UNION OF INDIA & ORS. versus VKC FOOTSTEPS INDIA PVT LTD.
[2021] 15 S.C.R. 169, Supreme Court of India, 2021
Outcome: Disposed off
Segment: Ratio
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UNION OF INDIA & ORS.
v.
VKC FOOTSTEPS INDIA PVT LTD.
(Civil Appeal No. 4810 of 2021)
SEPTEMBER 13, 2021
[DR DHANANJAYA Y. CHANDRACHUD AND
M. R. SHAH, JJ.]
Central Goods and Services Tax Act, 2017 – ss. 54(3) and
s.164 – Central Goods and Services Tax Rules, 2017 – r.89(5) –
Writ petitions were filed in the High Court of Gujarat and High
Court of Madras, challenging the validity of r.89(5) on the ground
that it is ultra vires s.54(3) – The High Court of Gujarat in VKC
Footsteps India Pvt. Ltd. v. Union of India (R/Special Civil
Application No.2792 of 2019) having examined the provisions of
s.54(3) and r.89(5) held that latter was ultra vires – However, the
Madras High Court in Tvl. Transtonnelstroy Afcons Joint Venture v.
Union of India (Writ Petition Nos. 8596-97, 8602 etc. of 2019) came
to a contrary conclusion – On appeal, held: Clause (ii) of the first
proviso to s.54(3) is not merely a condition of eligibility for availing
of a refund but a substantive restriction under which a refund of
unutilized ITC can be availed of only when the accumulation is
relatable to an inverted duty structure, namely the tax on input goods
being higher than the rate of tax on output supplies – Therefore,
there is no disharmony between r.89(5) on one hand and s.54(3)
particularly clause (ii) of its first proviso on the other hand – The
decision passed by the Madras High Court is affirmed.
Central Goods and Services Tax Act, 2017 – s.54(3) – Central
Goods and Services Tax
Rules, 2017 –  r.89(5) – Claim of refund –
Constitutional right or not – Held: Refund is a matter of a statutory
prescription – Parliament was within its legislative authority in
determining whether refunds should be allowed of unutilised ITC
tracing its origin both to input goods and input services or, as it has
legislated, input goods alone – By its clear stipulation that a refund
would be admissible only where the unutilised ITC has accumulated
on account of the rate of tax on inputs being higher than the rate of
tax on output supplies, Parliament has confined the refund – While
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recognising an entitlement to refund, it is open to the legislature to
define the circumstances in which a refund can be claimed – The
proviso to s.54(3) is not a condition of eligibility but a restriction
which must govern the grant of refund u/s. 54(3).
Central Goods and Services Tax Rules, 2017 –  r.89(5) –
Validity of formula prescribed in r.89(5) – Held: The formula is not
ambiguous in nature or unworkable, nor it is opposed to the intent
of the legislature in granting limited refund on accumulation of
unutilized ITC – It is merely the case that the practical effect of the
formula might result in certain inequities – Given the anomalies
pointed out by the assesses, GST Council to reconsider the formula
and take policy decision regarding the same.
Disposing of the appeals, the Court
HELD: Construing the Proviso
1. Sub-Section (3) of Section 54 begins, in its main part,
with the stipulation that a registered person may claim refund of
any ‘unutilised ITC at the end of any tax period’. Whether we
construe the first proviso as an exception or in the nature of a
fresh enactment, the clear intent of Parliament was to confine
the grant of refund to the two categories spelt out in clauses (i)
and (ii) of the first proviso. That clauses (i) and (ii) are the only
two situations in which a refund can be granted is evident from
the opening words of the first proviso which stipulates that “no
refund of unutilised input tax
credit shall be allowed in cases other
than”. What follows is clauses (i) and (ii). The intent of Parliament
is evident by the use of a double – negative format by employing
the expression “no refund” as well as the expression “in cases
other than”. In other words, a refund is contemplated in the
situations provided in clauses (i) and (ii) and no other. To put it
differently, the first proviso can be recast, without altering its
meaning to read that a refund of unutilised ITC shall be allowed
only in the cases governed by clauses (i) and (ii). Clause (i) deals
with zero rated supplies without payment of tax. Explanation-1 to
Section 54 clarifies that the expression ‘refund’ includes refund
of tax paid on zero rated supplies on goods or services or both,
or on inputs or input services used in making such zero-rated
supplies. On the other hand, in the case of deemed exports,
Explanation-1 refers to a refund of tax on the supply of goods.
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Likewise in regard to domestic supplies, governed by clause (ii)
of the first proviso, the expression ‘refund’ means refund of
unutilised ITC as provided under sub-Section (3). With the clear
language which has been adopted by Parliament while enacting
the provisions of Section 54(3), the acceptance of the submission
which has been urged on behalf of the assessee would involve a
judicial re-writing of the provision which is impermissible in law.
Clause (ii) of the proviso, when it refers to “on account of” clearly
intends the meaning which can ordinarily be said to imply ‘because
of or due to’. When proviso (ii) refers to “rate of tax”, it indicates
a clear intent that a refund would be allowed where and only if the
inverted duty structure has arisen due to the rate of tax on input
being higher than the rate of tax on output supplies. Reading the
expression ‘input’ to cover input goods and input services would
lead to recognising an entitlement to refund, beyond what was
contemplated by Parliament. [Para 69][253-G-H; 254-A-F]
2. This Court must be cognizant of the fact that no
constitutional right is being asserted to claim a refund, as there
cannot be. Refund is a matter of a statutory prescription.
Parliament was within its legislative authority in determining
whether refunds should be allowed of unutilised ITC tracing its
origin both to input goods and input services or, as it has
legislated, input goods alone. By its clear stipulation that a refund
would be admissible only where the unutilised ITC has
accumulated on account of the rate of tax on inputs being higher
than the rate of tax on output supplies, Parliament has confined
the refund in the manner which we have described above. While
recognising an entitlement to refund, it is open to the legislature
to define the circumstances in which a refund can be claimed.
The proviso to Section 54(3) is not a condition of eligibility (as
the assessees’ Counsel submitted) but a restriction which must
govern the grant of refund under Section 54(3). [Para 70][254-G-
H; 255-A-B]
Constitutional Validity of s.54(3)
2. Parliament while enacting the provisions of Section 54(3),
legislated within the fold of the GST regime to prescribe a refund.
While doing so, it has confined the grant of refund in terms of the
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first proviso to Section 54(3) to the two categories which are
governed by clauses (i) and (ii). A claim to refund is governed by
statute. There is no constitutional entitlement to seek a refund.
Parliament has in clause (i) of the first proviso allowed a refund
of the unutilized ITC in the case of zero-rated supplies made
without payment of tax. Under clause (ii) of the first proviso,
Parliament has envisaged a refund of unutilized ITC, where the
credit has accumulated on account of the rate of tax on inputs
being higher than the rate of tax on output supplies. When there
is neither a constitutional guarantee nor a statutory entitlement
to refund, the submission that goods and services must
necessarily be treated at par on a matter of a refund of unutilized
ITC cannot be accepted. Such an interpretation, if carried to its
logical conclusion would involve unforeseen consequences,
circumscribing the legislative discretion of Parliament to fashion
the rate of tax, concessions and exemptions. If the judiciary were
to do so, it would run the risk of encroaching upon legislative
choices, and on policy decisions which are the prerogative of the
executive. Many of the considerations which underlie these
choices are based on complex balances drawn between political,
economic and social needs and aspirations and are a result of
careful analysis of the data and information regarding the levy of
taxes and their collection. That
is precisely the reason why courts
are averse to entering the area of policy matters on fiscal issues.
This Court is therefore unable to accept the challenge to the
constitutional validity of Section 54(3). [Para 81][261-E-H; 262-
A-B]
Validity of Rule 89(5) of CGST Rules in exercise of the
rule making power u/s.164 of the CGST Act
3. Under Section 164(1), confers an express power on the
Central Government to make rules for carrying out the provisions
of the CGST Act on the recommendations of the GST Council. It
may be true that in certain specific statutory provisions, the Act
recognizes, by using the expression ‘prescribes’, that rules may
be framed for that purpose. But the converse cannot be assumed
inferentially, by presuming that in other areas, recourse to the
rule making power cannot be taken. By its very nature, a statutory
provision may not visualize every eventuality which may arise in
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implementing the provisions of the Act. Hence it is open to the
rule making authority to frame rules, so long as they are consistent
with the provisions of the parent enactment. The rules may
interstitially fill-up gaps which are unattended in the main
legislation or introduce provisions for implementing the
legislation. So long as the authority which frames the rules has
not transgressed a provision of the statute, it cannot be deprived
of its authority to exercise the rule making power. The wide
powers given under Section 164 of the CGST Act are only limited
by the provisions of the Act itself, in furtherance of which a rule
maybe framed. It is for this reason that the powers under Section
164 are not restricted to only those sections which grant specific
authority to frame rules. If such a construction, as assessee has
hypothesised, were to be acceptable, it would render the
provisions of Section 164 otiose. Thus, this Court finds that the
absence of the words “as may be prescribed” in Section 54(3)
does not deprive the rule making authority to make rules for
carrying out the provisions of the Act. [Para 85][263-F-H; 264-
A-C]
The Vires of Rule 89(5) vis-à-vis Section 54(3) of the CGST
Act
4.  The grievance however is that Rule 89(5) goes beyond
the “provisions of the Act” when in the garb of fixing a formula, it
restricts the refund of ITC to input goods by denying ITC of
input services. This is done by defining ‘Net ITC’ to mean ITC
availed of
inputs. The gravamen of the challenge is that this
consequently ignores ITC relatable to input services. In other
words, the submission is that Rule 89(5) cannot be construed to
be a rule for carrying out the “provisions of the Act”. [Para
90][266-B-C]
5. The second limb of the line of challenge is that even
though the rules are required to be recommended by the GST
Council this will not elevate them to the status of a law enacted
by the legislature. The submission which has been urged by
assessee proceeds on an underlying assumption which is that
Rule 89(5) by restricting the definition of Net ITC to mean ITC
availed on input goods is an affront to Section 54(3). It is on this
foundation, that it has been urged that a rule which is contrary to
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the statute cannot be saved merely on the ground that either (i)
the rule has been laid before Parliament and is subject to its power
of modification annulment or amendment; or (ii) the rule was made
on the recommendations of the GST Council. The application of
the second layer of the argument does not arise in the present
case for the simple reason that Rule 89(5) in defining Net ITC to
mean “input tax credit availed on inputs” does not transgress
the statutory restriction which is contained in proviso (ii) of Section
54(3). The challenge to Rule 89(5) as a piece of delegated
legislation on the ground that it is ultra vires Clause (ii) of the
first proviso to Section 54(3) is therefore lacking in substance.
As reasoned in the earlier part of this judgment, Clause (ii) of
the first proviso is not merely a condition of eligibility for availing
of a refund but a substantive restriction under which a refund of
unutilized ITC can be availed of only when the accumulation is
relatable to an inverted duty structure, namely the tax on input
goods being higher than the rate of tax on output supplies. There
is therefore no disharmony between Rule 89(5) on the one hand
and Section 54(3) particularly Clause (ii) of its first proviso on
the other hand. [Para 92][266-F-G; 267-A-B]
The Validity of the Formula prescribed in Rule 89(5)
6. In view of this Court, the justification of the formula under
Rule 89(5) given by the ASG to
create a legal bifurcation is valid.
In this context, it would be material to advert to the provisions of
Rule 42. Rule 42(1) provides that the ITC in respect of input
goods or input services which attract the provisions of sub-Section
(1) or sub-Section (2) of Section 17 being partly used for the
purpose of business and partly for other purposes or partly used
for affecting taxable supplies including zero rated supplies and
partly for effecting exempts supplies shall be attributed for the
purposes of business or for effecting taxable supplies in the
manner which is indicated in the Rule. Sub-Section (1) of Section
17 provides that where the goods and services or both are used
by a registered person partly for the purposes of any business
and partly for any other purpose, the amount of credit shall be
restricted to so much of the input tax as is attributable to the
purpose of its business. Sub-Section (2) of Section 17 provides
that where the goods or services or both are used by a registered
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person partly for effecting taxable supplies including zero rated
supplies under the CGST Act or under the IGST Act and partly
for effecting exempt supplies the amount of credit shall be
restricted to so much of the input tax as is attributable to the
taxable supplies including zero rated supplies. Rule 42, in other
words, provides for the manner in which the attributions of ITC
in respect of the input or input services under sub-Sections (1)
or (2) of Section 17 shall be carried out. Rule 43 similarly provides
the manner in which ITC in respect of capital goods attracting
the provisions of sub-Section (1) of Section 17, used partly for
business and partly for other purposes or partly for effecting
taxable supplies including zero rated supplies and partly for
effecting exempt supplies would be attracted to the purpose of
business or for effecting taxable supplies. Both Rules 42 and 43
provide for a formula for attribution. Rule 86 provides for the
maintenance of an electronic credit ledger. Rule 89(5) provides
for a refund. In both sets of rule clusters, Rules 42 and 43 on the
one hand and Rule 89(5) on the other hand, a formula is used for
the purpose of attribution in a post assimilated scenario. The use
of such formulae is a familiar terrain in fiscal legislation including
delegated legislation under parent norms and is neither untoward
nor ultra vires. [Para 103][271-G; 272-A-F]
7. The aberrations which have been pointed out, certainly
indicate that
the formula is not perfect. The formula makes a
presumption that the output tax payable on supplies has been
entirely discharged from the ITC accumulated on account of input
goods and there has been no utilisation of the ITC on input
services. While a similar formula is provided in Rule 89(4) with
regard to zero rated supplies, in that case, the ‘Net ITC’ includes
input goods and input services and thus, there is no imbalance
between the different components of the formula. The formula
prescribed in Rule 89(5) however, seeks to deduct the total output
tax from only one component of the ITC, namely ITC on input
goods. This in our view is at odds with reality, where the ITC on
both input goods and input services is accumulated in the
electronic ledger and is then utilised for the payment of output
tax. In making such an assumption, the formula tilts the balance
in favour of the Revenue by reducing the refund granted. We are
equally cognizant of the fact that the proposed solution, that is
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prescribing an order of utilisation of the ITC accumulated on input
services and input goods, may tilt the balance entirely in favour
of the assessee as that would make a contrary assumption that
the output tax is discharged by the ITC accumulated on account
of input services entirely. Another possible solution could be that
the Rule itself provides for a statutory assumption or a deeming
fiction of utilisation of a certain percentage of ITC on input
services towards the payment of output tax for the purpose of
calculation of refund. [Para 105][273-A-E]
8. The above judicial precedents indicate that in the field
of taxation, this Court has only intervened to read down or
interpret a formula if the formula leads to absurd results or is
unworkable. In the present case however, the formula is not
ambiguous in nature or unworkable, nor is it opposed to the intent
of the legislature in granting limited refund on accumulation of
unutilised ITC. It is merely the case that the practical effect of
the formula might result in certain inequities. The reading down
of the formula as proposed by prescribing an order of utilisation
would take this Court down the path of recrafting the formula
and walk into the shoes of the executive or the legislature, which
is impermissible. Accordingly, we shall refrain from replacing the
wisdom of the legislature or its delegate with our own in such a
case. However, given the anomalies pointed
out by the assessees,
we strongly urge the GST Council to reconsider the formula and
take a policy decision regarding the same. [Para 111][280-D-F]
VKC Footsteps India Pvt. Ltd. v. Union of India
R/Special Civil Application No 2792 of 2019 –
disapproved.
Tvl. Transtonnelstroy Afcons Joint Venture v. Union of
India Writ Petition Nos 8596, 8597, 8602, 8603, 8605
and 8608 of 2019 – affirmed.
Assistant Commissioner of Urban Land Tax v.
Buckingham and Carnatic Co. Ltd. (1969) 2 SCC 55 :
[1970] 1 SCR 268; Federation of Hotel & Restaurant
Association of India v. Union of India (1989) 3 SCC
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634 : [1989] 2 SCR 918; RK Garg v. Union of India
(1981) 4 SCC 675 : [1982] 1 SCR 947 – followed.
S Sundaram Pillai v. V R Pattabiraman (1958) 1 SCC
591; Hiralal Rattanlal v. State of UP (1973) 1 SCC 216
: [1973] 2 SCR 502; Union of India v. NITDIP Textile
Processors Private Limited (2012) 1 SCC 226 : [2011]
13 SCR 26; Elel Hotels and Investments Limited and
Others v. Union of India (1989) 3 SCC 698 : [1989] 2
SCR 880; Spences Hotel Pvt Ltd. v. State of West Bengal
(1991) 2 SCC 154 : [1991] 1 SCR 429; Commissioner
of Income Tax v. HCL Technologies Limited (2018) 16
SCC 709 : [2018] 7 SCR 1079; Arun Kumar and Others
v. Union of India (2007) 1 SCC 732 : [2006] 6 Suppl.
SCR 290 – relied on.
Mafatlal Industries Limited v. Union of India (1997) 5
SCC 536 : [1996] 10 Suppl. SCR 585; All India
Federation of Tax Practitioners v. Union of India (2007)
7 SCC 527 : [2007] 9 SCR 147; Association of Leasing
and Financial Service Companies v. Union of India
(2011) 2 SCC 352 : [2010] 13 SCR 381; CIT v.
Bipinchandra Maganlal AIR 1961 SC 1040 : [1961]
SCR 493; State of Rajasthan v. Leela Jain AIR 1965
SC 1296 : [1965] SCR 276; Bihar Cooperative
Development Cane Marketing Union Ltd. v. Bank of
Bihar AIR 1967 SC 389 : [1967] SCR 848; State of
Jammu & Kashmir v. Triloki Nath Khosa (1974) 1 SCC
19 : [1974] 1 SCR 771; Re The Special Courts Bill 1978
(1979) 1 SCC 380 : [1979] 2 SCR 476; Assistant
Commissioner of Commercial Tax (Asst.) v. Dharmendra
Trading Company (1988) 3 SCC
570 : [1988] 3 SCR
946; Kerala State Electricity Board v. Indian Alluvium
Co. Ltd. (1976) 1 SCC 466 : [1976] 1 SCR 552; Bharat
Hari Singhania v. Commissioner of Wealth Tax (Central)
(1994) 3 Suppl. SCC 46 : [1994] 1 SCR 1033;
Commissioner of Income Tax, Coimbatore v. Lakshmi
Machine Works (2007) 11 SCC 126 : [2007] 5 SCR
622 – referred to.
UNION OF INDIA v. VKC FOOTSTEPS INDIA PVT LTD.

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Case Law Reference
[1996] 10 Suppl. SCR 585
referred to
Para 11 D.1.3.(iii)
[2007] 9 SCR 147
referred to
Para 14(ii) & 24
[2010] 13 SCR 381
referred to
Para 57
(1958) 1 SCC 591
referred to
Para 65
[1973] 2 SCR 502
relied on
Para 66
[1961] SCR 493
referred to
Para 66
[1965] SCR 276
referred to
Para 66
[1967] SCR 848
referred to
Para 66
[1974] 1 SCR 771
referred to
Para 72
[1979] 2 SCR 476
referred to
Para 72
[1970] 1 SCR 268
followed
Para 76(i)
[1989] 2 SCR 918
followed
Para 76(ii)
[2011] 13 SCR 26
relied on
Para 76(iv)
[1988] 3 SCR 946
referred to
Para 77
[1989] 2 SCR 880
relied on
Para 78
[1991] 1 SCR 429
relied on
Para 79
[1976] 1 SCR 552
referred to
Para 91
[1994] 1 SCR 1033
referred to
Para 91
[2007] 5 SCR 622
referred to
Para 99
[1982] 1 SCR 947
followed
Para 102
[2018] 7 SCR 1079
relied on
Para 110
[2006] 6 Suppl. SCR 290
relied on
Para 110
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4810
of 2021.
From the Judgment and Order dated 24.07.2020 of the High Court
of Gujarat at Ahmedabad in S.C.A. No.2792 of 2019.
With
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Civil Appeal Nos. 4809, 4811, 4807, 4767, 4804, 4806, 4802, 4783,
4775-4781, 4769-4744, 4805, 4808, 4764-4765 of 2021 and Writ Petition
(C) No. 489 of 2021.
N. Venkataraman, Balbir Singh, ASGs, Amit Anand Tiwari, AAG,
Arvind Datar, V. Sridharan, Sr. Advs., Mukesh Kumar Maroria, Shyam
Gopal, Ms. Binu Tamta, M. Yogesh Kanna, Joseph Pookkatt, Prashant
Kumar, Nilesh Sharma, Dhawesh Pahuja, M/s Ap & J Chambers,
Dr. Avinash Poddar, Anant Kumar Vatsaya, Devendra Singh, Naresh
Thacker, Kumar Visalaksh, Hardik Modh, Udit Jain, Amit Laddha,
Abhishek Vikas, Harish Bindhumadavan, Pawanshree Agrawal, Rahul
Unnikrishnan, Ashwini Chandrashekharan, Sharyashree Thyagarajan,
Manoharan Ellappan, G. Natarajan, Kartik Jindal, Anant Gautam, Nipun
Sharma, Madhur Tewatia, Rajesh Kumar Gautam, Mahesh Agarwal, P.
R. Renganath, Rohan Talwar, Shantanu Sharma, Chinmayee Chandra,
B. Krishna Prasad, B. V. Balaram Das, Sujit Gosh, Krishna Rao, Ajinka
Tiwari, Nikilesh Ramachandran, Ms. Charanya Lakshmikumaran, Ankit
Yadav, Ms. Veena Kamath, Ratnesh Sharma, Uchit Sheth, Santosh
Krishnan, Anand Nainavati, Aditya Bhattacharya, Ms. Apeksha Mehta,
Sriram Sridharan, Somesh Jain, Nalin Bajaj, E. C. Agrawala, Vinay Shraff,
Ravi Bharuka, Ankit Agarwal, Sandeep Goyal, Dr. Joseph Aristotle S.,
Saaketh Kasibhatla, Ms. Preeti Singh, Advs. for the appearing parties.
The Judgment of the Court was delivered by
DR DHANANJAYA Y CHANDRACHUD, J.
Index*
A
Introduction...................................................................... 5
B
Factual Backdrop ............................................................ 6
C
Statutory Provisions......................................................... 8
D
Submissions ................................................................... 12
D.1
Union of India .................................................... 12
D.1.1 Part I- Distinction between goods and services 12
D.1.2 Part II- Interpretation of Section 54(3).............. 13
D.1.3. Part III- Legal Propositions ............................... 19
D.2
Assessees .......................................................... 21
UNION OF INDIA v. VKC FOOTSTEPS INDIA PVT LTD.
*Ed. Note : The pagination in the Index is as per the original judgment.
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D.3   Rejoinder by Union of India ................................. 58
E
Constitutional Scheme of GST....................................... 60
F
CGST Act ...................................................................... 68
F.1 Definitions .............................................................. 68
F.2 Section 16 & Section 49 of the CGST Act ............ 71
F.3 Interpretation of Section 54(3) of the CGST Act... 75
F.4 Construing the proviso............................................ 93
F.5 Constitutional validity: The ultra vires doctrine ... 102
G
Rule 89(5) ..................................................................... 111
G.1 The validity of Rule 89(5) of CGST Rules in exercise
of the rule-making power under Section 164 of the
CGST Act .............................................................112
G.2 The vires of Rule 89(5) vis-à-vis Section 54(3) of the
CGST Act .............................................................114
G.3 The validity of the formula prescribed in Rule 89(5)118
H
Conclusion ................................................................... 134
A Introduction
1. Parliament while enacting the Central Goods and Services Tax
Act 2017,1 has incorporated a provision for refund of tax in Section 54.
Sub-Section (3) embodies a provision for refund of unutilised input tax
credit2 in cases involving:
(i)
zero rated supplies made without payment of tax; and
(ii) credit
accumulation “on account of rate of tax on inputs being
higher than rate of tax on output supplies”.
2. While envisaging a refund in the latter of the above two
situations, Parliament was cognizant of the fact that ITC may accumulate
due to a variety of reasons. However, Parliament envisaged a specific
situation where the credit has accumulated due to an inverted duty
structure, that is where the accumulation of ITC is because the rate of
tax on inputs is higher than the rate of tax on output supplies. Taking
1  “CGST Act”
2  “ITC”
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legislative note of this situation, a provision for refund has been provided
for in Section 54(3). The Central Goods and Service Tax Rules 20173
have been formulated in pursuance of the rule making power conferred
by Section 164 of the CGST Act. Rule 89(5) provides a formula for the
refund of ITC, in “a case of refund on account of inverted duty structure”.
The said formula uses the term “Net ITC”. In defining the expression
“Net ITC”, Rule 89(5) speaks of “input tax credit availed on inputs”.
B Factual Backdrop
3. Writ petitions under Article 226 of the Constitution were
instituted before the High Court of Gujarat and the High Court of
Judicature at Madras. The petitioners before the High Court submitted
inter alia that
(i)
Section 54(3) allows for a refund of ITC where the
accumulation is due to an inverted duty structure;
(iii) ITC includes the credit of input tax charged on the supply of
goods as well as services;
(iv) Section 54(3) does not restrict the entitlement of refund only
to unutilised ITC which is accumulated due to the rate of tax
on inputs being higher than the rate of tax on output supplies.
It also allows for refund of unutilised ITC when the rate of
tax on input services is higher than the rate of tax on output
supplies;
(v) While Section 54(3) allows for a refund of ITC originating in
inputs as well as input services, Rule 89(5) is ultra vires in so
far as it excludes tax on input services from the purview of
the formula; and
(vi) In
the event that Section 54(3) is interpreted as a restriction
against a claim for refund of accumulated ITC by confining it
only to tax on inputs, it would be unconstitutional as it would
lead to discrimination between inputs and input services.
4. By its judgment dated 24 July 2020 in VKC Footsteps India
Pvt. Ltd. v. Union of India4, the Division Bench of the Gujarat High
Court, held that:
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“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.”
The High Court therefore directed the Union Government to allow
the claim for refund made by the petitioners before it, considering unutilised
ITC on input services as part of “Net ITC” for the purpose of calculating
refund in terms of Rule 89(5), in furtherance of Section 54(3).
5. By its judgment dated 21 September 2020, in Tvl.
Transtonnelstroy Afcons Joint Venture v. Union of India5 and
connected cases the Division Bench of the Madras High Court came to
a contrary conclusion, after having noticed the view of the Gujarat High
Court, which it has declined to follow. The Madras High Court has
concluded that
“63…
(1) Section 54(3)(ii) does not infringe Article 14.
(2) Refund is a statutory right and the extension of the benefit of
refund only to the unutilised credit that accumulates on account of
the rate of tax on input goods being higher than the rate of tax on
output supplies by excluding unutilised input tax credit that
accumulated on account of input services is a valid classification
and a valid exercise of legislative power.”
6. The writ petitions challenging the validity of Rule 89(5) on the
ground that it is ultra vires Section 54(3)(ii) were dismissed.
The
divergence between the views of the Gujarat High Court on the one
hand, and the Madras High Court on the other, forms the subject matter
of this batch of appeals.
C Statutory Provisions
7. Section 54 of the CGST Act provides for a refund of ax. Under
sub-Section (1) of Section 54, a person claiming a refund of “tax and
interest, if any, paid on such tax or any other amount paid” has to make
an application within two years of the relevant date. Section 54(3)
provides for a claim of refund of unutilised ITC. Sub-sections (1) and
(3) of Section 54 provide as follows:
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“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.
[…]
(3) 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:
Provided that no refund of unutilized input tax credit shall be allowed
in cases other than-
(i) zero rated supplies made without payment of tax;
(ii) where the credit has accumulated on account of rate of tax
on inputs being higher than the rate of tax on output supplies
(other than nil rated or fully exempt supplies), except supplies
of goods and services or both as may be notified by the
Government on the recommendations of the Council:
Provided further that no refund of unutilized 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 of drawback in
respect of central tax or claims refund of the integrated
tax paid
on such supplies.”
8. Rule 89 was originally inserted in the CGST Rules through the
Central Goods and Services Tax (Second Amendment) Rules 20176,
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which came into force on 1 July 2017. Rule 89(4) and Rule 89(5) were
in the following terms:
“(4) […]
(B) “Net ITC” means input tax credit availed on inputs
and input services during the relevant period;
[…]
(E) “Adjusted Total turnover” means the turnover in a State or
a Union territory, as defined under sub-section (112) of section
2, excluding the value of exempt supplies other than zero-rated
supplies, during the relevant period;
(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) x Net ITC ÷ Adjusted Total Turnover} ? tax payable on
such inverted rated supply of goods
Explanation:- For the purposes of this sub rule, the
expressions “Net ITC” and “Adjusted Total turnover” shall
have the same meanings as assigned to them in sub-rule
(4).”
(emphasis supplied)
9. On 18 April 2018, the Central Goods and Services Tax (Fourth
Amendment) Rules 20187 were notified. Rule 89(5) was amended in
the following terms
“(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-
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(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 4(A)
or (4B) or both; and
(b) “Adjusted Total turnover” shall have the same meaning as
assigned to it in sub-rule (4).”
(emphasis supplied)
The amendment was with prospective effect. Rule 89(5), as it
stands at present, was substituted on 13 June 2018 by the Central Goods
and Services Tax (Fifth Amendment) Rules 20188. By the amendment,
Rule 89(5) was substituted with the retrospective effect from 1 July
2017 in the following terms:
“(iii) with effect from 01st July 2017, in rule 89, for sub-rule
(5), the following shall be substituted namely:-
“(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 relevant period other than the input tax credit
availed for which refund is claimed under sub-rules 4(A)
or (4B) or both; and
(b) Adjusted Total turnover shall have the same meaning as
assigned to it in sub-rule (4).””
(emphasis supplied)
The above sequence indicates that the definition of the
expression
‘Net ITC’ in Rule 89(5) originally meant “input tax credit availed on
input and inputs services”. By the amendment of 18 April 2018, the
definition of ‘Net ITC’ was substituted so as to mean ITC availed on
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inputs, with prospective effect. On 13 June 2018, this definition was
made applicable with retrospective effect from 1 July 2017.
10. Before we proceed to analyse the submissions and formulate
the points for consideration, it is necessary to emphasise at the outset
that one of the core issues in the present batch of cases would turn upon
the interpretation of the expression “inputs” in Section 54(3)(ii) of CGST
Act and the definition of “Net ITC” in the amended Rule 89(5). During
the course of the submissions, in the interest of maintaining clarity, Counsel
on both sides used the expression ‘input goods’ while dealing with goods
that are used as inputs and ‘input services’ while dealing with services
that are used as inputs. We propose to use the same formulation to
ensure conceptual clarity while distinguishing between goods which are
used as inputs and services which are used as inputs. With this preface,
we shall now proceed to deal with the submissions of the parties.
D Submissions
D.1 Union of India
D.1.1 Part I- Distinction between goods and services
11. Mr N Venkataraman, learned Additional Solicitor General9 led
the arguments on behalf of the Union Government in assailing the
correctness of the decision of the Gujarat High Court (and supporting
the decision of Madras High Court). Mr Venkataraman urged that:
(i)
Goods and services are distinct at a constitutional level. Article
366(12) of the Constitution
defines goods, while Section
366(26A) defines services. Under the CGST Act, the
expression ‘input’ in Section 2(59) means tangible
commodities other than capital goods, while on the other hand
‘input service’ in Section 2(60) means any service used or
intended to be used by a supplier for business. Hence, ‘goods’
and ‘services’ and ‘inputs’ and ‘input services’ have distinct
definitions;
(ii)
Article 366(12A) defines ‘goods and services tax’ to mean
any tax on the supply of goods or services or both except
taxes on the supply of alcoholic liquor for human consumption;
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(iii) Article 246A, which traces the source of power of taxation
and identifies the fields of taxation, empowers the Parliament,
the States and Union Territories to impose simultaneous tax
both on goods and services. Consequently, though goods and
services are brought to tax under a common code, both the
Constitution and the statute have maintained a distinction
between goods and services. They remain distinct for
prescription, treatment and interpretation;
(iv) Section 2(62) and Section 2(63) define ‘input tax’ and ‘input
tax credit’ which include taxes paid on goods (input goods)
and services (input services) either under CGST, State Goods
and Services Tax Act10 and Integrated Goods and Services
Tax Act 201711;
(v) Input tax means a tax charged both on goods and services.
These are taxes paid by a supplier on their outward supplies
as defined under Section 2(83) which become inward supply
for the recipient under Section 2(67); and
(vi) The need to integrate both taxes on input goods and input
services is to enable credit on a single pool for further cross
utilisation on both goods and services.
D.1.2 Part II- Interpretation of Section 54(3)
(i) The structure of Section 54(3) is as follows:
(a) The opening clause permits a registered person to claim refund
of any unutilised ITC at the end of any tax period.
(b) The main clause permits:
i.  a claim;
ii. in the nature of refund;
iii. of any unutilized ITC; and
iv. at the end of the tax period.
(ii) Section
54(3) contains three provisos, out of which the first
proviso falls for interpretation in this case. The three provisos
share common features which indicate that these provisos
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are in the nature of restrictions and not conditions (or
qualifications);
(iii) The provisos to Section 54(3) should be construed as
restrictions for the following reasons:
(a) The expression employed in the main clause of Section
54(3) is ‘claim’ whereas the provisos restrict this ambit
by the use of the expression ‘allowed’. The expression
‘allowed’ appears in all the three provisos;
(b) The main clause of Section 54(3) uses the expression “any
unutilised ITC”. On the other hand, the expression ‘any’
is conspicuous by its absence in all the provisos;
(c) The main clause of Section 54(3) uses the expression “a
registered person may claim refund” while on the other
hand, the three provisos have employed a restrictive
expression or a negative expression, that is, “no refund of
unutilized ITC shall be allowed”;
(d) When the main clause used the expression ‘any’, this is
expressly restricted by the use of the expression “no refund
of unutilised ITC shall be allowed in cases other than”. In
other words, the expression ‘any’ has been restricted to
“other than”; and
(e) In view of the above, the provisos under Section 54(3)
have to be read and interpreted as restrictions and not as
qualifications;
(iv) The first proviso restricts the refund of unutilized ITC only to
two situations and the subsequent two provisos further restrict
it to one of the categories out of the two in the first proviso.
The two situations
contemplated in the first proviso deal with
contrasting situations with stark differences:
(a) Sub clause (i) of the first proviso deals with zero rated
supplies which are exports. Exports of goods and services
are not taxable. Hence, the taxes paid either on exported
goods or services or on the input goods/input services or
both used in the export of such goods and services need
to be totally refunded;
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(b) However, sub-clause (ii) of the first proviso deals with
domestic supplies which are taxable outward supplies, in
respect of which Parliament has chosen to allow refund
of unutilised ITC only to the extent of the ‘credit
accumulated on account of rate of tax on inputs’;
(v) The first proviso cannot be read as a mere qualification or
eligibility for the grant of refund on the entire unutilised ITC
comprising input goods and input services by a specified
registered person, for the following reasons:
(a) The expression used is ‘the credit’ and the accumulation
is restricted only on account of ‘inputs’. This cannot be
read or interpreted to include input services and capital
goods;
(b) The proviso limits the grant of refund only to two
circumstances and hence the limitation has to be read as
it is without extending it to input services and capital goods,
specifically since the legislature has not included them;
(c) If the intention was to allow refund of unutilised ITC on
account of input services and capital goods, in addition to
input goods, such an intent would have been conveyed
through statutory language, which is missing;
(d) The expression ‘credit’ has to be read along with ‘inputs’
and cannot be read as to extend a refund to input services
and capital goods also, which are expressly not referred
to in the proviso;
(e) ‘The credit’ in sub clause (ii) can go only with the
expression ‘inputs’ and excludes accumulation of any
credit on account of rate
of tax on input services or capital
goods;
(f)
When there is an express inclusion limited only to the credit
accumulation arising out of ‘inputs’, it would not be
permissible to include input services and capital goods in
the face of the statutory provision. What has not been
included in the statute should not be included by way of
judicial interpretation;
(xvi) The reason why Parliament has adopted the expression
‘unutilised ITC’ in the main part of Section 54(3) and the
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first proviso, but has chosen to employ only the expression
‘inputs’ is as follows:
(a) There is a significant difference between the main
provision and the first proviso even in the use of the
expression ‘unutilized ITC’. The expression ‘any’ in the
main Section is absent in the first proviso with the further
limitation that refund of ‘unutilized ITC’ is limited only to
two circumstances specified in the proviso;
(b) The first situation deals with refund on account of zero-
rated supplies which are exports where refund is granted
on all the taxes paid on input goods, input services including
taxes paid on export supplies. This is evident from
Explanation-I to Section 54(3) where the expression refund
permits the above;
(c) However, when it comes to an inverted duty tax structure,
the refund is limited to only one category namely, ‘credit
accumulated on account of rate of tax on inputs’;
(d) The expression ‘unutilized ITC’ could comprise of taxes
paid both on input goods and input services, and the first
proviso and the main Section necessarily have to employ
the expression ‘unutilized ITC’ to take care of zero-rated
supplies which are exports under the first category;
(e) When it comes to an inverted tax structure, it is limited
only to ‘inputs’. It is a common fact that unutilized credit
arising out of input services also partakes the character
of unutilized ITC;
(f)
Parliament has rightly used the expression
‘unutilised ITC’
both in the main clause and in the first proviso to deal
with zero rated supplies and restricted refund to those
arising out of ‘inputs’ when it comes to an inverted
structure;
(g) Parliament could not have used the expression ‘inputs’ in
the main clause and first proviso as this would act as a
disability to zero rated supplies where Parliament intended
to grant a refund arising out of both input goods and input
services;
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(h) Parliament has therefore appropriately employed the
expression ‘unutilized ITC’ in the main clause and the
first proviso and has used the limited expression ‘inputs’
in sub-clause (ii) to the first proviso in the inverted
structure;
(vii)  Explanation-I to Section 54(3) defines refund in three parts:
(a) When it comes to zero rated supplies on exports, it extends
the refund to ‘inputs’, ‘input services’ and also taxes paid
on zero rated supplies of goods or services or both;
(b) When it comes to deemed exports, it restricts the refund
of tax only on the supply of goods;
(c) When it comes to inverted structure, it limits it as provided
in the proviso to Section 54(3). This is one more reason to
read the proviso to Section 54(3), as a restriction and not
as a qualification. If the intent of Parliament was to grant
a refund arising both out of input goods and input services
even in the case of inverted tax structure, it would have
defined refund in Explanation-I at par with zero rated
supplies and there was no need to limit it only to one
situation of the credit accumulation arising on account of
‘inputs’.
D.1.3. Part III- Legal Propositions
(i)
Article 265 of the Constitution provides that no tax shall be
levied or collected except by authority of law. There being
no challenge either to the levy or collection of taxes in these
cases, taxes paid into the coffers of the Union Government
or the States become the property of the Union/States;
(ii)
The
refund of taxes is neither a fundamental right nor a
constitutional right. The Constitution only guarantees that
the levy should be legal and that the collection should be in
accordance with law. There is no constitutional right to
refund. Refund is always a matter of a statutory prescription
and can be regulated by the statute subject to conditions
and limitations;
(iii)
Even in the case of an illegal levy or a levy which is
unconstitutional, the decision of the nine judges Bench in
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Mafatlal Industries Limited v. Union of India12 held
that the right of refund is not automatic. The burden of
proof lies on the claimant to establish that it would not cause
unjust enrichment;
(iv)
Though tax enactments are subject to Articles 14 and
19(1)(g) of the Constitution, this is subject to two well-settled
principles:
(a) Discriminatory treatment under tax laws is not per se
invalid. It is invalid only when equals are treated unequally
or unequals are treated equally. Both under the
Constitution and the CGST Act, goods, services, input
(goods) and input services are not one and the same.
These are distinct species, though covered by a common
code; and
(b) The legislature is entitled to the widest latitude when it
identifies categories of classification and unless things
constituting the same class are treated differently without
a rationale, the provision cannot be declared as
unconstitutional;
(v)
The doctrine of reading down is employed to narrow down
the scope of a proviso under challenge, when it may
otherwise be unconstitutional. The doctrine cannot result in
expansion of a statutory provision for refund which would
amount to rewriting the legislation;
(vi)
Accepting the submission of the assessees that goods and
services must be treated at par can lead to drastic
consequences in terms of:
(a) rates of taxes;
(b) concessions, benefits and exemptions;
(c) intervention in the areas of political, economic
and
legislative policies;
(vii)
Refund of taxes is one form of granting exemption;
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(viii) Once a refund is construed as a form of exemption from
taxes, the provision has to attract strict interpretation;
(ix)
Exemptions, concessions and exceptions have to be treated
at par and must be strictly construed;
(x)
ITC is not a matter of right and the burden of proof is on
the assessee to establish a claim for a concession or benefit;
(xi)
The manner in which a proviso can be construed has been
elucidated in the precedents of this Court. A proviso may
not be only an exception but may constitute a restriction on
the operation of the main statutory provision; and
(xii)
A legislative amendment which reflects a policy choice is
not subject to judicial review.
12. Mr Balbir Singh, learned ASG has adopted the submissions of
Mr N Venkataraman, learned ASG.
D.2 Assessees
13. Mr V Sridharan, learned Senior Counsel appearing on behalf
of the assessee13 submitted:
(i)
The assessee is, inter alia, engaged in the manufacture
and supply of footwear which attracts output tax (goods
and services tax14) at the rate of 5%;
(ii)
The assessee, inter alia, procures input goods such as
synthetic leather, PU Polyol and input services such as job
work service, goods transport agency service on payment
of applicable GST for use in the course of business and
avails ITC on the GST paid thereon. A majority of the input
goods and input services attract tax at the rate of 12% or
18%;
(iii)
The rate of GST paid by the assessee on procurement of
input goods and input
services is higher than the rate of tax
payable on their outward supply of footwear. Therefore,
despite utilization of credit for payment of GST on outward
supply, there is an accumulation of unutilized ITC in the
electronic credit ledger of the assessee;
13 Appearing in SLP (Civil) No 14801 of 2020
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(iv)
The assessee applied for refund of such unutilised
accumulated ITC under Section 54(3) of the CGST Act
read with Rule 89(5) of the CGST Rules;
(v)
Rule 89(5) of the CGST Rules as originally enacted provided
for refund of ITC availed on both inputs (that is input goods)
and input services and was in line with Section 54(3) of the
CGST Act. Accordingly, the assessee was granted refund
of such unutilised ITC;
(vi)
Rule 89(5) was substituted by Notification No. 21/2018-
CT dated 18 April 2018 prescribing a revised formula for
determining the refund on account of inverted duty structure.
The above substitution was given retrospective effect from
1 July 2017 by Notification No. 26/2018-CT dated 13 June
2018;
(vii)
The revised formula inter alia excludes ‘input services’
from the scope of ‘Net ITC’ for computation of the refund
amount under the said Rule;
(viii) The substituted Rule 89(5) of the CGST Rules denies refund
on the unutilised ITC availed on input services and allows
relief of refund of ITC availed on input goods alone;
(ix)
The Revenue is relying on amended Rule 89(5) to contend
that refund will not be allowed on taxes paid on input
services; and
(x)
The Revenue is allowing refund of accumulated ITC of tax
paid on input goods such as synthetic leather, and PU Polyol.
Further, the Revenue is allowing accumulation of ITC paid
on procurement of input services such as job work service
and goods transport agency
service. However, the refund
of accumulated unutilised ITC paid on input services is being
denied and refund already granted has been recovered from
the assessee.
14. Mr Sridharan urged that Rule 89(5) of the CGST Rules, to the
extent to which it denies refund of ITC relatable to input services, is
ultra vires Section 54. The submission has been premised on the
following propositions:
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(i)
GST is a destination-based consumption tax. The fundamental
principle of GST laws worldwide is that it is a multistage tax.
Each point in a supply chain is potentially taxed. However,
suppliers are entitled to avail credit of taxes paid at an anterior
stage. This feature of GST leads to its description as being a
tax on value addition, with the final consumer alone ultimately
bearing the tax. The GST laws enacted in India are also
based on this principle;
(ii)
In All India Federation of Tax Practitioners v. Union of
India15, this Court held that excise duty, service tax and value
added tax legislation provide for taxes on value addition and
are destination based-consumption taxes. These are not
charges on the business but on the consumer. Though the
erstwhile tax legislation, prior to the enforcement of the
Constitution (One Hundred and First Amendment) Act 2016,
was based on the principle of value addition and consumption
tax, there was no seamless flow of credit between Central
and State levies. This anomaly was sought to be addressed
by the constitutional amendment and by the legislation which
has been enacted in pursuance of it;
(iii) The purpose of the One Hundred and First Constitutional
Amendment was:
(a) to replace a number of indirect taxes being levied by the
Union Government and the State Governments;
(b) to obviate and remove the cascading effect of taxes; and
(c) to provide for a common national market for goods and
services.
(iv) The
Statement of Objects and Reasons accompanying the
bill introducing the CGST Act also emphasised that there
would be a seamless transfer of ITC from one stage to another
in the chain of value addition;
(v)
These principles reaffirmed the guidelines issued by the
Organisation of Economic Co-operation and Development
which emphasise that
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(a) value added tax systems are designed to tax final
consumption;
(b) only the consumers should bear the tax burden; and
(c) the main characteristic of a value added tax is of preserving
neutrality in the value chain.
(vi) Compelling economic and fiscal realities necessitated the levy
of value added tax like GST in place of traditional excise
duties, service tax, sales tax and other legislation;
(vii) In a tax regime which was not based on value added tax,
ensuring refund of tax paid at various stages of manufacturing
would be cumbersome and complicated. It was to obviate
the problems of the earlier regime that GST legislation was
enacted by various countries including India to fully effectuate
the principle underlying value-added destination-based
consumption tax;
(viii) The situation in which the quantum of input taxes exceeds
output tax is an anomaly, aberration and distortion resulting
from various sources of taxes and conflicts with the
fundamental principles of GST. The impact of these
distortions can be revealed by practical examples involving
situations such as
(a) Intermediate products attracting a lower rate of tax; and
(b) Intermediate products attracting a higher rate of tax.
(ix) As a result, varied situations of economic distortion resulting
from a cascading effect of taxes in the form of unabsorbed
ITC emerged due to variations in the rate of taxes. This is
against the basic tenets of GST. GST being a
consumption
tax, postulates that the only tax in the entire chain should be
the tax charged to the end customer without any ‘sticking’
or unabsorbed ITC;
(x)
Government may in the public interest impose lower rates of
tax on products such as fertilizers, tractors and lower-price
footwear. The objective of taxing such goods at a lower rate
is frustrated if inputs for making the final products are taxed
at a higher rate and no refund of unutilized credit is granted.
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Refund of unutilised7 ITC seeks to achieve the objective of
value-added consumption-based taxation in its true sense;
(xi) Cognizant of the anomaly resulting from inverted duty
structures, the erstwhile State Value Added Tax legislations
provided for refund of unutilized ITC, even before the GST
legislation saw the light of the day;
(xii) A near perfect GST legislation provides for refund of ITC in
a situation involving an inverted duty structure. The provisions
for refund ensure that anomalies in tax rates do not result in
distortions to the fundamental features of GST which remains
a true consumption tax. ITC may accumulate for a variety
of reasons including (a) inverted duty structure, that is, GST
on output supplies is less than the GST on the input supplies;
(b) stock accumulation; (c) capital goods; and (d) partial
reverse charge mechanism for certain services;
(xiii) The cascading effect or sticking credit may arise on account
of higher taxes paid on input goods or input services. Refund
of unutilized ITC will ensure the elimination of the cascading
effect of taxes in a true sense;
(xiv) Section 54(3) has been enacted to achieve the objective of
removing the cascading effect of unutilized ITC. Section
54(3) provides for refund of “any unutilised input tax credit”
but the refund is available in only two situations namely, (a)
zero rated supplies; and (b) inverted duty structure. The
quantum of refund is provided by the main part of Section
54(3)
which stipulates the refund of any unutilised ITC. This
includes credit availed on input goods as well as on input
services having regard to the definitions contained in Sections
2(62) and 2(63);
(xv) The proviso only provides for cases in which the refund under
the main provisions of Section 54(3) will be available. Once
the requirement of inverted duty structure in proviso (ii) is
fulfilled, the entire unutilised ITC has to be refunded. The
reason why proviso (ii) defines the inverted duty structure
with reference to only input (goods) vis-a-vis output supplies
may be that while services (barring a few) were leviable to
tax at 18 per cent, goods were subject to various categories
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of rates. If input services were also considered for
determining inverted duty structure, refund may be required
to be granted practically to all the assessees. Hence, the
legislature defined inverted duty structure only with reference
to ‘inputs’ (input goods). However, once a case fulfils the
condition of an inverted duty structure, refund of the entire
unutilised ITC which is attributable to inverted duty structure
supplies is allowed, including the credit availed on input goods
and input services;
(xvi) A circular has been issued on 31 December 2018, being
Circular No. 79/53/2018-GST by the Central Board of
Indirect Taxes and Customs16. In a situation where GST on
some inputs is higher than the rate of GST applicable on the
output supply, while the rate of GST on other inputs is lower
than the GST on the output supply, the circular provides that
refund will be granted by taking the ITC availed on all inputs,
including input services, which attract a lower rate of tax
than on output supply. The circular, in other words, does not
treat Section 54(3) read with the proviso (ii) as qualifying
the extent of refund but only as a pre-condition to qualify for
the grant of refund;
(xvii)Proviso (ii) to Section 54(3) only lays down ‘cases’ where
refund is eligible but it does not define the quantum of refund.
This will be evident from the following:
(a)
The quantum of refund is provided in the main segment to
Section 54(3).
The expression “any” unutilised ITC means
all unutilised ITC;
(b)
The definitions of ‘input tax credit’ under Section 2(63) and
‘input tax’ in Section 2(62) would indicate that both input
goods and input services are included;
(c)
The proviso indicates the ‘cases’ in which refund will be
eligible. The expression ‘cases’ means situations or
circumstances;
(d)
Clause (ii) of the first proviso commences with the
expression “where” which signifies that what follows will
be a situation or aspect of something;
16 “CBIC”
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(e)
The statutory provision must be read as a whole and in the
context of other provisions. All the three provisos refer to
cases in which refund is allowed or, as the case may be,
not allowed and do not refer to the quantum of refund;
(f)
Clause (ii) of the proviso refers to “the credit”. The use of
the definitive article clearly indicates that the reference is
to unutilised ITC already mentioned in the main part of
Section 54(3). The expression ‘the’ signifies one particular
sum or credit and any attempt to bifurcate it into credit on
input goods and input services will produce anomalous
results;
(g)
The expression ‘accumulated’ signifies the credit balance
which is unutilized after credit has been availed and utilised
for making payments on output tax on outward supplies;
(h)
Clause (ii) of the proviso uses the words “on account of”
which means by reason of or because of. By stipulating
that the proviso provides for the quantum of refunds, the
Revenue is attempting to substitute the words “on account
of” with “to the extent of”;
(i)
The submission of the Revenue cannot be accepted because
clause (ii) of the proviso refers to the rate of tax. To accept
the interpretation of the Revenue, the words “and only to
the extent” will have to be added to the proviso;
(j)
Though the CGST Act makes a distinction between ‘inputs’
and ‘input services’, this is only relevant at the stage prior
to the availment of credit, namely to determine the eligibility
of credits
under Sections 16 and 17 of the CGST Act. After
the credit has been availed, it goes in a common pool from
which the credit is utilised for making payment for output
tax. Utilization happens from the entire credit available for
the tax period in this common pool and it cannot be co-
related to ITC availed on particular input goods or input
services. The balance is the unutilised ITC at the end of
the tax period. At this stage, it is not possible to determine
whether the balance pertains to ITC availed on input goods
or on input services; and
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(k)
Alternatively, the words, “rate of tax on inputs” must be
read to include whatever goes in the making of output
supplies namely, both input goods and input services.
(xviii) Explanation (1) to Section 54 covers four cases of refund:
(a) refund of tax paid on zero-rated supplies of goods or
services; (b) refund of tax paid on input goods or input
services used in making zero rated supplies (where no output
tax is paid); (c) refund of tax on the supply of goods regarded
as deemed exports; (d) refund of unutilised ITC under sub-
Section (3). In the case of (a) above, the legislature has
used the expression “goods or services”; in the case of
(b), “inputs or input services”; in the case of (c), “goods or
services”. However, in respect of refund of unutilised ITC,
it has only been provided that the refund will be granted as
provided under sub-Section (3). The explanation does not
restrict the refund only to credit availed on input goods in
the case of an inverted rated structure;
(xix)
Rule 89(5) by confining refund of unutilised ITC on input
goods and denying refund of ITC on input services curtails
the ambit of Section 54(3) and is hence ultra vires:
(a)
Rule 89(5) originally provided for refund of ITC paid both
on input goods and input services but it was amended with
retrospective effect to restrict refund only to ITC availed
on input goods;
(b)
After the amendment in terms of the formula, the ratio of
proportionate turnover is applied only to ITC availed on
input goods. However, after arriving at the proportionate
value, the entire amount of tax paid on output supplies is
deducted. The formula erroneously assumes that the entire
output tax will be paid from ITC availed on input goods
and the credit on input services will not be utilised for
payment of output tax. If the rule took into computation
ITC availed on both input goods and input services, both
parts of the formula would be comparable and would result
in a correct amount of unutilised ITC attributable to an
inverted duty structure. The rule is ultra vires Section 54(3)
since it restricts the computation of refund only by taking
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into account the credit availed on input goods. Section 54(3)
provides for entitlement to refund, its quantum and the
cases in which the refund is to be granted. Section 54(3)
being a code in itself, there is no reference to a provision
enabling the Government to frame rules in this regard.
Hence, with reference to Section 54(3), any exercise of
the rule making power is unwarranted;
(xx)
The general rule making power conferred by Section 164(1)
is to carry out the provisions of the CGST Act and cannot
save the offending provisions of the Explanation to Rule
89(5):
(a)
Accumulation of credit may occur due to various reasons
such as absence of outward supplies in a tax period, supplies
made at a loss, bulk purchase of inputs, excess opening
balance of credit, and change in the rate of tax during the
tax period;
(b)
A rule which provides for the identification of unutilised
ITC which is attributable to supplies having an inverted duty
structure and bifurcating it from credit accumulating due to
other causes would be for the purpose of carrying out the
provisions of the CGST Act;
(c)
A rule may provide a proportionate formula for determining
the pro-rata amount of credit relatable to the inverted duty
structure vis-a-vis total turnover. Such a formula may be
needed where the assessee is making supplies involving an
inverted duty structure as well as supplies not involving it;
(d)
Where the entire supplies made by assessee are by way of
export, the entire ITC
is refundable under proviso (i).
However, where an assessee is engaged in exporting goods
and in domestic supplies, the assessee should be eligible for
claiming refund from ITC attributable to exports while not
being entitled to cash refund on ITC relatable to domestic
supplies. In such cases where an assessee makes both
domestic supplies as well as exports, a formula may be
required to estimate the ITC relatable to exports which alone
can be refunded to the assessee in a similar manner if an
assessee has output supplies. Where an assessee has output
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supplies having an inverted duty structure and output supplies
not having an inverted duty structure, refund is to be given
only for the former and not for the latter. The formula would
be required for that purpose. Rule 89(4) relating to export
adopts pro-rata of export turnover to total turnover as the
basis. Rule 89(5) is similarly enacted to deal with an assessee
having inverted duty structure supplies and other supplies
not having an inverted duty structure. This should be the
sole purpose of the formula for Rule 89(5);
(e)
However, Rule 89(5) in the garb of fixing a formula for
determining pro-rata the amount of credit relatable to the
inverted duty structure vis-à-vis total turnover has restricted
the refund to ITC on input goods by denying it on input
services. This has been done by defining ‘Net ITC’ to mean
ITC availed on all ‘inputs’, thus overlooking ITC relatable
to input services. Such a rule cannot be treated as one for
carrying out the purpose of the CGST Act;
(xxi)
A delegated legislation can be struck down as ultra vires
of a principal statute. The laying of delegated legislation
before Parliament does not confer any validity on such
ultra vires rules. The process of laying rules before
Parliament and making them subject to modification or
annulment cannot be equated with legislation which has
the assent of the President, or the Governor, as the case
may be. The doctrine of ultra vires will apply
even if a
resolution is passed by Parliament approving or modifying
the rules. Though, the CGST Rules have been laid before
Parliament, any part which is ultra vires the CGST Act is
liable to be struck down;
(xxii) The fact that the rules have been recommended by the
Goods and Services Tax Council17 does not elevate them
to the status of a statute enacted by the legislature. The
recommendations made by the GST Council under Article
279A(4) of the Constitution take effect only after they have
been incorporated in the legislation passed by the Parliament
or the State legislature. The CGST Act and SGST Act
have been enacted on the recommendations of the GST
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Council, in exercise of the power under Article 279A, while
the CGST Rules have been framed on the recommendations
of the GST Council in exercise of the powers conferred
by Section 2(87) and Section 164 of the CGST Act. There
is a clear distinction between laws enacted by the legislature
and delegated legislation. A rule made on the
recommendation of the GST Council must be in consonance
with the relevant legislation, failing which it would be ultra
vires;
(xxiii) Section 54(3) grants a refund of the entire unutilised ITC
in the case of an inverted duty structure irrespective of
whether the credit pertains to input goods or input services.
The amendment made in Rule 89(5) which restricts the
refund of unutilised ITC availed only on ‘inputs’ is ultra
vires Section 54(3); and
(xxiv) By virtue of the doctrine of severability that portion of Rule
89(5) which is ultra vires may be struck down. This would
not constitute judicial legislation. The challenge to the vires
of Rule 89(5) is only because of the definition of ‘Net ITC’
in the explanation to the rule. The explanation defines net
ITC to mean ITC availed on inputs during relevant period.
Section 54(3) allows refund of any unutilized ITC and not
only credit on input goods. Consequently, only if the
expression “on inputs” employed in Explanation (a) to Rule
89(5) is struck down, will Rule 89(5) be in line with Section
54(3).
15. Mr Sujit Ghosh, learned Counsel18 submitted that
(i)
The meaning of the
expression “unutilised ITC” is credit on
goods as well as services (which remains after paying output
tax) in view of the definitions contained in Section 2(63) read
with Section 2(62) of the CGST Act;
(ii)
In Explanation-I to Section 54, the expression ‘refund’ qua
zero rated supplies
(a) is an inclusive definition which refers to unutilized ITC qua
Section 54 (3);
18 Appearing in SLP (Civil) Nos 1552-1557 of 2021
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(b) covers a refund on both input goods and input services for
the purpose of Section 54(3);
(c) in relation to zero rated supplies, the expression refund in
Explanation-I to Section 54 is clarificatory though it uses the
words “inputs” and “input services”;
(d) The right to refund in the case of zero-rated supplies arises
in Section 16(3)(a);
(e) The provision uses the phrase “refund of unutilised ITC in
accordance with Section 54”; and
(f)
The meaning of the term ‘refund’ for both export and domestic
supplies is one and the same.
(iii) The construction of Section 54(3) must be based on the
following circumstances:
(a) The substantive part deals with the quantum of refund. The
proviso is not a restriction but merely prescribes threshold
conditions;
(b) Threshold conditions are evident from the use of the
expression “in cases”;
(c) Each of the three provisos lays down (i) situations; and (ii)
conditions, as evident from the following table:
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(iv)
The object and purpose of Section 54(3) must be borne in
mind:
(a)
The purpose of the provision is to give effect to the doctrine
of equivalence or neutrality which is the basic objective of
the GST and this is sought to be achieved by granting
seamless credit through Section 16;
(b)
The legislative background and preparatory material duly
support the purpose of the legislation;
(c)
The State does not want the taxpayers to suffer the ill effect
of tax cascading solely because of its decision to offer a
reduced rate of tax on outputs, relative to the tax rate on
inputs;
(d)
In the case of the petitioner which is engaged in providing
services to Chennai Metro Rail, the original rate of output
tax used to be 18 per cent while the input tax on goods and
services was between 18 per cent to 28 per cent. As a
result of Notification No. 1/2018 and a corresponding State
notification, the rate of tax on output supplies, namely
construction of mono rails and metro rails, was reduced to
12 per cent;
(e)
Section 54(3) is not intended to cover a situation where the
inverted duty structure is created by assessee due to its
own actions such as discount/distress/non-supply as
distinguished from the rate structure created by the State;
(f)
The object of achieving tax neutrality is sought to be
implemented for the first time through the anti-profiteering
measure embodied in Section 171;
(v)
The international jurisprudence on GST and tax neutrality
postulates that such
taxes are not a permanent cost to the
business and that businesses are pass through entities. The
essential character is of an economically neutral tax through
a seamless flow of credit;
(vi)
A contextual interpretation of Section 54(3) must look at
the overall scheme of the statute. The substantive part of
Section 54(3) deals with the quantum of credit which is
amplified by three attributes:
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(a)
it connotes a finite sum and thus a quantum, since a time
period is prescribed for identifying such quantum by the
use of the phrase “at the end of any period”;
(b)
Section 54(3) needs to be read contextually with sub-
Sections (4), (5) and (6) of Section 49 and Rule 86(3) and
Rule 89(3); and
(c)
Both the GST Council and the Union Government also
understood that the quantum of refund was the entire
unutilised ITC and not only ITC accumulated on account
of input goods. This is evident from Notification No. 5/2017
dated 28 June 2017. If the exception contemplated in clause
(ii) of the first proviso to Section 54(3) contemplates denial
of the entire basket of unutilised ITC (as argued by the
State) a fortiori the first part of clause (ii) should be
presumed to include refund of the entire basket of unutilised
credit. This is because unless the first part of clause (ii) did
not entitle refund of the entire basket of ITC, carving out
an exception for denial of the entire basket of ITC in the
latter part would be absurd.
(vii)
The expression ‘claim’ means a demand made of right,
calling upon another to pay something which is due.
Accordingly, a claim in the context of Section 54(3) is a
demand for enforcement of a right of refund which becomes
due. The entitlement to the right is not through the process
of allowance of the claim but instead, the enforcement of
the right is through the process of allowance. The
entitlement to the right of the entire basket of credit accrues
from the substantive provision and its enforcement happens
through the proviso;
(viii) The expression ‘allowed’ should be interpreted to mean
verification of the claim and its sanction. Allowed cannot
mean the ‘creation of an entitlement’ or else the main
provision of Section 54(3) would become redundant;
(ix)
The phrase “wholly on account of” is conspicuous by its
absence in proviso to Section 54(3);
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(x)
The absence of the word ‘any’ in the proviso is not fatal.
Despite the absence of ‘any’, the words “unutilised ITC”
refer to credit on goods and services both;
(xi)
The proviso to Section 54(3) merely prescribes the condition
and does not deal with the quantum of refund since the
quantum is prescribed by the substantive provision. The
proviso is not an exception to the substantive part since it
makes a reference to the substantive condition to be
satisfied. Both must be construed harmoniously. Thus, the
main provision of Section 54(3) confers an entitlement to
the refund of the entire unutilised ITC and the proviso only
seeks to provide the condition and not to obliterate the main
provision. The better view is that the entitlement is created
of the quantum of refund by the main provision while the
proviso only indicates the conditions to be satisfied;
(xii)
The convergence of credit takes place at the stage of availing
and not at the stage of utilization;
(xiii) The CGST Act contemplates that conditions and restrictions
are two distinct concepts;
(xiv) If the proviso was meant to deal with the quantum of refund,
Parliament would have separately carved out a substantive
provision for zero rated supplies and a separate provision
for domestic supplies. Since that has not been done, both
cases derive their entitlement to refund of unutilised ITC
through the substantive provision;
(xv)
Section 54(3) is not akin to an exemption but is aimed at
achieving tax
neutrality;
(xvi) Reliance on the decision of the nine judge Bench in Mafatlal
Industries Limited v. Union of India (supra) is out of
context since what is being claimed as a refund is not
contrary to the statutory drill, but a refund through an
appropriate construction of the statute;
(xvii) The main submissions, in summation, are that:
(a)
The expression ‘input’ in the proviso if read contextually,
and not by the strict statutory definition, would cover both
input goods and input services;
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(b)
Grammatically ‘input’ covers labour and material and is
opposite to ‘output’;
(c)
Use of the word “output supplies” as opposed to the defined
expression “outward supplies” (Section 2(83)) emphasises
the legislative intent to use common parlance words;
(d)
The substantive part of Section 54(3) should be construed
to provide for the quantum of refund of the entire basket of
credit and the proviso should be construed merely as a
threshold condition that an “inverted duty structure” should
exist qua goods;
(e)
If the above propositions are not acceptable, there would
be an invidious discrimination between input goods and input
services violating Articles 14 and 19; and
(f)
The only way to save the provision in such a case is by (i)
reading down the word “input” in the proviso to include
both goods and services or (ii) interpreting the proviso as
laying down conditions and the quantum of refund being
prescribed by the main part of Section 54(3); or (iii) striking
down/severing the offending portion;
(xviii) The doctrine of reading down the words of the statute to
save its constitutional validity also includes reading up. If
two interpretations are possible, the one which ensures that
the provision is constitutionally valid must be adopted. Even
otherwise, if the phrase “on inputs being higher than rate of
tax on output supplies” is struck down, the impermissible
classification between input goods and input services
can
be severed, thereby enlarging the class. Under such
circumstances Section 54(3) as re-cast should read as
follows:
“(3) Subject to provisions of Sub-section 10, a registered
person may claim refund of any unutilized input tax credit at
the end of any tax period:-
PROVIDED THAT no refund of unutilized input tax credit
shall be allowed in cases other than-
(i)
Zero rated supplies made without payment of tax;
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(ii) Where the credit has accumulated on account of rate
of tax (other than nil rated or fully exempt supplies),
except supplies of goods or services or both as may be
notified by the Government on the recommendations
of the Council.”
(xix) All registered persons demanding refund on account of
inverted duty structure for input goods and input services
form a part of the same class and seek equality of privileges
in terms of Article 14:
(a) Class legislation
i.
The class consists of all registered persons possessing
unutilised ITC whether or not they are engaged in domestic
supplies or exports;
ii.
The species consists of (i) exporters and (ii) domestic
suppliers where unutilised credit arises due to an inverted
duty structure;
iii.
Discrimination inter se the species or sub-species of the
same class would be a class legislation which is hit by Article
14;
iv.
To form a part of the same class, the claimant’s position
should be substantially similar or in like circumstances, and
conditions need not be identical; and
v.
In order to ascertain whether the persons are similarly placed
one must look beyond classification and into the purpose of
the law.
(xx)
Goods and services, though defined separately, are treated
substantially in a similar manner in several aspects both in
the Constitution and in the CGST Act;
(xxi) In examining discriminatory treatment, it is the real effect
of the provision which must be considered:
(a)
The real effect of the provision is
to create an economy
which does not perpetuate a harmonized structure of GST
or a harmonized national market for goods and services,
which is contrary to the constitutional object of GST as
provided in Article 279A(6); and
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(b)
The effect that goods are tangible while services are
intangible does not bear any reasonable relation to the object
of the legislation or to Article 279A(6). According to the
submission, equal laws in respect of refunds of taxes in
cases involving an inverted duty structure would have to be
applied to everyone in the same situation whether dealing
in input goods or input services. Since the purpose of GST
is to achieve tax neutrality, equivalence and anti-profiteering,
their position is substantially the same. The taxable event,
person, measure of tax, machinery, penal and prosecution
provisions are substantially the same. Hence the denial of
the privilege of refund to input services is arbitrary. The
classification which is found to be valid in a given frame of
reference may be invalid in a different frame. From a
revenue harvesting perspective, goods and services may
be treated as different. However, from the perspective of
neutrality and achieving a true consumption tax, goods and
services cannot be treated differently;
(xxii) The limitation on the power of judicial review of tax
legislation on grounds of ‘wide latitude’ is subject to
exception. The submission is that after treating tax on input
goods and input services in an identical fashion by granting
credit (to achieve neutrality) and making the entire credit
as a part of homogeneous basket, granting refund to input
goods and not to input services (from
that basket) is a
colourable device to set at naught the doctrine of neutrality.
The State having reduced the rate of tax on output supplies
(leading to an inverted structure) the intent behind the refund
was to reduce the tax burden on the consumer. Denying
refund on input services would lead to an indirect impact
on the very consumer that the State wanted to benefit in
the first place. Moreover, the State has made no distinction
between input goods and input services at the time of granting
credit, thereby declaring an intent to achieve tax neutrality.
The denial of refund on input services obliterates that intent
and runs contrary to the purpose of the legislation; and
(xxiii) Denial of interest in the case of input services would be an
unreasonable restriction and would not be saved by Article
19(6).
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16. Mr Arvind Datar, learned Senior Counsel19 urged the following
submissions:
(i) An interpretation of Section 54(3) first proviso (ii) which leads
to disallowance of credit on input services is impermissible
as, firstly, Articles 269A and 279A introduced by the One
Hundred and First Constitutional Amendment seek to
harmonise goods and services and remove the cascading effect
of taxes. Secondly, the Statement of objects and reasons
associated with the constitutional amendment and the Bill
introducing the CGST Act emphasised the need to treat goods
and services as one combined category. The concept of one
nation one tax introduced by GST laws cannot be ignored
only at the time of refund;
(ii) The proviso to Section 54(3) speaks only of categories of
cases where refund would be available. It does not speak of
a restriction on the quantum of refund. This is for the following
reasons:
(a) The quantum is determined by the main sub-section (3),
which speaks of “refund of any unutilised input tax
credit”;
(b) The first proviso employs the word “cases” [“no refund
of unutilised input tax credit shall be allowed in cases
other than”] thus making it clear that it only lists categories
of cases, and does not deal with quantum of credit;
(c) The first proviso does not mention “credit to the extent
of” or “credit of an amount equal to” or any other such
wording indicative of quantum;
(d) Where the legislature intended to advert to the quantum,
it has used the words
“amount claimed as refund” in the
4th proviso – such is not the phrase employed in the first
proviso;
(e) The second and third provisos too refer only to ‘cases’ –
it is thus clear that first, second and third provisos are
intended to deal with cases and are in nature of conditions,
while it is only the fourth proviso which adverts to the
19 Appearing in SLP (Civil) No 589 of 2020
UNION OF INDIA v. VKC FOOTSTEPS INDIA PVT LTD.
[DR DHANANJAYA Y CHANDRACHUD, J.]
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quantum and there again not to restrict the quantum but
only to refer to the amount claimed as refund under the
main sub-section (3); and
(f) It has been the Union Government’s case that every word
has been carefully chosen in Section 54(3) first proviso
(ii). It follows that where the provision speaks the language
of categories (i.e. ‘cases’) and not the language of
quantum (i.e. ‘amount’), it cannot be read as any
restriction of quantum.
(iii) The word ‘inputs’ in the first proviso (ii) of Section 54(3)
refers to the aggregate of goods and services that are
used in output supplies. In the context of the first proviso
(ii), the word ‘inputs’ has not been used to refer only to
input goods. The word employed in the proviso is “input(s)”
whereas definition of ‘input’ under Section 2(59) refers to
goods alone;
(iv) The accumulation (of ITC) is because the total GST on
all the inputs (goods or services or both) is more than the
GST payable on the output supplies. The reference is to
all the inputs used to produce the output supplies;
(v) The word “inputs” in Section 54(3) first proviso (ii) cannot
be restricted to goods because the CGST Act/ SGST Act
treats goods as services. For instance, transfer of right in
goods without transfer of title is deemed as “Supply of
Services” as per Clause 1(b) of Schedule II, which reads
as follows:
“b. any transfer of right in goods or of undivided share in
goods without the transfer of
title thereof, is a supply of
services;”
(vi) Similarly, “Works Contract” as defined in Section 2(119)
of the CGST Act is deemed as per Clause 6(a) of Schedule
II as “Supply of Services” although it involves the supply
of goods. Section 2(119) and the relevant portion of
Schedule reads thus:
“Section. 2(119) “works contract” means a contract
for building, construction, fabrication, completion,
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erection, installation, fitting out, improvement,
modification, repair, maintenance, renovation, alteration
or commissioning of any immovable property wherein
transfer of property in goods (whether as goods or in
some other form) is involved in the execution of such
contract”
Clause 6(a) of Schedule II provides:
“6. Composite supply
The following composite supplies shall be treated as a supply of
services, namely:—
works contract as defined in clause (119) of section 2.”
(vii)
Further, Article 366(29A) of the Constitution, which provides
for tax on sale or purchase of goods and which treats six
kinds of supplies as deemed sales of goods, pertains to and
is part of the erstwhile Entry 54 of List II which deals only
with goods. Article 366(29A) reads as follows:
“(29A) tax on the sale or purchase of goods includes
(a) a tax on the transfer, otherwise than in pursuance of a
contact, of property in any goods for cash, deferred
payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as
goods or in some other form) invoked in the execution
of a works contract;
(c) a tax on the delivery of goods on hire purchase or any
system of payment by instalments;
(d) a tax on the transfer of the right to use any goods for
any purpose (whether or not for a specified period) for
cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated
association or body of persons to a member
thereof for
cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service
or in any other manner whatsoever, of goods, being
food or any other article for human consumption or
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any drink (whether or not intoxicating), where such
supply or service, is for cash, deferred payment or other
valuable consideration, and such transfer, delivery or
supply of any goods shall be deemed to be a sale of
those goods by the person making the transfer, delivery
or supply and a purchase of those goods by the person
to whom such transfer, delivery or supply is made;”
(viii) Chapter V (Section 16 to 21) of the CGST Act does not
make any distinction between credit of input tax on goods
or services. Under Section 17 of the CGST Act, the input
tax on both the goods and services used in exempt supplies
or other classes of supplies specified therein, are not
permitted to be availed as ITC. The remaining/ balance
input tax is eligible to be availed as ITC, which remains in
the electronic credit ledger of the taxpayer. After utilizing
such ITC in terms of Section 49 of the CGST Act (towards
output GST on supply of goods or services or both),
which too makes no distinction between ITC accumulated
on account of input goods or input services, the balance is
to be refunded in accordance with Section 54(3) of the Act.
The relevant portion of Section 49 reads thus:
“49. […]
(6) The balance in the electronic cash ledger or electronic
credit ledger after payment of tax, interest, penalty, fee or
any other amount payable under this Act or the rules made
thereunder may be refunded in accordance with the
provisions of section
54’’
(ix)
There is no distinction between ITC on goods or services
either at the time of availing or taking of the credit or at the
time of utilization of credit. Therefore, it could not have
been the intention of the Parliament to differentiate between
the two only at the time of refund in the case of an inverted
duty structure envisaged under clause (ii) to the first proviso
to section 54;
(x)
Without prejudice to the above submissions and assuming
that the words “inputs” means only input goods and not
input services, it is stated that even proceeding on the basis
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that the use of the words “on account of” suggests the
requirement of a causal relationship between the higher rate
of input goods and the accumulation of credit, once such a
relationship is present, then the entire accumulation is
available as refund, rather than just the portion relatable to
input goods. To elaborate:
(a)
Parliament did not state “the credit has accumulated solely/
only/entirely on account of rate of tax on inputs being higher
than the rate of tax on output supplies.”;
(b)
Thus, all that is required is that there is accumulation and
that the tax on input goods is higher than the output supplies.
If these two criteria are met, it follows logically that at least
some portion of the accumulation would be on account of
the higher rate of input services; and
(c)
Thereupon, the entire accumulation would be available as
refund in line with the main sub-section (3); and
(xi)
The impugned notifications/delegated legislation, Notification
No. 21/2018-CT (amending Rule 89(5)) dated 18 April 2018
and Notification No. 26/2018 (retrospectively amending Rule
89(5)) dated 13 June 2018, by disallowing the refund of
ITC of tax on input services in an inverted duty structure
scenario is not only ultra vires Section 54(3) proviso but
also beyond the scope of powers of the delegate i.e. the
Central Government, because such a restriction is a typical
policy change which could not have been done through a
delegated legislation.
17. Appearing on behalf of
intervenor, Mr G Natarajan, in the
course of his submissions urged (for the purpose of his submissions) that
he does not dispute the position that under Section 54(3) read with rule
89(5), refund of ITC accumulating only on account of “input goods” is
eligible for refund and the credit accumulated on input services is not
entitled for refund. Based on this hypothesis, the submissions of the
learned counsel are thus:
(i)
The formula which has been prescribed in Rule 89(5) seeks
to identify the quantum of ITC availed on inputs attributable
to the outward supplies having an inverted rate structure.
From the quantum of ITC on inputs, the tax payable by the
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supplier on the supplies having an inverted rated structure
is reduced to arrive at the quantum of the credit
accumulating on account of the inverted rate structure,
which is available for refund;
(ii)
In the formula which is prescribed under Rule 89(5), while
reducing the “tax payable on such inverted rated supply of
goods or services” the tax payer should be allowed to first
utilise the ITC accumulated on account of input services,
which is otherwise not eligible for refund;
(iii)
If the formula prescribed under Rule 89(5) is not read down
in this manner, it will lead to gross inequality between
taxpayers having only inverted rated supplies and taxpayers
who also have other supplies; and
(iv)
The formula in Rule 89(5) should hence be read down by
stipulating that while calculating the refund entitlement as
the difference between Net ITC and tax payable on such
supplies having inverted rated structure, the tax payable
after utilising the ITC availed on input services attributable
to inverted rate supplies for payment of the tax should be
reckoned.
18. During the course of his oral submissions Mr Natarajan further
elaborated on the above submissions by urging that
(i)
Rule 89(5) suffers from the vice of treating unequals equally.
This happens because a discrimination results between
assessees who have only inverted rated supplies and those
who have other supplies;
(ii) ITC is available both on input goods and input
services;
(iii) At the end of every tax period, it is possible to note how
much ITC has arisen from input goods or input services.
However, once a credit in the electronic ledger is utilised, it is
not possible to bifurcate what remains between input goods
and input services;
(iv) In the above backdrop, the manufacturer should be allowed
to utilise the ITC on input services first for the payment of
taxes; and
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(v) The formula, as it stands, presumes that the outward tax
liability is paid out of the ITC accumulated only on account of
input goods. Thus, what is granted by the statute in Section
16 is indirectly taken away by the formula prescribed in the
rule. Thus, an order of utilization of credit should be provided
for payment of taxes to avail of credit on input services. In
other words, in the formula in Rule 89(5) the following words
should be read in at the end: “after utilising the input tax credit
on input services pertaining to such inverted rate supply of
goods and services.”
19. Appearing for another intervenor20, Mr Shraff, learned Counsel
submitted that-
(i)
If the Explanation (a) to Rule 89(5) is ultra vires Section
54(3), unutilised ITC should include capital goods in addition
to input goods and input services;
(ii)
The electronic ledger makes no distinction between input
goods and input services. The credit arises under integrated
tax, central tax and state tax. The electronic ledger represents
a collective credit of input goods, input services and capital
goods;
(iii) The inequality arises because small and medium enterprises
(SMEs) with one product, facing an inverted rate structure,
would get a lesser amount while availing refund whereas
large companies with multiple products would get refunds
violating Article 19(1)(g); and
(iv) The retrospective amendment to Rule 89(5) takes away
vested or accrued rights.
20. Mr Uchit Sheth, learned
Counsel21 has urged the following
submissions:
(i)
Once tax credit is claimed and credited into the electronic
credit ledger, it forms a consolidated pool of credit, making
it impossible to segregate into credit for input goods and
credit for input services. Hence, it is not possible to ascertain
20 IA 56717/2021
21 Appearing in SLP (Civil) Nos 2973 of 2021, 16003 of 2020, 677 of 2021 and 1340
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the source of unutilized ITC. The proviso to Section 54(3)
only lays down a condition precedent for claiming ITC and
once the condition is fulfilled, then refund is admissible on
the entire amount of unutilized input ITC;
(ii)
The amended formula in Rule 89(5) stipulates maximum
refund permissible by deducting output tax from the Net
ITC qua inputs goods. In other words, it is presumed that
output tax is first adjusted against ITC pertaining to input
goods and thereafter qua input services. There is no basis
for such hierarchy in utilization of tax credit and the anomaly
arises because of an incorrect interpretation of Section 54(3)
of the Act by the rule making authority;
(iii)
Section 49(6) of the Act provides that the balance in the
electronic cash ledger or electronic credit ledger after
payment of tax, interest, penalty, fee or any other amount
payable is to be refunded in accordance with Section 54.
The legal obligation is to refund the balance in the ledger if
the conditions specified in Section 54 are fulfilled. There is
no legal basis for the artificial dissection of such a balance;
(iv)
If the rate of tax on inputs is higher than the rate of tax on
output supplies, the entire unutilized ITC is “on account” of
such circumstance and the entire balance of tax credit is
required to be refunded. The expression ‘on account of’
cannot be read to mean ‘to the extent of’ particularly when
it is not possible to
compute the unutilized ITC attributable
to input goods or services;
(v)
There are two different connotations of the term ‘input’.
The first distinguishes it as goods vis-a-vis services while
the second distinguishes it from output. The expression
‘input tax’ and ‘input tax credit’ have been defined to include
tax in respect of both goods as well as services and there is
no phrase called “input service tax credit”. The expression
‘inputs’ in the proviso to Section 54(3) has been used in the
second sense to distinguish it from output; and
(vi)
GST is a destination-based consumption tax and the
imposition of the tax is on supply. A supplier is liable to pay
tax only to the extent it is payable on the output supply of
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goods or services and the refund of excess balance of input
of ITC under inverted duty structure is a means to achieve
this end. If the excess tax credit is not refunded, the tax
liability of the supplier will be in excess of the liability fixed
by the charging section and such interpretation should be
avoided.
21. Dr Arvind Poddar, learned Counsel appearing on behalf of the
respondents22, urged that the respondents are in the business of providing
dyeing and printing services for textile industries. For job work operations,
they procure input goods (such as chemicals, stationeries and colours)
and for providing outward supplies, they also avail of input services such
as contract labour, consultancies, repairs of plants and machinery. The
rate on outward supply of job work on textile fabrics is 5 per cent, while
the rate on input goods and the rate on input services is 12 per cent /18
per cent. Thus, most of the input goods and input services attract a
higher rate of GST compared to rate of GST applicable on the outward
supply which is 5 per cent. The inverted duty structure results where the
rate of GST on inverted supplies is higher than the outward supplies. As
a result, over a period of time, credit gets accumulated in the electronic
credit ledger. In this backdrop, the following submissions have been urged:
(i)
Clause (ii) to the first proviso of Section 54(3) merely
prescribes the eligibility conditions subject to which a refund
of unutilised ITC
could be made. The main part of Section
54(3) allows for a refund of any unutilised ITC subject to
the satisfaction of two conditions – either that the assessee
is making zero rated supplies without payment on taxes or
where the credit is getting accumulated on account of the
rate of tax on inputs being higher than the rate of tax on
output supplies. Clause (ii) of the first proviso merely
prescribes a condition of eligibility subject to which refund
of unutilised ITC could be made;
(ii)
Rule 89(5) while providing a procedure for computing refund
under Section 54(3) imposes an artificial restriction which
has not been prescribed in the main statute and is patently
arbitrary and illegal. Section 49 allows credit utilization
irrespective of whether it is out of input goods or input
22 Appearing in SLP (Civil) No 1868/2021
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services. On the other hand, Rule 89(5) artificially restricts
the credit by initiating the formula under which duty can be
paid out of credit on input goods and input services only
and hence the credit of input services will keep on
accumulating. Rule 89(5) must allow the taxpayers to utilise
and make payment through input services first and then the
balance through credit on inputs; and
(iii)
It is paradoxical that while on the one hand the definition of
net ITC has been amended to exclude ITC availed on input
services, on the other hand, turnover of inverted supply of
services and tax payable on such inverted rated supply of
services has been included in the formula for calculating
the maximum amount of refund.
D.3 Rejoinder by Union of India
22. In response to the submissions of the assessees, Mr N
Venkataraman, the learned ASG, has submitted the following propositions:
(i)
The submission of the respondents that Article 279A(6) of
the Constitution mandates a harmonised structure of GST
and obligates parity of treatment amongst goods and services
is misplaced for the following reasons:
(a)
Article 279A(6) does not compel parity of treatment
between goods and services. In fact, Article 366(12) deals
with the definition of ‘goods’, Article 366(26A) deals with
the definition of ‘services’ and Article 366(12A) defines
‘goods and services’. Thus, goods and services are identified
as two distinct aspects;
(b)
Article
279A deals with the GST Council. The purpose of
Article 279A(6) is to ensure that the GST Council, while
discharging its function, is guided by the need for a
harmonised structure. Thus, the term ‘harmonised’ or,
harmony in this context would mean uniformity, consistency,
shared values and responsibilities between the Union
Government and State Governments. The essence of Article
279(A)(6) is promotion of cooperative federalism;
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(c)
If the interpretation of the respondents is accepted, it would
render Article 279A(4) otiose as it allows the GST Council
to make recommendations including rates and floor rates
with bands of GST.
(ii)
Registered assessees having unutilised ITC do not form a
distinct and separate class. Unutilised ITC can accumulate
on account of huge discounts on output supplies of goods
or services; as a business strategy to indulge in predatory
pricing; loss of business resulting in undervaluation of goods;
an Act of God; and inverted duty structure on account of
inputs or input services, among other reasons . Thus,
although registered assessees accumulating unutilised ITC
constitute one category, it has numerous species. Parliament
is entitled to choose the species out of the category and
grant concessions or benefits. This would amount to treating
equals equally, and unequals unequally;
(iii)
The doctrines of equivalence, neutrality or secondary stage
cascading effect are inapplicable and should not be used to
read in grant of refund for unutilised ITC on input services.
Although the stated goal of the doctrines may be
convergence of a destination-based tax, policy issues as to
how to achieve the stated goal must be left to the discretion
of the Union Government and the State Governments. The
level, type and time frame to achieve a complete
convergence is a policy issue which cannot be subject to
judicial review;
(iv)
After the ITC on account of both inputs and
input services
is booked into an electronic ledger, it forms a homogenous
nucleus and the source of the ITC (that is whether it arises
from input or input services) cannot be determined. Thus,
the formula provided in Rule 89(5) is necessary to make
such a bifurcation; and
(v)
Prior to the enactment of GST, MODVAT/CENVAT Rules
contained formulae to determine the quantum of eligibility
of credit. Similarly, to legally dissect the homogenous
unutilised ITC, a formula may be resorted to determine
eligibility, restrictions, or refunds.
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E Constitutional Scheme of GST
23. The idea which permeates GST legislation globally is to impose
a multi stage tax under which each point in a supply chain is potentially
taxed. Suppliers are entitled to avail credit of tax paid at an anterior
stage. As a result, GST fulfils the description of a tax which is based on
value addition. Value addition is intended to achieve fiscal neutrality and
to obviate a cascading effect of taxation which traditional tax regimes
were liable to perpetuate. In a sense therefore, the purpose of a tax on
value addition is not dependent on the distribution or manufacturing model.
The tax which is paid at an anterior stage of the supply chain is adjusted.
The fundamental object is to achieve both neutrality and equivalence by
the grant of seamless credit of the duties paid at an anterior stage of the
supply chain.
24. The State VAT legislation in India represented a significant
stage in the evaluation of fiscal legislation based on the principle of value
addition. In All India Federation of Tax Practitioners v. Union of
India23, this Court, speaking through a two judge Bench, noted the
principle that VAT is a consumption tax as it is borne by the consumer.
The Court observed that with its increasing importance in the economy,
the service sector is “occupying the centre stage of the Indian economy”.
As economists postulate, there is no distinction between consumption of
goods and
consumption of services both of which satisfy human wants
and needs. The Court underscored that service tax is a destination-based
consumption tax, not a charge on business but on the consumer of the
service.
25. Though the erstwhile regime recognised the principle of value
addition-based consumption taxes, there was an absence of a seamless
flow of credit, particularly between Central and State levies. The
background material antecedent to the adoption of the constitutional and
legal structure underlying GST in the country indicates the importance
which was ascribed to developing a tax regime which would achieve a
continuous chain of set-off from the original producer and service
provider’s point up to the retailer’s level in the supply chain and eliminate
the burden of cascading tax effects. Thus, the first discussion paper on
GST in India published by the Empowered Committee of State Finance
Ministers on 10 November 2009 emphasised that :
23 2007 (7) SCC 527
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 “1.14 … In the GST, both the cascading effects of CENVAT and
service tax are removed with set-off, and a continuous chain of
set-off from the original producer’s point and service provider’s
point upto the retailer’s level is established which reduces the
burden of all cascading effects. This is the essence of GST, and
this is why GST is not simply VAT plus service tax but an
improvement over the previous system of VAT and disjointed
service tax.”
26. The Statement of Objects and Reasons appended to the
Constitution (One-Hundred and Twenty-Second Amendment) Bill 2014
which eventually became the Constitution (One Hundred and First
Amendment) Act 2016 postulates that GST shall replace a number of
indirect taxes levied by the Union Government and the State Governments.
The object was to introduce a goods and service tax which would fulfil
two fiscal priorities namely, (1) removing the cascading effect of taxes;
and (2) providing for a common national market for goods and services.
An extract from the Statement of Objects and Reasons is set out below:
“The Constitution is proposed to be amended to introduce the goods
and services tax for conferring concurrent taxing powers on the
Union as well as the States including Union territory with Legislature
to make laws for levying goods and services tax on every
transaction of supply of goods or services or both. The goods and
services tax shall replace a number of indirect taxes being levied
by the Union and the
State Governments and is intended to remove
cascading effect of taxes and provide for a common national market
for goods and services. The proposed Central and State goods
and services tax will be levied on all transactions involving supply
of goods and services, except those which are kept out of the
purview of the goods and services tax.”
27. Now, it is in this backdrop that it becomes necessary to advert
to the constitutional amendment and the resulting legislation. The One
Hundred and First Amendment to the Constitution is a watershed
moment in the evolution of cooperative federalism. Since its origin, the
Constitution contained a three-fold distribution of legislative power. Under
Article 246, the subjects of legislation enumerated in the Union List of
the Seventh Schedule were assigned to Parliament, those in the State
List were assigned exclusively to the States and those in the Concurrent
List were assigned both to Parliament and the States with precedence
to Parliament under the provisions of Article 254.
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28. To illustrate, Entry 84 of the Union List provided for duties of
excise on tobacco and other goods manufactured or produced in India
except – (a) alcoholic liquors for human consumption; and (b) opium,
hemp and other narcotic drugs and narcotics. Entry 54 of the State List
provided for taxes on sale or purchase of goods other than newspapers
subject to Entry 92A of the Union List which provided for taxes on the
sale or purchase of goods other than newspapers in the course of
interstate trade or commerce. Entry 97, the residual entry of the Union
List subsumed within it among other subjects, taxes not mentioned in the
Union, State or Concurrent List, thereby bringing with its ambit the notion
of ‘rag-bag’ legislation. The field contemplated by the erstwhile Entry
83 of the Union List (duties of customs including export duties) or Entry
97 did not travel into the area of trading. State legislation in the area of
sales tax and VAT defined the ambit of the expression ‘inputs’, ‘capital
goods’ and ‘input tax credit’.
 29. The One Hundred and First Constitutional Amendment brought
about a significant merger by contemplating a fiscal umbrella
comprehending GST. Article 246A was adopted in terms of which,
notwithstanding anything contained in Article 246 and Article 254,
Parliament and (subject to Clause (2)), the State Legislature of every
State have the power to make laws with respect to GST imposed by the
Union or by
the State under clause (2) of Article 246A24. Parliament has
the exclusive power to make laws with respect to goods and services
tax where the supply of goods or of services, or both takes place in the
course of inter-State trade or commerce. With the enactment of the
One Hundred and First Constitutional Amendment, Entry 84 of the Union
List has been restructured to incorporate duties of excise on the following
goods manufactured or produced in India, namely –
24 “Article 246A. (1) Notwithstanding anything contained in articles 246 and 254,
Parliament, and, subject to clause (2), the Legislature of every State, have power to
make laws with respect to goods and services tax imposed by the Union or by such
State.
(2) Parliament has exclusive power to make laws with respect to goods and services
tax where the supply of goods; or of services, or both takes place in the course of
inter-State trade or commerce.
Explanation. – The provisions of this article, shall, in respect of goods and services tax
referred to in clause (5) of article 279A, take effect from the date recommended by the
Goods and Services Tax Council.”
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(a) petroleum crude;
(b) high speed diesel;
(c) motor spirit (commonly known as petrol);
(d) natural gas;
(e) aviation turbine fuel; and
(f) tobacco and tobacco products.
30. Entry 54 of the State List has been restructured to provide for
taxes on the sale of petroleum crude, high speed diesel, motor spirit
(commonly known as petrol), natural gas, aviation turbine fuel and
alcoholic liquor for human consumption, other than in the course of inter-
State trade or commerce.
31. Article 246A has brought about several changes in the
constitutional scheme:
(i)
Firstly, Article 246A defines the source of power as well
as the field of legislation (with respect to goods and services
tax) obviating the need to travel to the Seventh Schedule;
(ii)
Secondly, the provisions of Article 246A are available both
to Parliament and the State legislatures, save and except
for the exclusive power of Parliament to enact GST
legislation where the supply of goods or services takes place
in the course of inter-State trade or commerce; and
(iii)
Thirdly, Article 246A embodies the constitutional principle
of simultaneous levy as distinct from the principle of
concurrence. Concurrence, which operated within the fold
of the Concurrent List, was regulated by Article 254.
32. The One Hundred and First Constitutional Amendment brought
in amendments to the constitutional dictionary of definitions contained in
Article 366. Clause 12 of Article 366 contained a definition of the
expression
“goods” to include all materials, commodities and articles.
Clause 12A has been introduced by the amendment to define “goods
and services tax”:
“Clause (12A) “goods and services tax” means any tax on supply
of goods, or services or both except taxes on the supply of the
alcoholic liquor for human consumption”.
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Clause 26A has been introduced to define “services”:
“Clause (26A) “Services” means anything other than goods”
‘Services’, therefore, under the constitutional scheme means
anything other than goods.
33. The constitutional scheme embodying GST is facilitated through
the composition of the GST Council under Article 279A. The GST Council
is to consist of the Union Finance Minister, the Union Minister of State
in charge of Revenue of Finance; and the Minister In-charge of Finance
or Taxation or any other Minister nominated by each State Government.
Clause (4) of Article 279(A) empowers the GST Council to make
recommendations to the Union and the States on the aspects
comprehended in sub-clauses (a) to (h) of Clause (4), which are extracted
below:
“[…]
(a)
the taxes, cesses and surcharges levied by the Union, the
States and the local bodies which may be subsumed in the
goods and services tax;
(b)
the goods and services that may be subjected to, or exempted
from the goods and services tax;
(c)
model Goods and Services Tax Laws, principles of levy,
apportionment of Goods and Services Tax levied on supplies
in the course of inter-State trade or commerce under article
269A and the principles that govern the place of supply;
(d)
the threshold limit of turnover below which goods and services
may be exempted from goods and services tax;
(e)
the rates including floor rates with bands of goods and
services tax;
(f)
any special
rate or rates for a specified period, to raise
additional resources during any natural calamity or disaster;
(g)
special provision with respect to the States of Arunachal
Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya,
Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and
Uttarakhand; and
(h)
any other matter relating to the goods and services tax, as
the Council may decide.”
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Clause (6) of Article 279A stipulates that:
“(6) While discharging the functions conferred by this article, the
Goods and Services Tax Council shall be guided by the need for a
harmonised structure of goods and services tax and for the
development of a harmonised national market for goods and
services.”
34. Article 279A(6) indicates that in the discharge of its functions,
the GST Council is to be guided by the need for a harmonised structure
of goods and services tax and the development of a harmonised national
market for goods and services. This emphasis on harmony is crucial to
co-operative federalism. It underscores that in a federal arrangement
where the States and Union are converging together for the first time to
adopt the same event for taxation, both sets of partners must be guided
by the over-arching need to preserve harmony. Harmony postulates
balance, an acceptance of mutual co-existence. Clauses (7) to (11) of
Article 279A contain provisions for quorum, procedure and voting. Clause
(9) is a clear indicator of the absence of supremacy either of the Union
of the States. Under sub clause (a) of Clause 9, the vote of the Union
Government is to have a weightage of one-third of the total votes cast,
while the votes of all the State Governments together are to have a
weightage of two-thirds of the total votes cast. Every decision of the
Council is to be taken by a majority of not less than three-fourths of the
weighted votes of the members present
and voting. The principle of
harmony does not postulate exact coincidence in all points of comparison
or reference. Harmony is a postulate of cooperative federalism and is
founded on the principle of mutual co-existence, deference and equality
of the coexisting units.
F CGST Act
F.1 Definitions
35. While understanding the provisions of Section 54(3), it becomes
necessary to advert to some of the key definitions contained in the CGST
Act.
Section 2 (52) defines the expression goods in the following terms:
“goods” means every kind of movable property other than money
and securities but includes actionable claim, growing crops, grass
and things attached to or forming part of the land which are agreed
to be severed before supply or under a contract of supply.”
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36. The expression ‘goods’ is defined on the basis of a ‘means
and includes’ formula. Following well-settled principles of statutory
interpretation, the legislature uses the expression ‘means’ when it intends
the definition to be exhaustive. The use of the expression ‘includes’ is
intended to convey an expansive meaning. By using the expression “means
and includes”, the legislature intends to employ an extensive definition,
incorporating subjects which may not ordinarily fall within the common
understanding of the expression. Thus, the expression ‘goods’ is defined
to mean every kind of movable property other than money and securities.
It also includes certain other items incorporated in the inclusive part
(“but includes”) of the definition. The expression ‘goods’ is broadly
defined. The expression ‘services’ is defined in Section 2(102) in the
following terms:
“Section 2(102) “services” means anything other than goods,
money and securities but includes activities relating to the use of
money or its conversion by cash or by any other mode, from one
form, currency or denomination, to another form, currency or
denomination for which a separate consideration is charged.
Explanation: For the removal of doubts, it is hereby clarified that
the expression “services” includes facilitating or arranging
transactions in securities.”
The expression ‘services’ is thus distinguished from goods since
the expression means “anything
other than goods”.
37. The definition of the expression ‘input’ is contained in Section
2(59) which reads thus:
“2(59) “input” means any goods other than capital goods used or
intended to be used by a supplier in the course or furtherance of
business”
The expression ‘input’ is thus defined to mean goods other than
capital goods. The definition however, incorporates a requirement of
use, actual or intended, by a supplier or in the course or furtherance of
business.
38. ‘Input service’ is defined in Section 2(60) as follows:
“input service” means any service used or intended to be used by
a supplier in the course or furtherance of business;”
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The definition of “input service” is parallel to that of “input”, with
the important distinction that while ‘input’ is defined with reference to
“any goods”, ‘input service’ is defined in relation to “any service”. Both
sets of definitions incorporate the further requirement of use or intended
use by a supplier in the course or furtherance of business.
39. The expression “input tax” is defined in Section 2(62) :
“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—
(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.”
The expression ‘input tax’ in relation to a registered person means
(i) the Central, State, Integrated or Union Territory tax; (ii) charged on
any supply of goods or services or both made to a registered person.
This is followed by an inclusive
definition.
40. The expression ‘input tax credit’ is defined in Section 2 (63):
“2(63) “input tax credit” means the credit of input tax”
Evidently, since input tax credit means the credit on input tax, the
definition of the expression ‘input tax’ has to be read into Section 2(63)
in understanding the ambit of the expression ‘input tax credit’. Now,
input tax is the tax charged on the supply of goods or services or both.
Apart from the above definitions there are three other definitions which
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must be noted at this stage. The expression ‘inward supply’ is defined in
Section 2 (67) in the following terms:
“2(67) “inward supply” in relation to a person, shall mean receipt
of goods or services or both whether by purchase, acquisition or
any other means with or without consideration.”
41. The expression ‘output tax’ is defined in the following terms:
“2(82) “output tax” in relation to a taxable person, means the tax
chargeable under this Act on taxable supply of goods or services
or both made by him or by his agent but excludes tax payable by
him on reverse charge basis”
The expression ‘outward supply’ is defined in Section 2(83) thus:
“2(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.”
42. Again, as in the case of inward supply, the expression “outward
supply” incorporates the supply of goods or services or both. The
expression “output tax” in other words means tax chargeable under the
Act on the taxable supply of goods or services or both. The above
definitions fall into three clusters: the first cluster relates to receipt –
Section 2(62), Section 2(63) and Section 2(67); the second cluster consists
of outward supply and output tax - Section 2(82) and Section 2(83); and
the third
cluster consists of goods, services, input and input services –
Section 2(52), Section 2(102), Section 2(59) and Section 2(60).
F.2 Section 16 & Section 49 of the CGST Act
43. Section 16 is comprised in Chapter V and is titled as ‘input tax
credit’. The marginal note to Section 16 indicates that the provision relates
to eligibility and conditions for taking ITC. Sub-Section (1) of Section 16
is in the following terms:
“16 Eligibility and conditions for taking input tax credit. – (1) Every
registered person shall, subject to such conditions and restrictions
as may be prescribed and in the manner specified in section 49, be
entitled to take credit of input tax charged on any supply of goods
or services or both to him which are used or intended to be used in
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the course or furtherance of his business and the said amount
shall be credited to the electronic credit ledger of such person.”
44. Under sub-Section (1) Section 16:
(i)
every registered person shall be entitled to take credit to input
tax charged on any supply of goods and services or both to
him;
(ii) which are used or intended to be used in the course or
furtherance of his business;
(iii) subject to such conditions and restrictions as may be
prescribed; and
(iv) in the manner specified in Section 49.
45. The amount of input tax credit is to be credited in the electronic
credit ledger of the registered person. Sub-Section (2) spells out the
conditions upon the fulfilment of which the entitlement to the credit of
input tax in respect of any supply of goods or services can be availed.
Sub- Section (2) of Section 16 is in the following terms:
“16. […]
(2) Notwithstanding anything contained in this section, no registered
person shall be entitled to the credit of any input tax in respect of
any supply of goods or services or both to him unless,––
(a) he is in possession of a tax invoice or debit note issued by a
supplier registered under this Act, or such other tax paying
documents as may be prescribed;
(aa) the details of the invoice or debit note referred to in clause (a)
has been furnished by the supplier in the statement of outward
supplies and such details have been communicated to the recipient
of such invoice or debit note in the manner specified
under Section
37
(b)he has received the goods or services or both.
Explanation.—For the purposes of this clause, it shall be deemed
that the registered person has received the goods or, as the
case may be, services-
(i) where the goods are delivered by the supplier to a recipient
or any other person on the direction of such registered person,
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whether acting as an agent or otherwise, before or during
movement of goods, either by way of transfer of documents of
title to goods or otherwise;
(ii) where the services are provided by the supplier to any person
on the direction of and on account of such registered person.
(c) subject to the provisions of section 41, the tax charged in respect
of such supply has been actually paid to the Government, either in
cash or through utilisation of input tax credit admissible in respect
of the said supply; and
(d) he has furnished the return under section 39:
Provided that where the goods against an invoice are received in
lots or instalments, the registered person shall be entitled to take
credit upon receipt of the last lot or instalment:
Provided further that where a recipient fails to pay to the supplier
of goods or services or both, other than the supplies on which tax
is payable on reverse charge basis, the amount towards the value
of supply along with tax payable thereon within a period of one
hundred and eighty days from the date of issue of invoice by the
supplier, an amount equal to the input tax credit availed by the
recipient shall be added to his output tax liability, along with interest
thereon, in such manner as may be prescribed:
Provided also that the recipient shall be entitled to avail of the
credit of input tax on payment made by him of the amount towards
the value of supply of goods or services or both
along with tax
payable thereon”
46. Section 16(2) indicates that the credit of input tax charged on
any supply of goods or services, or both, can be availed of by a registered
person subject to the conditions which are set out in the provisos. Input
tax, as we have already seen, has been defined in Section 2(62) as tax
charged on any supply of goods or services or both. The credit of input
tax is, therefore, relatable both to the supply of goods and services.
Whether tax is paid on the supply of goods or services, the recipients
receive ITC in a similar manner. Taxes on goods and services are
identifiable, but upon credit to the electronic ledger they form a common
pool for utilization. Section 16(1) indicates that the manner in which
input tax credit can be utilized is spelt out in Section 49. Sub- Section (1)
of Section 49 provides:
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“Section 49 (1) - Every deposit made towards tax, interest, penalty,
fee or any other amount by a person by internet banking or by
using credit or debit cards or National Electronic Fund Transfer or
Real Time Gross Settlement or by such other mode and subject to
such conditions and restrictions as may be prescribed, shall be
credited to the electronic cash ledger of such person to be
maintained in such manner as may be prescribed...”
47. Sub-Section (3) of Section 49 envisages that the amount
available in the electronic cash ledger may be used for making any
payment towards tax, interest, penalty, fees or any other amount payable
under the provisions of the Act or its rules in the manner and subject to
conditions and within such time as is prescribed. Similarly, sub-Section
(4) of Section 49 stipulates that the amount available in the electronic
credit ledger can be used for making payment towards output tax under
the CGST Act or under the IGST Act in such manner and subject to the
conditions and within such time as is prescribed. Sub-Section (5) of
Section 49 spells out the priorities according to which the amount of ITC
available in the electronic credit ledger can be utilized. Sub Section (6)
of Section 49 is significant and provides as follows:
“(6) The balance in the electronic cash ledger or electronic credit
ledger after payment of tax, interest, penalty, fee or any other
amount payable under this Act or the rules made thereunder may
be refunded in
accordance with the provisions of Section 54.” 
48. The provisions of Section 16 and Section 49 indicate the
following position:
(i)
The ITC in the electronic credit ledger may be availed of
for making any payment towards output tax under the CGST
Act or under the IGST Act;
(ii)
The amount available in the electronic cash ledger may be
used for making any payment towards tax, interest, penalty,
fees or any other amount payable under the CGST Act or
its rules;
(iii)
The balance in the electronic cash ledger or electronic credit
ledger after the payment of tax, interest, penalty, fees or
any other amount payable under the Act or rules may be
refunded in accordance with the provisions of Section 54;
and
UNION OF INDIA v. VKC FOOTSTEPS INDIA PVT LTD.
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(iv)
Sub Section (6) of Section 49, in other words contemplates
a refund of the balance which remains in the electronic cash
ledger or electronic credit ledger in the manner stipulated
by the provisions of Section 54.
F.3 Interpretation of Section 54(3) of the CGST Act
49. The controversy in the present case turns upon the
interpretation of Section 54, which is found in Chapter XI titled as
‘Refunds’. The marginal note of Section 54 is titled “Refund of Tax”.
Section 54(1) provides thus:
“54. (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:
Under sub-Section (1) of Section 54, an application has to be
made within two years of the relevant date by a person claiming refund
of tax and interest (if any, paid on the tax or any other amount paid), in
such form and manner as prescribed. Explanation 1 to Section 54 is in
the following terms:
“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.”
Sub-Section (3) of Section 54 is in the following terms:
“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:
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 credit has accumulated on account of rate of tax on
inputs being higher than the rate of tax on output supplies (other
than nil rated or fully exempt supplies), except supplies of goods
or services or both as may be notified by the Government on the
recommendations of the Council:
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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 of drawback in
respect of central tax or claims refund of the integrated tax paid
on such supplies.”
50. The submission which was urged by the assessees before the
Gujarat and Madras High Courts, as well as this Court, is that under the
substantive part of Section 54(3), Parliament has contemplated that the
claim of refund may extend to any unutilized ITC. ITC means credit of
input tax and since ‘input tax’ is defined with reference to the tax charged
on the supply of goods or services or both, a refund may be claimed not
only of the tax charged on input goods but also input services as a whole.
According to the Revenue, the first proviso to Section 54(3) is a restriction.
On the other hand, assessees have urged that the first proviso sets out
only a condition or provision for eligibility and once it is fulfilled, the
refund is available on the entirety of the unutilized ITC including the
credit which is relatable to tax paid on input goods and input services.
 51. The crux of the dispute in the present case pertains to how
sub-Section (3) to Section 54 and Explanation 1 to sub-Section (1) of
Section 54 are to be understood and interpreted. For convenience of
analysis, the
interpretation of sub-Section (3) of Section 54 can be
distributed in its main tier and the three provisos. The main part of sub-
Section (3) provides that a registered person may claim refund of any
unutilized ITC at the end of any tax period. Tax period is defined in
Section 2(106) as the period for which the return is required to be
furnished. While enacting Section 54(3), Parliament has envisaged a
claim for the refund of unutilized ITC by a registered person at the end
of the tax period. The first tier is the main provision of Section 54(3)
which lays down four conditions:
(i) A claim of refund;
(ii) By a registered tax person;
(iii) Of any unutilized ITC; and
(iv) At the end of any tax period, subject to the provisions of sub-
Section (10).
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52. The second tier is the first proviso. The first proviso begins
with the expression “no refund of unutilized ITC shall be allowed in
cases other than” which is followed by clauses (i) and (ii). The opening
line of the first proviso contains two expressions of significance, namely,
“no refund shall be allowed” and “in cases other than”. The expression
‘allowed’ in the proviso must be contrasted with the expression ‘claim’
in the substantive part of sub-Section (3). A refund can be allowed only
in the eventualities envisaged in clauses (i) and (ii). The expression ‘other
than’ operates as a limitation or restriction.
53. The third tier of sub-Section 54(3) consist of the two clauses
of the first proviso which deal with two distinct cases: Clause (i) deals
with zero-rated supplies made without payment of tax, while Clause (ii)
deals with credit which has accumulated on account of the rate of tax
on inputs being higher than the rate of tax on output supplies. Proviso (ii)
embodies the concept of an inverted duty structure. Proviso (ii) states
that the refund of unutilized ITC shall be allowed only when the credit
has accumulated because the rate of tax of inputs is higher than the rate
of tax on output supplies. Input, as we have already noted, is defined in
Section 2(59) to mean goods other than the capital goods. ‘Output
supplies’ is not defined in the statute. As seen above, Section 16 stipulates
the eligibility
and conditions for availing ITC. ITC accumulates when
the credit cannot be utilized either partly or in whole and this may occur
for a variety of reasons. The credit of ITC may accumulate for several
reasons. Without spelling out an exhaustive list of circumstances, the
accumulation may be due to: (a) an inverted duty structure when the
GST on output supplies is less than the GST on inputs; (b) stock
accumulation; (c) capital goods; and (d) partial reverse mechanism for
certain services. There could be other reasons as well, such as excessive
discounts or predatory pricing.
54. The distortion caused by unutilized accumulated ITC was
noticed before the advent of the GST regime, in the context of the State
VAT legislation under the erstwhile regime. A White Paper on State-
level Value Added Tax by the Empowered Committee of State Finance
Ministers dated 17 January 2005 contemplated that if any credit remained
unutilized in a month, it will be carried forward. If even at the end of
second year there is an excess unadjusted ITC, the same will be refunded:
“Carrying Over of Tax Credit
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2.4 If the tax credit exceeds the tax payable on sales in a month,
the excess credit will be carried over to the end of next financial
year. If there is any excess unadjusted input tax credit at the end
of second year, then the same will be eligible for refund….”
Based on this, a provision for refund of unadjusted ITC was
inserted in Section 11 of the Gujarat Value Added Tax Act read with
Rule 15(6) of the Gujarat Value Added Tax Rules 200625. When the
GST regime was under discussion, the first discussion paper by the
Empowered Committee of State Finance Ministers published on 10
November 2009 acknowledged the problem of the accumulation of ITC
on account of the rate of input tax being higher than output tax and
suggested that a refund be provided of accumulated ITC. The relevant
extract from the discussion paper dealing with the ‘Salient features of
the GST model’ reads thus:
“3.2…(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.”
55. The report of the Joint Committee, Empowered Committee of
State Finance Ministers on Business Process for GST and on Refund
Process published in August 2015 noted that under the proposed GST
law, ITC will be allowed, so as to remove the cascading effect of
taxes
and it is the ultimate customer who should bear the burden of taxes.
However, the report noticed that there can be cases where there is an
accumulation of credit due to an inverted duty structure. The report
envisaged that there would fewer rates of taxes and exemptions under
25 Rule 15
“(6) Where the tax credit (other than tax credit on capital goods) admissible in the year
remains unadjusted against the output tax as per section 11, such amount shall be
refunded not later than expiry of two years from the end of the year in which such tax
credit had become admissible:
Provided that the dealer claiming such refund shall have to prove to the satisfaction of
the assessing authority that the purchases of the goods on which such tax credit had
been calculated have been disposed off in the manner referred to in sub-section (3) of
section 11 within the period by which refund under this sub-rule becomes admissible.”
See also, Section 51 of the Maharashtra Value Added Tax Act 2002 read with Rule 60
of the Maharashtra Value Added Tax Rules 2005
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GST and hence, the chances of an inverted duty structure would be
“minimal”. At the same time, it recommended a refund of carried forward
ITC in the following terms:
“(H) REFUND OF CARRY FORWARD INPUT TAX CREDIT:
i) As stated earlier, ITC is allowed to remove cascading and under
modern VAT laws, tax is charged on value addition only and tax is
not charged on tax. It is for this reason that the ultimate consumer
is liable to bear the tax burden.
ii) It is noted that the ITC may accumulate on account of the
following reasons :
a) Inverted Duty Structure i.e. GST on output supplies is less
than the GST on the input supplies;
b) Stock accumulation;
c) Capital goods; and
d) Partial Reverse charge mechanism for certain services.
iii) As regards the accumulated ITC attributed to accumulation of
stock or capital goods, it is recommended that GST Law may
provide that refund of carried forward ITC may not be allowed
and such amount would be carried forward to the next tax period
(s). The GST Law may provide for appropriate provisions in this
regard.
iv) Under the proposed GST law, it is proposed to have fewer
tax rates and fewer exemptions and therefore it is felt that
chances of inverted duty structure would not be there or
would be very minimal. But still there might be a possibility
that ITC may accumulate on account of inverted duty
structure.
v) It is recommended that in such case, cash refund may be
granted after due
audit and should be sanctioned only after
the input tax credit has been matched from the purchase
and sales statements filed along with monthly returns. The
refund would be granted on submission of application. It
may be mentioned, however, that presently the Centre does
not grant refund in such cases.…”
(emphasis supplied)
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While enacting Clause (ii) of the first proviso to Section 54(3) in
the CGST Act, Parliament, took legislative notice of a specific eventuality
namely “where the credit has accumulated on account of the rate of tax
on inputs being higher than the rate of tax on output supplies”. Parliament
would be cognizant of the fact that ITC may accumulate for a variety of
reasons, of which an inverted duty structure is one situation. Parliament
was legislating to provide for a refund and therefore restricted it to the
two situations spelt out in clauses (i) and (ii) of the first proviso. The
opening words of the substantive part of Section 54(3) contemplate a
claim of refund of “any unutilized input tax credit”. Undoubtedly, any
unutilized ITC would include credit on account of tax charged on any
supply of goods or services or both. The opening sentence of Section
54(3) provides for (i) a claim of refund by a registered person; (ii) of any
unutilized input tax credit; (iii) at the end of any tax period. But the
impact of the first proviso, as its opening words indicate, is that :
(i)
“No refund” of unutilized ITC “shall be allowed” “in cases
other than” (i) and (ii);
(ii)
The expression “claim” in the substantive part must be
distinguished from the phrase “shall be allowed” in the
opening sentence of the first proviso. Likewise, the
expression “may claim refund” in the opening part must be
distinguished from “no refund” in the opening part of the
first proviso;
(iii)
The impact of the first proviso is that a refund of unutilized
ITC shall be allowed only in cases falling under (i) and (ii).
The expression ‘only’ in the previous sentence is not a judicial
addition to statutory language but follows plainly from the
expressions “no refund” of unutilized ITC shall be allowed
“in cases other than”;
(iv)
The expression “in cases other than” is a clear indicator
that clauses (i) and (ii) are restrictive and not conditions of
eligibility. A refund, in other words, can be allowed in the
two contingencies spelt out in clauses (i) and (ii) of the first
proviso;
(v)
There is a clear distinction between clause (i) and clause
(ii) of the first proviso: (a) in the case of exports, the
contingency is zero-rated supplies without any distinction
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between input goods or input services; (b) in contrast for
domestic supplies, clause (ii) relates to the accumulation of
credit on account of rate of tax on inputs being higher than
the rate of tax on output supplies;
(vi)
The legislative draftsperson has made a clear distinction
between clause (i) and clause (ii) of the first proviso and it
was in this context that the opening words of Section 54(3)
have used the expression “may claim refund of any unutilized
ITC”;
(vii)
Explanation 1 to Section 54, while defining the expression
“refund” for the purposes of the section adopts an inclusive
definition covering (a) refund of tax paid on zero rated
supplies of goods or services or both; (b) refund of tax paid
on input goods or inputs services used in making such zero-
rated supplies; (c) refund of tax on supply of goods regarded
as deemed exports; and (d) refund of unutilized ITC as
provided under sub-section(3) of Section 54; and
(viii) Explanation 1 indicates that with reference to exports, the
legislature has brought within its fold ITC on input goods
and input services. In contrast, in the case of domestic
supplies it has contemplated refund of unutilized ITC “as
provided under sub-section(3)”. The Explanation is a clear
indicator that in respect of domestic supplies, it is only
unutilized credit which has accumulated on the rate of tax
on input goods being higher than the rate of output supplies
of which a refund
can be allowed. Clause (ii) of the first
proviso in other words is a restriction and not a mere
condition of eligibility.
56. The fulcrum of the argument of the assessees before the
Gujarat and Madras High Courts and before this Court is that clause (ii)
of the first proviso prescribes a condition of eligibility and not a restriction
on the entitlement to refund. The entire basket of unutilized ITC, whether
traceable to goods or services, is in the submission, eligible for refund.
This submission has been made before the Court on three planes. The
first plane on which the submission has been urged is that the purpose
of enacting Section 54(3) was to ensure against a cascading effect or
‘sticking’ inputs tax. According to the assesses, the GST regime is a
result of a long-standing exercise of legislative preparation in the doctrine
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of equivalence and tax neutrality. According to the submission, the
doctrine of equivalence postulated an equivalence between goods and
services in the VAT regime, which must a fortiori be so under the auspices
of a unified GST legislation which contemplates that businesses are only
pass-through entities. The second plane of the submission is that the
function of the GST Council, as specified in Article 279A(6), is that it is
to be guided by the need for a harmonized structure of GST and a
harmonized national market for goods and services. Clause (12A) of
Article 366 provides for the levy of GST on both- goods and services. In
this context, it was urged that in any fiscal regime, there are five essential
components comprising of (a) taxable events; (b) taxable persons; (c)
measure of tax; and (d) rate of tax; and (e) administrative machinery. In
all these, it is urged that the CGST makes absolutely no distinction between
goods and services. Section 16 which provides for the utilization of ITC
makes no distinction between goods and services. The pale of the law, it
was urged, applies substantive provisions similarly in the case of goods
as well as services except as regard rates. But as regards rates, it was
urged that even within the category of goods, the rates may or do vary.
The legislature, for the first time, introduced anti-profiteering provisions
based on the precept that a reduction in the rate of tax must be passed
on to the consumer. When
neutrality was not intended, as in the case of
Section 17(5), a specific provision has been made by the legislature where
the ITC cannot be availed of in those cases. Once the threshold of
Section 17(5) is crossed, tax neutrality must, in their submission, be
achieved. Finally, it was also urged that an inverted duty structure arises
in many cases where the rate of tax on output supplies is reduced in
order to fulfil certain objectives guided by public interest such as
encouraging infrastructure development. In this backdrop, it was
submitted that where the reduction of the rate of tax on outward supplies
is in pursuance of the policy of the State, the ultimate object of achieving
tax neutrality must be given full effect by fully effectuating a refund
under Section 54(3) by allowing a refund of unutilized ITC, whether
relatable to goods or services.
57. The submission based on the doctrine of equivalence places
reliance on the decision of a three judge Bench of this Court in
Association of Leasing and Financial Service Companies v. Union
of India26. Chief Justice S H Kapadia, speaking for a three judge Bench,
dealt with the validity of the provisions of Sections 65(12) and 65(105)
26 2011 (2) SCC 352
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(zm) of the Finance Act 1994, in so far as the said provisions sought to
levy service tax on leasing and hire purchase. The levy of service tax on
financial leasing services was challenged as being beyond the
competence of Parliament by virtue of Article 366(29A) of the
Constitution. While construing the issue, the Court adverted to the decision
in All India Federation of Tax Practitioners (supra) and observed:
“Service tax is an economic concept based on the principle of
equivalence in a sense that consumption of goods and consumption
of services are similar as they both satisfy human needs. Today
with the technological advancement there is a very thin line which
divides a “sale” from “service”. That, applying the principle of
equivalence, there is no difference between production or
manufacture of saleable goods and production of marketable/
saleable services in the form of an activity undertaken by the
service provider for consideration, which correspondingly stands
consumed by the service receiver. It is this principle of equivalence
which is inbuilt into the concept of service tax under the Finance
Act, 1994. That service tax is, therefore, a tax on an activity. That,
service tax is a value added tax. The value addition is on account
of the activity which provides value addition, for example, an
activity undertaken by a chartered accountant or a broker is an
activity undertaken by him based on his performance
and skill.
This is from the point of view of the professional. However, from
the point of view of his client, the chartered accountant/broker is
his service provider. The value addition comes in on account of
the activity undertaken by the professional like tax planning,
advising, consultation, etc. It gives value addition to the goods
manufactured or produced or sold. Thus, service tax is imposed
every time service is rendered to the customer/client. This is clear
from the provisions of Section 65(105)(zm) of the Finance Act,
1994.”
58. The above formulation of the doctrine of equivalence dwelt
on the economic rationale underlying the enactment of service tax. The
economic rationale is based on the equivalence of goods and services,
both of which are instruments for the satisfaction of human needs. The
principle recognizes that there is, in economic terms, an equivalence
between production or manufacture of saleable goods and production of
marketable and saleable services. The issue before this Court, however,
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is whether an a priori equivalence between goods and services for the
purpose of bringing both within a composite tax regime must result in the
conclusion that a refund of unutilized ITC must be made available to
both - input goods as well as input services, disregarding the provision
which has been inserted by the legislature in the present case in the
form of Section 54(3). The answer to this is clear. The Court while
interpreting the provisions of Section 54(3) must give effect to its plain
terms. The Court cannot redraw legislative boundaries on the basis of
an ideal which the law was intended to pursue.
59. Sub-Section (6) of Article 279A has provided that while
discharging its functions the GST Council shall be guided by the need for
(a) a harmonised structure of goods and service tax; and (b) the
development of a harmonised national market for goods and services. In
emphasizing the need, the constitutional provision reflects a goal, object
and aspiration to be achieved. By emphasizing this, the provision
underscores the vision that the GST Council should bear in mind in the
discharge of its constitutional functions. The constitutional object is
however to be realized under the auspices of legislation duly enacted
under the provisions of Article 246A. The GST Council is intended to
function towards the advancement of a harmonised structure for GST
and market for goods and services. Contemporary doctrine would suggest
that these objects of the fiscal
regime may be furthered by bearing in
mind (i) the doctrine of equivalence; (ii) the doctrine of neutrality; and
(iii) the need of obviating secondary stage cascading effects. The
realpolitik of tax policy and governance in the real world may not always
match up to ideals. In an ideal tax regime, with a uniform rate of taxes
on inputs goods, input services and outward supplies, the chance of
accumulating unutilized ITC as a result of an inverted rate structure
would be minimal. An inverted duty structure arises where the rate of
tax on inputs exceeds the rate of tax on output supplies as a result of
which the unutilized ITC may get accumulated. The jurisprudential
material which has been relied upon by the assesses portrays an ideal
state of GST legislation. In the well-known treatise on VAT, Alan Schenk
and Oliver Oldman27 explained the principled basis in VAT/GST legislation
for the grant of refund of excess input tax credit. According to the authors:
27 Alan Schenk and Oliver Oldman, VALUE ADDED TAX: A COMPARATIVE APPROACH
(Cambridge Tax Law Series, 2007)
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“II. Treatment of Excess Input Credits –Carry Forward, Offset,
or Refund:
As was discussed earlier and will be discussed in detail in Chapter
7, most countries define the jurisdictional reach of their VATs under
the destination principle. Applying the destination principle,
exports are free of tax (zero rated). As a result, exporters
commonly report excess input VAT in their periodic VAT
returns. In addition, even registered persons making sales
taxable at a positive rate may experience occasional excess
input VATs, such as when they make capital purchases
generating substantial input credits or when they increase
their inventory as part of an expansion of their businesses.
There is an implicit assumption in VAT systems that registered
persons will recover input VAT used in making taxable sales so
that the input VAT does not enter into the pricing structure for
those sales. To accomplish that goal, a normative or well-structured
VAT must grant registered persons the right to recover excess
input VATs within a reasonable period of time after incurring the
input t(a)x (sic). …
In the EU, the Sixth Directive provides that if there are excess
input tax deductions, “Member States may either make a refund
or carry the excess forward to the following period according to
conditions which they shall determine. For Member States, excess
credits must be refunded after being carried forward six months.
However, Member States may
refuse to refund or carry forward
if the amount of the excess is insignificant…”
(emphasis supplied)
60. The jurisprudential basis furnishes a depiction of an ideal state
of existence of GST legislation within the purview of a modern economy,
as a destination-based tax. But there can be no gain saying the fact that
fiscal legislation around the world, India being no exception, makes
complex balances founded upon socio-economic complexities and
diversities which permeate each society. The form which a GST
legislation in a unitary State may take will vary considerably from its
avatar in a nation such as India where a dual system of GST law operates
within the context of a federal structure. The ideal of a GST framework
which Article 279A(6) embodies has to be progressively realized. The
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doctrines which have been emphasized by Counsel during the course of
the arguments furnish the underlying rationale for the enactment of the
law but cannot furnish either a valid basis for judicial review of the
legislation or make out a ground for invalidating a validly enacted law
unless it infringes constitutional parameters. While adopting the
constitutional framework of a GST regime, Parliament in the exercise of
its constituent power has had to make and draw balances to accommodate
the interests of the States. Taxes on alcohol for human consumption and
stamp duties provide a significant part of the revenues of the States.
Complex balances have had to be drawn so as to accommodate the
concerns of the states before bringing them within the umbrella of GST.
These aspects must be borne in mind while assessing the jurisprudential
vision and the economic rationale for GST legislation. But abstract doctrine
cannot be a ground for the Court to undertake the task of redrawing the
text or context of a statutory provision. This is clearly an area of law
where judicial interpretation cannot be ahead of policy making. Fiscal
policy ought not be dictated through the judgments of the High Courts or
this Court. For it is not the function of the Court in the fiscal arena to
compel Parliament to go further and to do more by, for instance, expanding
the coverage of the legislation (to liquor, stamp duty and petroleum) or to
bring in uniformity of rates. This would
constitute an impermissible judicial
encroachment on legislative power. Likewise, when the first proviso to
Section 54(3) has provided for a restriction on the entitlement to refund
it would be impermissible for the Court to redraw the boundaries or to
expand the provision for refund beyond what the legislature has provided.
If the legislature has intended that the equivalence between goods and
services should be progressively realized and that for the purpose of
determining whether refund should be provided, a restriction of the kind
which has been imposed in clause (ii) of the proviso should be enacted,
it lies within the realm of policy.
61. The submission which has been urged on behalf of the
assessees is that registered persons constitute a class within the meaning
of sub-Section (3) of Section 54 and each of them is entitled to claim a
refund of unutilized ITC whether its origin lies in input goods or input
services. In other words, it has been urged that Section 54(3) constitutes
one homogenous class of registered persons who have unutilized ITC.
The fallacy of the argument is in the hypothesis that unutilized ITC cannot
be unbundled for the purpose of fiscal legislation. Accumulated ITC
may result due to a variety of circumstances, some of which may while
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others may not lie within the volition of a registered person. We have
referred to some of these factors earlier, including
(i) High discount pricing;
(ii) Predatory pricing;
(iii) Shut down of business or industry;
(iv) Business loss;
(v) Economic compulsion to sell at below value prices; and
(vi) Stoppage of work.
62. These examples are indicators that the class, comprising of
registered persons with unutilized ITC, covers a bundle of species as
opposed to one unique or homogenous specie. Once we recognize this,
it is necessary to allow the legislature the latitude to distinguish between
credits arising out of the input goods stream and input service stream.
GST legislation in India is the product of hard constitutional and legislative
work which stretched over several decades. Our fiscal regime is yet to
arrive at an ideological position of one bundle for goods and services
based on a single rate structure. Broadly speaking, goods and services
are taxed at 5 per cent, 12 per cent, 18 per cent and 40 per cent. As on
date, there is an absence of uniformity in rates and it is the multiplicity of
rates which has given rise to an inverted duty structure. Registered
persons with unutilized ITC may conceivably form one class but it is not
possible to ignore that this class consists of species of different hues.
Given these intrinsic complexities, the legislature has to draw the balance
when it decides upon granting a
refund of accumulated ITC which has
remained unutilized. In doing so, Parliament while enacting sub-Section
(3) of Section 54 has stipulated that no refund of unutilized ITC shall be
allowed other than in the two specific situations envisaged in clauses (i)
and (ii) of the first proviso. Whereas clause (i) has dealt with zero rated
supplies made without the payment of tax, clause (ii), which governs
domestic supplies, has envisaged a more restricted ambit where the credit
has accumulated on account of the rate of tax on inputs being higher
than the rate of tax on output supplies. While the CGST Act defines the
expression ‘input’ in Section 2(59) by bracketing it with goods other than
capital goods, it is true that the plural expression ‘inputs’ has not been
specifically defined. But there is no reason why the ordinary principle of
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construing the plural in the same plane as the singular should not be
applied. To construe ‘inputs’ so as to include both input goods and input
services would do violence to the provisions of Section 54(3) and would
run contrary to the terms of Explanation-I which have been noted earlier.
Consequently, it is not open to the Court to accept the argument of the
assessee that in the process of construing Section 54(3) contextually,
the Court should broaden the expression ‘inputs’ to cover both goods
and services.
F.4 Construing the proviso
63. Provisos in a statute have multi-faceted personalities. As
interpretational principles governing statutes have evolved, certain basic
ideas have been recognized, while heeding to the text and context. Justice
GP Singh, in his seminal text, Principles of Statutory Interpretation28
formulates the governing principles of interpretation which have been
adopted by courts while construing a statutory proviso. The first rule of
interpretation is that:
“The normal function of a proviso is to except something
out of the enactment or to qualify something enacted therein
which but for the proviso would be within the purview of
the enactment. As stated by LUSH, J.: “When one finds a proviso
to a section the natural presumption is that, but for the proviso, the
enacting part of the section would have included the subject- matter
of the proviso. In the words of LORD MACMILLAN: “The proper
function of a proviso is to except and to
deal with a case which
would otherwise fall within the general language of the main
enactment and its effect is confined to that case.” The proviso
may, as LORD MACNAGHTEN laid down, be “a qualification
of the preceeding enactment which is expressed in terms too
general to be quite accurate”. The general rule has been stated by
HIDAYATULLAH, J., in the following words: “As a general rule,
a proviso is added to an enactment to qualify or create an exception
to what is in the enactment, and ordinarily, a proviso is not
interpreted as stating a general rule”. And in the words of KAPUR,
J.: “The proper function of a proviso is that it qualifies the generality
of the main enactment by providing an exception and taking out as
28 Justice GP Singh, PRINCIPLES OF STATUTORY INTERPRETATION 215-234, (14th Ed., Lexis
Nexis)
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it were, from the main enactment, a portion which, but for the
proviso would fall within the main enactment.”29
(emphasis supplied)
64. But then these principles are subject to other principles of
statutory interpretation which may supplement or even substitute the
above formula. These other rules which have been categorized by Justice
GP Singh are summarized as follows:
(i)
A proviso is not construed as excluding or adding something
by implication:
“Except as to cases dealt with by it, a proviso has no
repercussion on the interpretation of the enacting portion of the
section so as to exclude something by implication which is
embraced by clear words in the enactment.”30
(ii) A proviso is construed in relation to the subject matter of the
statutory provision to which it is appended:
“The language of a proviso even if general is normally to be
construed in relation to the subject-matter covered by the section
to which the proviso is appended. In other words normally a
proviso does not travel beyond the provision to which it is a
proviso. “It is a cardinal rule of interpretation”, observed
BHAGWATI, J., “that a proviso to a particular provision of a
statute only embraces the field which is covered by the main
provision. It carves out an exception to the main provision to
which it has been enacted as a proviso and to no other.”31
(iii) Where the substantive provision of a statute lacks clarity, a
proviso may shed light
on its true meaning:
“If the enacting portion of a section is not clear, a proviso
appended to it may give an indication as its true meaning. As
stated by LORD HERSCHELL: “ Of course a proviso may be
used to guide you in the selection of one or other of two possible
constructions of the words to be found in the enactment, and
show when there is doubt about its scope, when it may
29 Id
30 Id at p. 218
31 Id at p. 221
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reasonably admit of doubt as to having this scope or that, which
is the proper view to take of it.”32
(iv) An effort should be made while construing a statute to give
meaning both to the main enactment and its proviso bearing
in mind that sometimes a proviso is inserted as a matter of
abundant caution:
“The general rule in construing an enactment containing a
proviso is to construe them together without making either of
them redundant or otiose. Even if the enacting part is clear
effort is to be made to give some meaning to the proviso and to
justify its necessity. But a clause or a section worded as a
proviso, may not be a true proviso and may have been placed
by way of abundant caution.”33
(v) While ordinarily, it would be unusual to interpret the proviso
as an independent enacting clause, as distinct from its main
enactment, this is true only of a real proviso and the draftsperson
of the statute may have intended for the proviso to be, in
substance, a fresh enactment:
“To read a proviso as providing something by way of an
addendum or as dealing with a subject not covered by the main
enactment or as stating a general rule as distinguished from an
exception or qualification is ordinarily foreign to the proper
function of a proviso. However, this is only true of a real proviso.
The insertion of a proviso by the draftsman has not always
strictly adhered to its legitimate use and at times a section worded
as a proviso may wholly or partly be in substance a
fresh
enactment adding to and not merely excepting something out
of or qualifying what goes before.”34
65. Perhaps the most comprehensive and oft-cited precedent
governing the interpretation of a proviso is the decision of this Court in S
Sundaram Pillai v. V R Pattabiraman35. Justice S Murtaza Fazal Ali
speaking for a three judge Bench of this Court held:
32 Id at p. 223
33 Id at p. 226
34 Id at p. 228
35 (1958) 1 SCC 591
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“43. …To sum up, a proviso may serve four different purposes:
(1) qualifying or excepting certain provisions from the main
enactment:
(2) it may entirely change the very concept of the intendment of
the enactment by insisting on certain mandatory conditions to be
fulfilled in order to make the enactment workable:
(3) it may be so embedded in the Act itself as to become an integral
part of the enactment and thus acquire the tenor and colour of the
substantive enactment itself; and
(4) it may be used merely to act as an optional addenda to the
enactment with the sole object of explaining the real intendment
of the statutory provision.”
66. While enunciating the above principles, S Sundaram Pillai
(supra) took note of the decision in Hiralal Rattanlal v. State of UP36
where Justice KS Hegde, speaking for a four judge Bench of this Court
observed that while ordinarily, a proviso is in the nature of an exception,
the precedents indicate that sometimes a proviso is in the nature of a
separate provision, with a life of its own. The Court held:
“22… Ordinarily a proviso to a section is intended to take out a
part of the main section for special treatment. It is not expected to
enlarge the scope of the main section. But cases have arisen in
which this Court has held that despite the fact that a provision is
called a proviso, it is really a separate provision and the so-called
proviso has substantially altered the main
section.
In CIT v. Bipinchandra Maganlal & Co. Ltd., Bombay [AIR
1961 SC 1040 : (1961) 2 SCR 493 : (1961) 41 ITR 290] this Court
held that by the fiction in Section 10(2)(vii) second proviso read
with Section 2(6-C) of the Indian Income Tax Act, 1922 what is
really not income is, for the purpose of computation of assessable
income, made taxable income.”
Besides the decision in CIT v. Bipinchandra Maganlal37, the
Court in Hiralal Rattanlal (supra) adverted to the earlier decisions in
State of Rajasthan v. Leela Jain38 and Bihar Cooperative
Development Cane Marketing Union Ltd. v. Bank of Bihar39.
36 (1973) 1 SCC 216
37 AIR 1961 SC 1040
38 AIR 1965 SC 1296
39 AIR 1967 SC 389
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67. In their effort to persuade this Court to accept the submission
that the first proviso to Section 54(3) is in the nature of an eligibility
condition as distinct from a restriction on the substantive part (contained
in the opening words) of the provision, Counsel appearing on behalf of
the assessees have sought to buttress their submissions with the following
facets:
(i)
Clause (ii) of the first proviso refers to “rate of tax” as
distinct from the quantum of tax;
(ii)
The expression “in cases other than where…” adverts to
situations or circumstances;
(iii)
The expression “on account of” would mean “due to”;
(iv)
The use of the expression ‘inputs’ (the singular being defined
in Section 2(59) but not the plural) and the corresponding
use of the expression “output supplies” (which is not defined,
though “outward supply” is defined in Section 2(83));
(v)
Section 54(8) and Section 49(6) provide that the balance in
the electronic credit ledger is to be refunded and makes no
distinction between a credit relatable to goods or to services;
(vi)
The expression “on account of” has been used in Section
22(3) and Section 18(3) and is distinct from the use of the
expression “to the extent of” in Section 23(1)(b) and the
proviso to Section 12(2). “To the extent of” is a limiting
expression and has a distinct connotation from “on account
of”;
(vii)
The Ministry of Finance has issued a circular dated 31
December 201840 clarifying the following position:
“4.
Representations have been received stating that while
processing the refund of unutilized ITC on account of
inverted tax structure, the departmental officers are denying
the refund of ITC of GST paid on those inputs which are
procured at equal or lower rate of GST than the rate of
GST on outward supply, by not including the amount of such
ITC while calculating the maximum refund amount as
40  Circular No 79/53/2018-GST available at <https://www.cbic.gov.in/resources//htdocs-
cbec/gst/Circular-No-79.pdf;jsessionid=CFAC18978FCA5664090473EACD101561>
(accessed on 12 September 2021)
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specified in rule 89(5) of the CGST Rules. The matter has
been examined and the following issues are clarified:
a)
Refund of unutilized ITC in case of inverted tax structure,
as provided in section 54(3) of the CGST Act, is available
where ITC remains unutilized even after setting off of
available ITC for the payment of output tax liability. Where
there are multiple inputs attracting different rates of tax, in
the formula provided in rule 89(5) of the CGST Rules, the
term “Net ITC  covers the ITC availed on all inputs in the
relevant period, irrespective of their rate of tax.
b)
The calculation of refund of accumulated ITC on account
of inverted tax structure, in cases where several inputs are
used in supplying the final product/output, can be clearly
understood with help of the following example:
i.
Suppose a manufacturing process involves the use of an
input A (attracting 5 per cent GST) and input B (attracting
18 per cent GST) to manufacture output Y (attracting 12
per cent GST).
ii.
The refund of accumulated ITC in the situation at (i) above,
will be available under section 54(3) of the CGST Act
read with rule 89(5) of the 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 Rs. 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 Rs.
3,000/-. Since the claimant has no other outward supplies,
his adjusted total turnover will also be Rs. 3,000/-.
iv.
If we assume that Input A, having value of Rs. 500/- and
Input B, having value of Rs. 2,000/-, have been purchased
in the relevant period for the manufacture of Y, then Net
ITC shall be equal to Rs. 385/- (Rs. 25/- and Rs. 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 Rs. 385/-.
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vi.
From this, if we deduct the tax payable on such inverted
rated supply of goods or services, which is Rs. 360/-, we
get the maximum refund amount, as per rule 89(5) of the
CGST Rules which is Rs. 25/-.”
68. Para 4(b) of the Circular thereafter proceeds to give certain
illustrations. The above circular, it is urged, would demonstrate that the
phrase “on account of” in the proviso is interpreted by the State qua
goods as a threshold condition. Hence even if one input in the basket of
inputs of a manufacturer results in an inverted duty structure, the whole
of the accumulated ITC can be availed of. On the other hand, for services
the same phrase is interpreted so as to mean ‘to the extent of’. The
expression “on account of” as understood for goods by the above circular
must apply for services as well, meaning thereby that it is a threshold
condition alone.
69. The above submissions demonstrate the scholarship which
has been brought to bear upon the controversy by Counsel appearing on
behalf of the assessees. The above aspects of the statutory provision –
Section 54(3) - must be juxtaposed together with all the features of the
statutory provision including Explanation- I which have been adverted to
earlier. The analysis earlier indicates why on a reading of the provision
as a whole, clauses (i) and (ii) of the first proviso are restrictions and not
mere conditions of eligibility. It is not possible for the Court to restrict
the ambit of clause (ii) of the
proviso, based on a circular which has
been issued by the Ministry of Finance on 31 December 2018. In
substance, the argument boils down to an effort to lead this Court to hold
that in spite of the language which has been used in clause (ii) of the first
proviso, (where the credit is accumulated on account of rate of tax on
inputs being higher than the rate of tax on output supplies), input services
must be read into the term “inputs”. The assessees argue that the
Departmental understanding, as reflected in the circular, should be the
basis of interpreting a statutory provision. Such an exercise would be
impermissible, when its effect is to expand the area of refund
contemplated by the first proviso to cover input services in addition to
input goods despite statutory language to the contrary. Sub-Section (3)
of Section 54 begins, in its main part, with the stipulation that a registered
person may claim refund of any ‘unutilised ITC at the end of any tax
period’. Whether we construe the first proviso as an exception or in the
nature of a fresh enactment, the clear intent of Parliament was to confine
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the grant of refund to the two categories spelt out in clauses (i) and (ii)
of the first proviso. That clauses (i) and (ii) are the only two situations in
which a refund can be granted is evident from the opening words of the
first proviso which stipulates that “no refund of unutilised input tax
credit shall be allowed in cases other than”. What follows is clauses
(i) and (ii). The intent of Parliament is evident by the use of a double –
negative format by employing the expression “no refund” as well as the
expression “in cases other than”. In other words, a refund is contemplated
in the situations provided in clauses (i) and (ii) and no other. To put it
differently, the first proviso can be recast, without altering its meaning to
read that a refund of unutilised ITC shall be allowed only in the cases
governed by clauses (i) and (ii). Clause (i) deals with zero rated supplies
without payment of tax. Explanation-1 to Section 54 clarifies that the
expression ‘refund’ includes refund of tax paid on zero rated supplies on
goods or services or both, or on inputs or input services used in making
such zero-rated supplies. On the other hand, in the case of deemed
exports, Explanation-1 refers to a refund of tax on the supply of goods.
Likewise in regard to domestic supplies, governed by clause (ii) of the
first proviso, the expression ‘refund’ means refund of unutilised ITC as
provided under sub-Section (3). With the clear
language which has been
adopted by Parliament while enacting the provisions of Section 54(3),
the acceptance of the submission which has been urged on behalf of the
assessee would involve a judicial re-writing of the provision which is
impermissible in law. Clause (ii) of the proviso, when it refers to “on
account of” clearly intends the meaning which can ordinarily be said to
imply ‘because of or due to’. When proviso (ii) refers to “rate of tax”, it
indicates a clear intent that a refund would be allowed where and only if
the inverted duty structure has arisen due to the rate of tax on input
being higher than the rate of tax on output supplies. Reading the expression
‘input’ to cover input goods and input services would lead to recognising
an entitlement to refund, beyond what was contemplated by Parliament.
70. We must be cognizant of the fact that no constitutional right is
being asserted to claim a refund, as there cannot be. Refund is a matter
of a statutory prescription. Parliament was within its legislative authority
in determining whether refunds should be allowed of unutilised ITC
tracing its origin both to input goods and input services or, as it has
legislated, input goods alone. By its clear stipulation that a refund would
be admissible only where the unutilised ITC has accumulated on account
of the rate of tax on inputs being higher than the rate of tax on output
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supplies, Parliament has confined the refund in the manner which we
have described above. While recognising an entitlement to refund, it is
open to the legislature to define the circumstances in which a refund can
be claimed. The proviso to Section 54(3) is not a condition of eligibility
(as the assessees’ Counsel submitted) but a restriction which must govern
the grant of refund under Section 54(3). We therefore, accept the
submission which has been urged by Mr N Venkataraman, learned ASG.
F.5 Constitutional validity: The ultra vires doctrine
71. The submission which has been urged on behalf of the
assessees is that if Section 54(3) is construed to confine a refund of
unutilised ITC only to the extent that the accumulation arises on account
of the rate of tax on inputs (meaning input goods) exceeding the rate of
tax on outward supplies, the principles underlying Article 14 of the
Constitution would be attracted and the statutory provision would suffer
from the vice of arbitrariness. The submission is that this has become an
incident of a class legislation: the class consists of registered persons
having unutilised ITC. The class comprises of the following species (i)
domestic suppliers; and (ii) exporters. The sub-species are (i) input goods;
and (ii) input services. Opposing this submission, the learned ASG’s
submission is that this is a valid classification, denying one of the species
namely input services the benefit of refund.
72. The principle which
Counsel for the assesses espouse is sought
to be buttressed by relying upon the decision in State of Jammu &
Kashmir v. Triloki Nath Khosa41 and in Re The Special Courts
Bill, 197842. The principles which are gleaned by Counsel from the
above decisions, in their application to the present case, are that:
(i)
Once the ITC comes within the fold of the electronic credit
ledger and is comprised into a homogenous credit, a ‘micro
distinction’ cannot be carried out; and
(ii)
A similarity of features between species comprised in the
class is sufficient: in the case of goods as well as services,
the taxable event is the value addition tax and the
administrative machinery treats goods as well as services
similarly. The mere fact of goods being tangible is a matter
of no consequence.
41 (1974) 1 SCC 19
42 (1979) 1 SCC 380
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73. Equality, it has been stressed in the above submission, cannot
be cabined, cribbed and confined. Differentiating between goods and
services, it has been urged, is not permissible and does not have a
reasonable nexus to the object sought to be achieved. There is an evident
difference in the rates at which goods and services are taxed but,
according to the submission, this is not a provision for revenue harvesting.
Finally, on this limb of submission, it has been urged that the wide latitude
which is available with the legislature in the case of fiscal legislation is
only where a revenue harvesting measure is involved. The twin test of
reasonableness and the nexus with the object sought to be achieved
must be demonstrated. The nexus (a) must be based on the object of the
legislation alone; and (b) indicate a discernible principle which emanates
from the classification. With the clarification on inputs by the Ministry of
Finance, it is urged that no discernible principle emerges.
74. Counsel for the assesses also argued that before the High
Courts of Gujarat and Madras, the Union Government did not urge that
outflow of finance was the reason to exclude refunds on input services
and it is not open to the Court to conjure up a reason. In support of the
above submissions on constitutional validity, which have been urged by
Mr Sujit Ghosh, learned Counsel, Mr Arvind Datar, learned Senior
Counsel has urged that it would
be paradoxical to posit on the one hand
that goods and services are pari materia for the purpose of levy, collection
and penalty but, that a distinction will be made between them for the
purpose of refund.
75. As a matter of first principle, it is not possible to accept the
premise that the guiding principles which impart a measure of flexibility
to the legislature in designing appropriate classifications for the purpose
of a fiscal regime should be confined only to the revenue harvesting
measures of a statute. The precedents of this Court provide abundant
justification for the fundamental principle that a discriminatory provision
under tax legislation is not per se invalid. A cause of invalidity arises
where equals are treated as unequally and unequals are treated as equals.
Both under the Constitution and the CGST Act, goods and services and
input goods and input services are not treated as one and the same and
they are distinct species.
76. Parliament engrafted a provision for refund Section 54(3). In
enacting such a provision, Parliament is entitled to make policy choices
and adopt appropriate classifications, given the latitude which our
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constitutional jurisprudence allows it in matters involving tax legislation
and to provide for exemptions, concessions and benefits on terms, as it
considers appropriate. The consistent line of precedent of this Court
emphasises certain basic precepts which govern both judicial review
and judicial interpretation of tax legislation. These precepts are:
(i)
Selecting the objects to be taxed, determining the quantum
of tax, legislating for the conditions for the levy and the
socio-economic goals which a tax must achieve are matters
of legislative policy. Chief Justice M. Hidayatullah, speaking
for the Constitution Bench in Assistant Commissioner
of Urban Land Tax v. Buckingham and Carnatic Co.
Ltd.43 held:
“10…The objects to be taxed, the quantum of tax to be
levied, the conditions subject to which it is levied and the
social and economic policies which a tax is designed to
subserve are all matters of political character and these
matters have been entrusted to the Legislature and not to
the Courts. In applying the test of reasonableness it is also
essential to notice that the power of taxation is generally
regarded as an essential attribute of sovereignty and
constitutional provisions relating to the power of taxation
are regarded not as grant of power but as limitation upon
the power which would otherwise be practically without
limit.
(ii)
The same principle has been reiterated in Federation of
Hotel & Restaurant Association of India v. Union of
India44,
where Justice MN Venkatachaliah (as the learned
Chief Justice then was), speaking for the Constitution Bench
held:
“46. It is now well settled that though taxing laws are not
outside Article 14, however, having regard to the wide variety
of diverse economic criteria that go into the formulation of
a fiscal policy legislature enjoys a wide latitude in the matter
of selection of persons, subject-matter, events, etc., for
taxation. The tests of the vice of discrimination in a taxing
43 (1969) 2 SCC 55
44 (1989) 3 SCC 634
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law are, accordingly, 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 differently in relation to different groups
or classes of persons to attain certain ends and must,
therefore, possess the power to distinguish and classify
persons or things. It is also recognised that no precise or set
formulae or
doctrinaire tests or precise scientific principles
of exclusion or inclusion are to be applied. The test could
only be one of palpable arbitrariness applied in the context
of the felt needs of the times and societal exigencies informed
by experience.”
(iii)
In matters of classification, involving fiscal legislation, the
legislature is permitted a larger discretion so long as there
is no transgression of the fundamental principle underlying
the doctrine of classification. In Hiralal Rattanlal (supra),
Justice KS Hegde, speaking for a four judge Bench
observed:
“20. It must be noticed that generally speaking the primary
purpose of the levy of all taxes is to raise funds for public
good. Which person should be taxed, what transaction should
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be taxed or what goods should be taxed, depends upon
social, economic and administrative considerations. In a
democratic set up it is for the Legislature to decide what
economic or social policy it should pursue or what
administrative considerations it should bear in mind. The
classification between the processed or split pulses and
unprocessed or unsplit pulses is a reasonable classification.
It is based on the use to which those goods can be put.
Hence, in our opinion, the impugned classification is not
violative of Article 14.”
(iv)
More recently in Union of India v. NITDIP Textile
Processors Private Limited45, a two judge Bench
observed:
“67. It has been laid down in a large number of decisions of
this Court that a taxation statute, for the reasons of functional
expediency and even otherwise, can pick and choose to tax
some. A power to classify being extremely broad and based
on diverse considerations of executive pragmatism, the
judicature cannot rush in where even the legislature warily
treads. All these operational restraints on judicial power must
weigh more emphatically where the subject is taxation.
Discrimination resulting from fortuitous circumstances
arising out of particular situations, in which some of the tax-
payers find themselves, is not hit by Article 14 if the
legislation, as such, is of general application and does not
single them out for harsh treatment. Advantages or
disadvantages to individual assessees are accidental and
inevitable and are inherent in every taxing statute as it has
to draw a line somewhere and some cases necessarily fall
on the other side of the line.”
77. The principles governing a benefit, by way of a refund of tax
paid, may well be construed on an analogous frame with an exemption
from the payment of tax or a reduction in liability (Assistant
Commissioner of Commercial Tax (Asst.) v. Dharmendra Trading
Company46).
45 (2012) 1 SCC 226
46 (1988) 3 SCC 570
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78. In Elel Hotels and Investments Limited and Others v.
Union of India47, Justice MN Venkatachaliah (as the learned Chief
Justice then was) held that:
“20…It is now well settled that a very wide latitude is available to
the legislature in the matter of classification of objects, persons
and things for purposes of taxation. It must need to be so, having
regard to the complexities involved in the formulation of a taxation
policy. Taxation is not now a mere source of raising money to
defray expenses of Government. It is a recognised fiscal tool to
achieve fiscal and social objectives. The differentia of classification
presupposes and proceeds on the premise that it distinguishes and
keeps apart as a distinct class hotels with higher economic status
reflected in one of the indicia of such economic superiority. The
presumption of constitutionality has not been dislodged by the
petitioners by demonstrating how even hotels, not brought into the
class, have also equal or higher chargeable receipts and how the
assumption of economic superiority of hotels to which the Act is
applied is erroneous or irrelevant.”
79. In Spences Hotel Pvt Ltd. v. State of West Bengal48, a
two judge Bench, speaking through Justice KN Saikia, revisited the
precedents of this Court governing the principles of classification in tax
legislation and held:
“24…The history of taxation is one of evolution as is the case in
all human affairs. Its progress
is one of constant growth and
development in keeping with the advancing economic and social
conditions; and the fiscal intelligence of the State has been
advancing concomitantly, subjecting by new means and methods
hitherto untaxed property, income, service and provisions to
taxation. With the change of scientific, commercial and economic
conditions and ways of life new species of property, both tangible
and intangible gaining enormous values have come into existence
and new means of reaching and subjecting the same to contribute
towards public finance are being developed, perfected and put
into practical operation by the legislatures and courts of this country,
of course within constitutional limitations.”
47 (1989) 3 SCC 698
48 (1991) 2 SCC 154
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80. The Court held that the principle of equality does not preclude
the classification of property, trade, profession and events for taxation –
subjecting one kind to one rate of taxation and another to a different
rate. The State may exempt certain classes of property from any taxation
at all and impose different specific taxes upon different species which it
seeks to regulate. The Court held:
“27. ”Perfect equality in taxation has been said time and again, to
be impossible and unattainable. Approximation to it is all that can
be had. Under any system of taxation, however, wisely and
carefully framed, a disproportionate share of the public burdens
would be thrown on certain kinds of property, because they are
visible and tangible, while others are of a nature to elude vigilance.
It is only where statutes are passed which impose taxes on false
and unjust principle, or operate to produce gross inequality, so that
they cannot be deemed in any just sense proportional in their effect
on those who are to bear the public charges that courts can interpose
and arrest the course of legislation by declaring such enactments
void.” “Perfectly equal taxation”, it has been said, “will remain an
unattainable good as long as laws and government and man are
imperfect.” ‘Perfect uniformity and perfect equality of taxation’,
in all the aspects in which the human mind can view it, is a baseless
dream.”
81. Parliament while enacting the provisions of Section 54(3),
legislated