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
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 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
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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. We are therefore unable to accept the challenge to the
constitutional validity of Section 54(3).
G Rule 89(5)
82. Rule 89(5) of the CGST Rules provides for the computation
of the refund of ITC on account of an inverted duty structure. The rule,
as it was originally enacted, provided for a refund of ITC paid both on
input goods and input services. Rules 89(5) was amended on 18 April
2018 with prospective effect. On 13 June 2018, Rule 89(5) as amended
was substituted with retrospective effect from 1 July 2017. The effect
of this amendment is that refund of unutilized ITC can only be availed on
input goods.
83. Section 164 of the CGST Act empowers the ‘government’
(the expression ‘government’ being defined in Section 2(53) to mean the
Central Government) to make rules for carrying out the provisions of
the Act on the recommendations of the
GST Council. Sub-Section (3) of
Section 164 stipulates that that power to make rules shall include the
power to make rules with retrospective effect not earlier than the date
on which the provisions of the Act came into force. As a result of the
amendment of Rule 89(5), the formula which has been specified for the
refund of ITC is as follows:
“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 (4A) or (4B) or
both; and
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(b)
Adjusted Total turnover shall have the same meaning as
assigned to them in sub-rule (4).”
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
84. A preliminary submission which has been urged by
Mr V Sridharan, learned Senior Counsel is that the rule-making power
under Section 164 of the CGST Act can only be used if specific authority
for making the rule is granted by the particular section of the CGST Act.
Elaborating on this submission, Mr V Sridharan has submitted that under
the CGST Act, various sections expressly employ the word “prescribed”
to indicate that rules may be formulated by way of delegated legislation
for that particular section. As an instance, Mr Sridharan points out that
Section 9 provides that the manner in which tax is to be collected may
be ‘prescribed’; Section 16(1) provides for conditions and restrictions
for availing ITC which may be ‘prescribed’ and Section 31(2) provides
that the time within which a person supplying a taxable service must
issue an invoice may be ‘prescribed’. These are examples where the
statute has expressly contemplated that rules would have to be framed
to give effect to a specific provision. It is the submission of Mr Sridharan
that in the absence of such words in the text of the legislation, the
government cannot exercise its authority under Section 164 of the CGST
Act to frame rules for other sections. Thus, since Section 54(3) does not
provide any words which indicate that specific authority has been granted
for framing rules, Rule 89(5) is (according to the submission) invalid.
85. We are unable to accept the above submission as it proceeds
on a misconception. 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 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
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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 Mr
Sridharan has hypothesised, were to be acceptable, it would render the
provisions of Section 164 otiose. Thus, we find 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.
G.2 The vires of Rule 89(5) vis-à-vis Section 54(3) of the
CGST Act
86. The next submission which has been urged by Mr V Sridharan,
learned Senior Counsel is that Rule 89(5) is not in line with Section
54(3). The rule, as retrospectively amended, is asserted to be ultra vires
Section 54(3) in as much as it restricts the computation of refund by
taking into account only the credit availed on input goods. Moreover,
under Section 54(1), the CGST Rules can provide only the form and
manner in which an application for refund can be made and the substantive
provisions of the CGST Act cannot, it is urged, be curtailed by making a
contrary rule. The
above submission which seeks to apply the doctrine
of ultra vires is based on the hypothesis that the rule is not in line with
Section 54(3). The submission, in other words, is based on the assumption
that Section 54(3) allows for a refund of unutilized ITC as a result of an
inverted duty structure due to input goods as well as input services.
 87. The second limb of Mr Sridharan’s submission is that any
rules framed under Section 164 of the CGST Act must be for “carrying
out the provisions of the Act”. According to the submission, Section
54(3) provides for entitlement to refund of unutilized ITC, its quantum
and for cases in which refund is to be granted. This is a complete code
which does not require any rules for its operations and there is no
reference in Section 54(3) enabling the Government to frame rules in
this regard. Hence, the exercise of the rule making power is urged to be
unnecessary and unwarranted.
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88. The rule-making power under Section 164(1) of the CGST
Act may be exercised in numerous situations. As we have already noticed
earlier in this judgment accumulation of credit may occur due to a variety
of reasons including the absence of outwards supplies in a tax period,
making supplies at a loss including by discount or predatory pricing, bulk
purchase of inputs, large opening balance of credit or change in the rate
of tax during the tax period. A rule providing for identifying unutilized
ITC which is attributable to supplies having an inverted duty structure
and bifurcating it from credit which has accumulated due to other causes
would be a rule required for carrying out the provisions of the Act. A
second instance to illustrate the same point is that a rule may provide a
proportionate formula for determining the pro rata amount of ITC relatable
to the inverted duty structure vis-à-vis the total turnover. Such a formula
is necessary where the assessee is engaged in outward supplies involving
an inverted duty structure as well as those not involving an inverted duty
structure. In fact, Mr Sridharan in his submissions also accepts that
such a formula would be a rule made for carrying out provisions of the
Act. The third illustration in the link is with reference to exports. Under
the CGST Act, ITC relatable to exports (which are zero-rated supplies)
has to be refunded. The assessee may have both domestic sales as well
as exports in which event there
is a need for a proportionate formula.
Rule 89(4) provides a formula for refund of ITC to cover a situation in
which zero-rated supplies of goods or services or both has been done
without payment of tax under bond or letter of undertaking in accordance
with Section 16(3) of the IGST Act.
89. Mr Sridharan, while arguing that Section 54(3) is a complete
code in itself and does not warrant a rule to further the provisions of the
Act, fairly concedes in his written note that a formula maybe required
for bifurcating the accumulated ITC for the purpose of refund. According
to the illustration which has been furnished by Mr Sridharan in his written
note, where an assessee has supplies which fall under an inverted duty
structure and supplies which do not, a refund of unutilized ITC can be
availed of only related to the former but not the latter. A formula would
be required to compute the ITC attributable to the two categories so that
a refund is granted to the former and not the latter. Rule 89(5) estimates
the refund attributable to the inverted duty structure by adopting a
proportionate turnover basis, that is by dividing the turnover of inverted
duty structure supplies by the adjusted total turnover and multiplying it
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with the ‘Net ITC’. The submission proceeds to concede that the need
and rationale for the formula contained in Rule 89(5) in considering the
turnover of supplies relating to inverted duty structure vis-à-vis overall
turnover is “understandable and reasonable”.
90. 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”.
91. Mr V Sridharan has also submitted that in case a rule restricts
the purpose of the legislation, it can be struck down if it is ultra vires the
principal statute. This is because despite a provision for laying rules
before a House of Parliament, subjecting them to the procedure for
modification and annulment, a rule can never be equated with the process
of legislation since in particular the rule lacks the assent of the President
or the Governor as the case may be. In support of his submission, he has
relied on the decision of a Constitution Bench in Kerala State Electricity
Board v. Indian Alluvium Co. Ltd.49 and the decision in Bharat Hari
Singhania v. Commissioner of
Wealth Tax (Central)50 rendered by
a three judge Bench.
92. 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 Mr V Sridharan 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 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
49 (1976) 1 SCC 466
50 (1994) Supp 3 SCC 46
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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.
93. For the sake of clarity, it is necessary to reproduce para 24.6
and para 24.7 of the written submissions of Mr V Sridharan:
“24.5 Similarly, this… court has in several cases extended the
benefit of exemption/ lower rate in case where such denial to a
particular case was ultra vires or unconstitutional, thereby enlarging
the scope of beneficial provision.
24.6 In the present case, challenge to the vires of Rule 89(5) is
only because of definition of Net ITC in Explanation to the said
rule which defines “Net ITC” as under:
“Net ITC” shall mean input tax credit availed on inputs during the
relevant period other than the input tax credit availed for which
refund is claimed under sub-rules (4A) or
(4B) or both”
94. Mr Sridharan urges that the words ‘inputs’ in Explanation (a)
to Rule 89(5) be struck down as being severable to bring it “entirely in
line with the main provision”. We are unable to accept this submission.
Explanation (a) to Rule 89(5) in defining ‘Net ITC’ to mean ITC availed
on inputs (goods) is, as a matter of fact, entirely in line with the main
provision, Section 54(3). On the contrary, to accept the submission of
Mr Sridharan, would expand the ambit of Rule 89(5) beyond the terms
governing the admissibility of a refund under Section 54(3) and would be
hence impermissible.
G.3 The validity of the formula prescribed in Rule 89(5)
95. Mr G Natarajan, Mr Sujit Ghosh, learned Counsel, and
Mr V Sridharan, learned Senior Counsel, have also urged an alternative
submission for the challenge to Rule 89(5). It has been submitted that
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the formula prescribed in Rule 89(5) which seeks to grant refund of the
ITC accumulated on account of input goods, is inherently flawed and
will lead to anomalous results. The alternative submission is made on the
assumption that Section 54(3)(ii) read with Rule 89(5) is restricted to
refund of ITC accumulated on account of input goods only, and not input
services.
96. Mr G Natarajan, learned Counsel appearing on behalf of the
intervenor, has submitted that as it was originally framed, ‘Net ITC’ in
Rule 89(5) allowed for a refund on account of an inverted duty structure
both for input goods and input services. The position was amended initially
on 18 April 2018 with prospective effect and thereafter on 13 June 2018
with retrospective effect on 1 July 2017. The formula prescribed in Rule
89(5) seeks to identify the quantum of ITC availed on input goods
attributable to the outward supplies having an inverted rate structure.
From such quantum of ITC on input goods, the tax payable by the supplier
on such inverted rated supplies of goods and services is reduced to arrive
at the quantum of credit accumulating on account of inverted rate
structure, which is eligible for refund. The submission of Mr Natarajan
is that in the formula prescribed under Rule 89(5), while reducing “tax
payable on such inverted rated supplies of goods or services”, the tax-
payer should first be allowed to utilize the ITC availed on input services
which is otherwise not eligible for refund. If the formula prescribed under
Rule 89(5) is not construed in the above manner, it is alleged that it will
lead to inequality between taxpayers dealing with outward supplies
involving only an inverted rate structure (single line of goods) and
taxpayers dealing with outward supplies having both an inverted rate
structure and those not having inverted rate structure. Thus, it has been
submitted that the Court should read down the formula prescribed in
Rule 89(5) to the effect that while calculating the refund entitlement as
the difference between Net ITC and tax payable on such supplies having
inverted rate structure, it is presumed that the ITC accumulated on
account of input services be allowed to be used for payment of tax
payable on inverted goods and services, and the remaining balance of
tax, which is paid out of accumulated ITC on account of input goods, is
deducted from Net ITC in the formula.
 97. Mr G Natarajan’s submission indicates an aberration where
a registered person with a single product with an inverted duty structure
is neither able to use the unutilized ITC for the payment of tax on output
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supply nor is allowed a refund. On the other hand, a registered person
with products involving an inverted duty structure and otherwise, is in a
position to utilise the ITC availed on input services for payment of tax on
turnover not having an inverted rate structure. Mr G Natarajan has given
the following example:
98. The submission of Mr Natarajan has also been supported by
Mr V Sridharan in rebuttal. The formula in Rule 89(5) is reproduced
below:
“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”
(emphasis supplied)
99. Mr V Sridharan has urged that the second leg of the formula,
that is, “tax payable on such inverted rated supply of goods and services”
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takes into account the entire tax payable on output supplies. In reality,
the tax payable on output supplies would have been discharged by utilising
the ITC on input goods and input services. However, the formula under
Rule 89(5) presumes that nothing has been utilised from the ITC on
input services and the entire tax on output supplies is discharged by
utilising ITC on input goods. It was urged that although the stated
objective of the formula is to grant refund of unutilised ITC accumulated
on account of input goods, by deducting the entire sum of tax payable on
output supplies, the quantum of such refund is reduced and the cascading
effect of taxes is maximised. As a solution to the said anomaly, Mr
Sridharan has proposed that for the purposes of Rule 89(5), an assumption
must be made that ITC accumulated on account of input services, which
is not refundable under Section 54(3), is used for discharging the output
tax payable on inverted rate supply of goods and services. The remaining
balance of output tax, must be then presumed to have been discharged
from the ITC accumulated on account of input goods and it is only this
remaining balance that should be deducted from the formula to calculate
the refund. In other words, Mr Natarajan and Mr Sridharan propose an
order of utilisation in the formula by which the ITC accumulated on
account of input services is used first for discharging the tax liability and
only then
is the ITC accumulated on account of input goods used. During
the course of his submissions, Mr Sridharan has relied on the decision of
this Court in Commissioner of Income Tax, Coimbatore v. Lakshmi
Machine Works51 and has urged before us to adopt a purposeful and
schematic interpretation to the formula which will make it comparable
and workable.
100. Mr Sujit Ghosh has urged before us that the formula in Rule
89(5) creates a distinction between suppliers of services having a higher
component of input goods than input services as against suppliers of
services having a higher component of input services than input goods.
In his submissions, Rule 89(5) would favour the former as they would be
entitled to a larger quantum of refund on account of more use of input
goods.
101. In response to these submissions, Mr N Venkataraman,
learned ASG, has conceded that certain inadequacies might exist in the
formula. However, he has sought to justify the need for a formula in
Rule 89(5). The ASG has submitted that under the scheme of the CGST
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Act, the accumulated ITC arising out of input goods and input services
is booked into the electronic credit ledger and is to be utilised thereafter
for payment of tax on outward supplies on goods and services in
accordance with Section 49 of the CGST Act. Once payments are made
from the electronic ledger, the remaining quantum of unutilised ITC
becomes one homogenous nucleus and it is impossible to attribute the
unutilised ITC to its source, that is, it cannot be identified whether the
balance unutilised ITC is arising from input goods or input services. In
order to bifurcate the unutilised ITC into input goods and input services
for the purpose of granting refund in accordance with Section 54(3)(ii)
on ITC on inputs, Rule 89(5)3 has resorted to prescribing a formula to
legally dissect the unutilised ITC. The learned ASG has urged that the
prescription of formulae to artificially determine refund or utilisation is a
common practice in the field of taxation and was used prior to the
enactment of the CGST Act in MODVAT/CENVAT Rules for
determining quantum of eligibility of credit. Another instance is Rule 42
and 43 of the CGST Rules 2017 which provide specific formulae in
restricting the ITC when a registered supplier uses input goods, input
services and capital goods for purpose of business and other than business
purposes.
102. The ASG, having justified the need for a formula, has then
argued that a formula prescribed by delegated legislation may not be
perfect and may have certain aberrations. However, a wide discretion is
given to the policy makers in this regard and only if the formula is arbitrary
and violative of Article 14 of the Constitution, can it be struck down. For
this, the ASG has relied on the decision of a Constitution Bench of this
Court in RK Garg v. Union of India52, where it was observed that
economic legislation ought not to be measured by abstract symmetry,
since it is essentially empirical in nature and is based on experimentation.
We note however, that the ASG has not refuted the anomalies point out
by the Counsel for the assessees.
103. In our view, 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
52 (1981) 4 SCC 675
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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 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.
 104. We now turn to the submissions of the counsel for the
assessees regarding the anomalies in the formula. In our view, the
submission of Mr Sujit Ghosh, that the formula creates a distinction
between suppliers having a higher component of input goods than those
having a higher component of input services, and must be read down
accordingly, must be rejected. The purpose of the formula in Rule 89(5)
is to give effect to Section 54(3)(ii) which makes a distinction between
input goods and input services for grant of refund. Once the principle
behind Section 54(3)(ii) of the CGST Act is upheld, the formula cannot
be struck down merely for giving effect to the same.
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105. The aberrations which have been pointed out by the Mr
Sridharan and Mr G Natarajan 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 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.
106. While we are alive to the anomalies of the formula, an anomaly
per se cannot result in the invalidation of a fiscal rule which has been
framed in exercise of the power of delegated legislation. In RK Garg
(supra), Justice P N Bhagwati (as the learned Chief Justice then was)
speaking for the Constitution Bench underscored the importance of the
rationale for viewing laws relating to economic activities with greater
latitude than laws touching civil rights. The Court held:
“8. Another rule of equal importance is that laws relating to
economic activities should be viewed with greater latitude than
laws touching civil rights such as freedom of speech, religion etc.
It has been said by no less a person than Holmes, J., that the
legislature should be allowed some play in the joints, because it
has to deal with complex problems which do not admit of solution
through any doctrinaire or strait-jacket formula and this is
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particularly true in case of legislation dealing with economic matters,
where, having regard to the nature of the problems required to be
dealt with, greater play in the joints has to be allowed to the
legislature. The court should feel more inclined to give judicial
deference to legislative judgment in the field of economic regulation
than in other areas where fundamental human rights are involved.
Nowhere has this admonition been more felicitously expressed
than in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)]
where Frankfurter, J., said in his inimitable style:
“In the utilities, tax and economic regulation cases, there are
good reasons for judicial self-restraint if not judicial deference
to legislative judgment. The legislature after all has the
affirmative responsibility. The courts have only the power to
destroy, not to reconstruct. When these are added to the
complexity of economic regulation, the uncertainty, the liability
to error, the bewildering conflict of the experts, and the number
of times the judges have been overruled by events — self-
limitation can be seen to be the path to judicial wisdom and
institutional prestige and stability.”
The Court must always remember that “legislation is directed to
practical problems, that the economic mechanism is highly sensitive
and complex, that many problems are singular and contingent, that
laws are not abstract propositions and do not relate to abstract
units and are not to be measured by abstract symmetry”; “that
exact wisdom and nice adaption of remedy are not always possible”
and that “judgment is largely a prophecy based on meagre and
uninterpreted experience”. Every legislation particularly in
economic matters is essentially empiric and it is based on
experimentation or what one may call trial and error method
and therefore it cannot provide for all possible situations or
anticipate all possible abuses. There may be crudities and
inequities in complicated experimental economic legislation
but on that account alone it cannot be struck down as invalid.
The courts cannot, as pointed out by the United States
Supreme Court in Secretary of Agriculture v. Central Roig
Refining Company [94 L Ed 381 : 338 US 604 (1950)] be
converted into tribunals for relief from such crudities and
inequities. There may even be possibilities of abuse, but
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that too cannot of itself be a ground for invalidating the
legislation, because it is not possible for any legislature to
anticipate as if by some divine prescience, distortions and
abuses of its legislation which may be made by those subject
to its provisions and to provide against such distortions and
abuses. Indeed, howsoever great may be the care bestowed
on its framing, it is difficult to conceive of a legislation which
is not capable of being abused by perverted human ingenuity.
The Court must therefore adjudge the constitutionality of such
legislation by the generality of its provisions and not by its crudities
or inequities or by the possibilities of abuse of any of its provisions.
If any crudities, inequities or possibilities of abuse come to light,
the legislature can always step in and enact suitable amendatory
legislation. That is the essence of pragmatic approach which must
guide and inspire the legislature in dealing with complex economic
issues.”
                       (emphasis supplied)
107. The dictum in RK Garg (supra) squarely applies to the present
case in which the Government has exercised its powers of delegated
legislation to frame a formula, which has certain inequities. However,
these inequities are to be ironed out by the Government in the course of
the application of the formula. We are affirmatively of the view that this
Court should not in the exercise of the power of judicial review allow
itself to become a one-time arbiter
of any and every anomaly of a fiscal
regime despite its meeting the jurisdictional framework for the validity
of the legislation, including delegated legislation.
108. Mr Sridharan had also urged that the formula may be read
down as was done by this Court in Lakshmi Machine Works (supra).
In this case, the Court was faced with a question of whether excise duty
and sales tax were to be included in the ‘total turnover’, which was a
denominator in the formula prescribed under Section 80-HHC(3) of the
Income Tax Act 1961 for the purpose of arriving at the deduction from
profits retained for export business. In order to arrive at the deduction,
the formula apportioned business profits by the ratio of export turnover
to total turnover. Various amendments had been made by the legislature
to the formula in Section 80-HHC(3) to make the formula workable.
The Court, speaking through Justice SH Kapadia (as the learned Chief
Justice then was), observed that
UNION OF INDIA v. VKC FOOTSTEPS INDIA PVT LTD.
[DR DHANANJAYA Y CHANDRACHUD, J.]
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“21. According to The Law and Practice of Income Tax by Kanga
and Palkhivala, the word “profits” in Section 28 should be
understood in normal and proper sense. However, subject to special
requirements of the income tax, profits have got to be assessed
provided they are real profits. Such profits have got to be
ascertained on ordinary principles of commercial trading and
accounting. However, the Income Tax Act has laid down certain
rules to be applied in deciding how the tax should be assessed and
even if the result is to tax as profits what cannot be construed as
profits, still the requirements of the Income Tax Act must be
complied with. Where a deduction is necessary in order to ascertain
the profits and gains, such deductions should be allowed. Profits
should be computed after deducting the expenses incurred for
business though such expenses may not be admissible expressly
under the Act, unless such expenses are expressly disallowed by
the Act (see p. 455 of The Law and Practice of Income Tax by
Kanga and Palkhivala). Therefore, schematic interpretation for
making the formula in Section 80-HHC workable cannot be ruled
out. Similarly, purposeful interpretation of Section 80-HHC which
has undergone so many changes cannot be ruled out, particularly,
when those legislative changes indicate that the legislature intended
to exclude items like commission and interest from deduction on
the ground that they did not possess
any element of “turnover”
even though commission and interest emanated from exports. We
have to read the words “total turnover” in Section 80-HHC as
part of the formula which sought to segregate the “export profits”
from the “business profits”. Therefore, we have to read the formula
in entirety. In that formula the entire business profit is not given
deduction. It is the business profit which is proportionately reduced
by the above fraction/ratio of export turnover ÷ total turnover which
constitutes Section 80-HHC concession (deduction). Income in
the nature of “business profits” was, therefore, apportioned. The
above formula fixed a ratio in which “business profits” under
Section 28 of the Act had to be apportioned. Therefore, one has to
give weightage not only to the words “total turnover” but also to
the words “export turnover”, “total export turnover” and “business
profits”. That is the reason why we have quoted hereinabove
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extensively the illustration from the Direct Taxes (Income Tax)
Ready Reckoner of the relevant word.”
109. The Court in Lakshmi Machine Works (supra) was dealing
with a question of interpretation, where the formula was silent on inclusion
of sales tax or excise duty, in the definition of total turnover. Thus, a
schematic interpretation was adopted to give effect to the intent of the
legislature.
110. In Commissioner of Income Tax v. HCL Technologies
Limited53, a two judge Bench of this Court considered whether, while
calculating ‘export profit’ for the deduction under Section 10-A of the
Income Tax Act 1961, software development charges are to be excluded
from the definition of ‘total turnover’. For calculating the export profit,
the total profits of the business were apportioned by the ratio of export
turnover to total turnover. The issue was complicated as these charges
were allowed to be deducted from export turnover, which was a
component of the total turnover and the numerator in the formula.
However, the Revenue had denied the deduction from the total turnover,
the denominator. The Court interpreted and revised the formula as
otherwise it would lead to undesirable results. In doing so, Justice RK
Agrawal observed that
“16. The respondent Company has claimed deduction under Section
10-A as per certificates filed on Form 56-F. The respondent, while
computing the deduction, has taken the same figure of export
turnover as of total turnover. […]
17. In
the above backdrop, we are of the opinion that the definition
of total turnover given under Sections 80-HHC and 80-HHE cannot
be adopted for the purpose of Section 10-A as the technical
meaning of total turnover, which does not envisage the reduction
of any expenses from the total amount, is to be taken into
consideration for computing the deduction under Section 10-A.
When the meaning is clear, there is no necessity of importing the
meaning of total turnover from the other provisions. If a term is
defined under Section 2 of the IT Act, then the definition would be
applicable to all the provisions wherein the same term appears. As
53 (2018) 16 SCC 709
UNION OF INDIA v. VKC FOOTSTEPS INDIA PVT LTD.
[DR DHANANJAYA Y CHANDRACHUD, J.]
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the term “total turnover” has been defined in the Explanation to
Sections 80-HHC and 80-HHE, wherein it has been clearly stated
that “for the purposes of this section only”, it would be applicable
only for the purposes of those sections and not for the purpose of
Section 10-A. If denominator includes certain amount of
certain type which numerator does not include, the formula
would render undesirable results.
[…]
22. In the instant case, if the deductions on freight,
telecommunication and insurance attributable to the
delivery of computer software under Section 10-A of the IT
Act are allowed only in export turnover but not from the
total turnover then, it would give rise to inadvertent,
unlawful, meaningless and illogical result which would cause
grave injustice to the respondent which could have never
been the intention of the legislature.
23. Even in common parlance, when the object of the formula is
to arrive at the profit from export business, expenses excluded
from export turnover have to be excluded from total turnover also.
Otherwise, any other interpretation makes the formula unworkable
and absurd. Hence, we are satisfied that such deduction shall be
allowed from the total turnover in same proportion as well.
(emphasis supplied)
In Arun Kumar and Others v. Union of India54, a challenge
was raised to the validity of the Rule 3 of the Income Tax Rules 1962
which amended the method of computing valuation of a
‘perquisite’
(which includes rent free accommodation provided to an assessee by
their employer) under Section 17(2) of the Income Tax Act 1961. The
appellants argued that the amended Rule did not provide the assessee
with the right to claim before the assessing officer that there was no
“concession” in the matter of rent with respect to the accommodation
provided and thus, Section 17(2) and Rule 3 were not applicable. An
argument was raised to “read down” the Rule by introducing the principle
54 (2007) 1 SCC 732
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of audi alteram partem. Rejecting this argument, the Court, speaking
through Justice CK Thakker, noted that
“55. The doctrine of “reading down” is well known in the field of
constitutional law. Colin Howard in his well-known
work Australian Federal Constitutional Law states:
Reading down puts into operation the principle that so far as it is
reasonably possible to do so, legislation should be construed as
being within power. It has the practical effect that where an Act is
expressed in language of a generality which makes it capable, if
read literally, of applying to matters beyond the relevant legislative
power, the Court will construe it in a more limited sense so as to
keep it within power.”
The Court after reviewing the judicial precedents on this point
observed:
“61. But it is equally well settled that if the provision of law
is explicitly clear, language unambiguous and interpretation
leaves no room for more than one construction, it has to be
read as it is. In that case, the provision of law has to be
tested on the touchstone of the relevant provisions of law
or of the Constitution and it is not open to a court to invoke
the doctrine of “reading down” with a view to save the
statute from declaring it ultra vires by carrying it to the point
of “perverting the purposes of the statute.
[…]
65. As we have already indicated earlier, Rule 3 prior to its
amendment in 2001 was totally different. It dealt with the method
of calculation of concession keeping
in view the concept of “fair
rental value”. In the light of the principle and phraseology in Rule
3, the rule-making authority provided an opportunity to the assessee
to satisfy the assessing officer that the rent sought to be recovered
from the employee could not be said to be “concession” as it was
“fair rent”, “reasonable rent”, “market rent” or “standard rent’.
When the rule is amended and the concept of “fair rental value”
has been done away with and the only method which has been
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[DR DHANANJAYA Y CHANDRACHUD, J.]
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adopted is to calculate the rent on the basis of population of the
city in question, it cannot be successfully contended that the
intention of the rule-making authority was to afford an opportunity
to the assessee to convince the assessing officer that the rent
recovered by the employer from his employee was not in the nature
of concession. Nor a court of law would, by interpretative process,
grant such opportunity to the assessee so as to enable him to
convince the assessing officer that the rent fixed was not covered
by Section 17(2)(ii) of the Act and therefore was not a “perquisite”.
We are, therefore, unable to accept the argument of Mr Salve and
allow import of the principles of natural justice in Rule 3.”
(emphasis supplied)
111. 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 Mr Natarjan and Mr Sridharan 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.
H Conclusion
112. Having devoted our attention to the submissions at the Bar,
we have come to the conclusion that the judgment of the Madras High
Court needs to be affirmed by dismissing the appeals challenging that
verdict while the appeals against the judgment of the Gujarat High Court
by the Union of India should be allowed.
113. The Division Bench of the Gujarat High Court having examined
the provisions of Section 54(3) and Rule 89(5) held that the latter was
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ultra vires. In its decision in VKC Footsteps India Pvt. Ltd. (supra),
the Gujarat High Court held that by prescribing a formula in sub-Rule
(5) of Rule 89 of the CGST Rules to execute refund of unutilized ITC
accumulated on account of input services, the delegate of the legislature
had acted contrary to the provisions of sub-Section (3) of Section 54 of
the CGST Act which provides for a claim of refund of any unutilized
ITC. The Gujarat High Court noted the definition of ITC in Section
2(62) and held that Rule 89(5) by restricting the refund only to input
goods had acted ultra vires Section 54(3). The Division Bench of the
Madras High Court on the other hand while delivering its judgment in
Tvl. Transtonnelstory Afcons Joint Venture (supra) declined to follow
the view of the Gujarat High Court noting that the proviso to Section
54(3) and, more significantly, its implications do not appear to have been
taken into consideration in VKC Footsteps India Pvt. Ltd. (supra)
except for a brief reference. Having considered this batch of appeals,
and for the reasons which have been adduced in this judgment, we affirm
the view of the Madras High Court and disapprove of the view of the
Gujarat High Court. We accordingly order and direct that:
(i)
The appeals55 filed by the Union of India against the judgment
of the Gujarat High Court dated 4 July 2020 in VKC
Footsteps India Pvt. Ltd. (supra) and connected cases
are allowed and the judgment shall be set aside;
(ii)
The appeals56 filed by the assessees against the judgment
of the Madras High Court in Tvl. Transtonnelstroy
Afcons Joint Venture (supra) and connected cases dated
21 September 2020 shall stand dismissed. As a consequence,
the writ petition filed by the assessees shall also stand
dismissed. There shall no order as to costs; and
55 SLP (Civil) No 14801 of 2020; SLP (Civil) No 16003 of 2020; SLP (Civil) No 1340
of 2021; SLP (Civil) No 16032 of 2020; SLP (Civil) No 677 of 2021; SLP (Civil) No
1868 of 2021; SLP (Civil) No 2951 of 2021; SLP (Civil) No 2456 of 2021; SLP (Civil)
No 2973 of 2021
56 SLP (Civil) No 589 of 2021; SLP (Civil) No 1418 of 2021; SLP (Civil) Nos 1742-
1748 of 2021; SLP (Civil) Nos 1552-1557 of 2021; SLP (Civil) Nos 8008-8009 of
2021
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[DR DHANANJAYA Y CHANDRACHUD, J.]

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(iii)
The observations in paragraphs 104 to 111 shall be
considered by the GST Council to enable it to take a
considered view in accordance with law.
114. Pending application(s), if any, stand disposed of.
Ankit Gyan
Appeals disposed of.