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TMI BlogRefund of unutilised ITC - inverted duty structure - Denial on Input services - Contradictory Judgements on the same issue - GUJARAT HIGH COURT allows the refund while MADRAS HIGH COURT notX X X X Extracts X X X X X X X X Extracts X X X X ..... e 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) 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. 27. The respondents are therefore, directed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les 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 is to be accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which registered persons become eligible for a refund of unutilised input tax credit. The proviso performs the larger function of also limiting the entitlement of refund to credit that accumulates as a result of the rate of tax on input goods being higher than the rate of tax on output supplies. 43. Given the fact that we concluded that Section 54(3)(ii) enables a registered person to claim a refund of unutilised input tax credit only to the extent that such credit has accumulated on account of the rate of tax on input goods being higher than the rate of tax on output supplies, it remains to be considered whether Rule 89(5) is ultra vires the rule making power and Section 54(3). Keeping in mind that Section 164 confers power on the Cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n unutilised input tax credit that accumulates on account of input goods, whereas, as per the unamended Rule 89(5), Net ITC covered not only input tax credit availed on input goods but also on input services. In light of the conclusion that a refund is permitted only in respect of unutilised input tax credit that accrues or accumulates as a result of the higher rate of tax on input goods vis-a-vis output supplies, we are of the view that the amended Rule 89(5) is in conformity with the statute. On the other hand, the unamended Rule 89(5) exceeded the scope of Section 54(3)(ii) and extended the benefit of refund to the credit that accumulates both on account of the rate of tax on "inputs" and "input services" being higher than the rate of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power. (3) Therefore, there is no necessity to adopt the interpretive device of reading down so as to save the constitutionality of Section 54(3)(ii). (4) Section 54(3)(ii) curtails a refund claim to the unutilised credit that accumulates only on account of the rate of tax on input goods being higher than the rate of tax on output supplies. In other words, it qualifies and curtails not only the class of registered persons who are entitled to refund but also the imposes a source-based restriction on refund entitlement and, consequently, the quantum thereof. (5) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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