point toward adoption of the common parlance meaning? In our view, there are multiple factors that militate against reading the word inputs against the meaning per definition. The first is that the definition expressly excludes capital goods, whereas if the common parlance meaning, as advocated by Mr. Ghosh, is adopted, capital goods would be included and one would be drawing conclusions that are antithetical to the text. The second reason is that the immediate context, namely, Section 54 contains more than a few usages of the terms inputs and input services in other sub-sections. By way of illustration, reference may be made to Section 54(8)(a) which uses the words inputs and input services separately and distinctively in the context of refund of tax paid to exporters. Similarly, the 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. Keeping in mind the aforesaid factors, we are unable to countenance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious consideration, we would be more than justified to conclude and also compelled to hold that every taxing statute including, charging, computation and exemption clause (at the threshold stage) should be interpreted strictly. Further, in case of ambiguity in charging provisions, the benefit must necessarily go in favour of subject/assessee, but the same is not true for an exemption notification wherein the benefit of ambiguity must be strictly interpreted in favour of the Revenue/State. 66. To sum up, we answer the reference holding as under: 66.1. Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. 66.2. When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the Revenue.... 52. In Ramnath , the said principle of strict interpretation was held as applicable to all rebates, incentives and concessions. Mr.Ghosh contends that the refund of input tax credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... output supplies is also entitled to and, therefore, accumulates input tax credit. In other words, there is no restriction when it comes to the accrual or accumulation of input tax credit. The differential treatment is limited to entitlement to refund. According to him, the Parliament/legislature is entitled to make a classification provided such classification is not arbitrary and bears a rational nexus to the object of the enactment, and the GST laws were introduced so as to treat both goods and services alike and depart from the historical practice of treating goods and services differently. Mr.Ghosh contended that the charging provisions, the machinery provisions, the penal provisions, the enforcement provisions all apply equally to goods and services under the CGST Act. In fact, even the provisions related to input tax credit applies equally both to goods and services, and the differentiation only for purposes of refund of unutilised input tax credit violates Article 14. According to him, the classification for purposes of refund should be analysed by keeping in view this frame work. If so analysed, Mr.Ghosh contended that excluding registered persons who avail input serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment what is looked into is not its phraseology, but the real effect of its provisions. A legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory. Decisions of this Court on the matter have permitted the legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. 47. But, with all this latitude certain irreducible desiderata of equality shall govern classifications for differential treatment in taxation laws as well. The classification must be rational and based on some qualities and characteristics which are to be found in all the persons grouped together and absent in the others left out of the class. But this alone is not sufficient. Differentia must have a rational nexus with the object sought to be achieved by the law. The State, in the exercise of its governmental power, has, of necessity, to make laws operating dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dmonition been more felicitously expressed than in Morey v. Doud [1 L Ed 2d 1485 : 354 US 457 (1957)] where Frankfurter, J. said in his inimitable style: In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events'self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability. The court must always remember that legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry ; that exact wisdom and nice adaptation of remedy are not always possible and that judgment is largely a prophecy ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n taxation disputes was also discussed in Spences Hotel and Mr. Ghosh placed considerable emphasis on this judgment, wherein it was held as under: ''22. The intrinsic complexity of fiscal adjustments of diverse elements and wide discretion and latitude of the legislature in the matter of classification for taxation purposes was emphasised by Sabyasachi Mukharji, J. as he then was, in State of Maharashtra v. Madhukar Balkrishna Badiya [(1988) 4 SCC 290 : 1988 SCC (Tax) 506] which was a case under the Bombay Motor Vehicles Tax Act, 1958 (as amended by Maharashtra Act 14 of 1987). In para 14 of the report it was said : (SCC p. 298, para 14) About discrimination it is well to remember that a taxation law cannot claim immunity from the equality clause in Article 14 of the Constitution. But in view of the intrinsic complexity of fiscal adjustments of diverse elements, a considerably wide discretion and latitude in the matter of classification for taxation purpose is permissible. 23. From the propositions of law enunciated in the above cases by this Court, it is well settled that a taxation will be struck down as violative of Article 14 if there is no reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to what articles should be taxed is a question of policy and there cannot be any complaint merely because the legislature has decided to tax certain articles and not others. In D.S. Nakara v. Union of India [(1983) 1 SCC 305 : 1983 SCC (L S) 145] , Desai, J. even expressed that too microscopic a classification may also be violative of Article 14. It was reiterated in Bank of Baroda v. Rednam Nagachaya Devi [(1989) 4 SCC 470] that the burden is always on the person alleging the violation of Article 14 of the Constitution of India to raise specific pleas and grounds and to prove it. 24. Whether a particular tax is discriminatory or not must necessarily be considered in light of the nature and incidence of that particular tax and cannot be judged by what has been held in the context of other taxes except the general propositions. The precedents relating to property taxes such as land tax, building tax, plantation tax, and even income tax or a service tax will not be of direct relevance to a luxury tax, as it is neither a property tax, nor an income tax but a tax on the provision for luxury. In case of tax on provision for luxury different aspects peculiar to the tax have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, they are not simply being influenced by the imaginative and quasi-aesthetic appeal of making the amount of payments proportionate to the number of people, or making it proportionate to their incomes? 58. Upon considering the rival contentions on this issue, we note the following features of input tax credit and its refund: (i) Registered persons who utilise input services, in their output supplies, are permitted to avail input tax credit, which is reflected in their ledger. (ii) The unutilised input tax credit does not lapse if refund is not granted. However, it is possible that it may have to be written down on account of applicable accounting standards if the probability of utilization is low. (iii) The differentiation between input goods and input services is only with regard to entitlement to refund. Section 54(3)(ii), as interpreted by us, limits the entitlement to refund to the credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies. (iv) Inter se registered persons who avail input services, the treatment is uniform as also inter se registered persons who procure input goods. 59. It s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislation is intended to consolidate the indirect taxes on goods and services under a common umbrella. 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 G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. While Mr.Ghosh contended that the principle of reading down may be resorted to so as to read the word input services into Section 54(3)(ii) by referring to judgments such as C.B. Gautam , Mr.Shaffiq contended that reading down may be resorted to only to curtail the scope of a provision and not to expand it. Indeed, he submitted that reading down does not mean reading up. For this proposition, he referred to the judgment in V.R.Kapur as well as the judgment in Cellular Operators Association. The ambit of reading down and the exceptions to the casus omissus rule would have to await an appropriate case that warrants a finding on these issues. CONCLUSIONS 63. Thus, we arrive at the following conclusions: (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 unu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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