Non-Applicability of ITC refund on services under Inverted duty structure- SC Ruling
Introduction
The Central Goods and Services Tax Act, 2017 (CGST Act), in accordance to section 54(3) provides for claiming of refund of Unutilized ITC and Rule 89(5) of CGST rules provides for a formula to calculate the refund of unutilized ITC. This rule was amended having retrospective effect from 01st July, 2017 vide Notification No.26/20218- Central Tax by the Government of India, Ministry of Finance, Department of Revenue of Central Board of Indirect Taxes and Customs dated 13th June 2018. This rule revised the earlier formula by excluding Input services from the scope of Net input tax credit for computation of refund under Inverted Duty Structure. We will understand this concept with the help of a very interesting case of Union of India & Ors. v. VKC Footsteps India Pvt. Ltd- Supreme Court Judgement.
What do you mean by Inverted Duty Structure under GST?
Inverted duty structure is a situation where the input GST rate is higher than the output GST rate. In simple words it means that the GST paid on your purchase is more than that of the GST received from your sales. This situation gives rise to ITC applicable for refund under Inverted Duty Structure in accordance to the GST law. Section 54(3) (ii) of the CGST Act lays down the eligibility criteria for the grant of refund on account of inverted duty structure or condition precedent.
The validity of rule 89(5) was challenged as there was difference of ruling by The Hon’ble Gujarat High Court in VKC Footsteps India Pvt. Ltd. v. Union of India [R/ Special Civil Application No 2792 of 2019 and The Hon’ble Madras High Court in Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India [Writ Petition Nos 8596, 8597, 8602,8603, 8605 and 8608 of 2019]. The Supreme Court in a recent case of Union of India & Ors. v. VKC Footsteps India Pvt. Ltd. [Civil Appeal No 4810,4809, 4811,4807,4767,4804,4806,4783.4775-4781, 4769-4774, 4805, 4808, 4764-4765 of 2021 and Writ Petition (C) 489 of 2021 dated September 13, 2021] applying the pronouncement of the case of RK Garg v. Union of India (1981) 4 SCC 675, upheld and affirmed the views of Madras High Court in the case of Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India thereby setting aside the ruling of Hon’ble Gujarat High Court in VKC Footsteps India Pvt. Ltd. v. Union of India.
Union of India & Ors. v. VKC Footsteps India Pvt. Ltd- Supreme Court
Facts of the case:
- A writ petition under Article 226 of the Constitution were instituted before the High Court of Gujarat and the High Court of Judicature at Madras.
- 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: “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).
- Thereafter 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, 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.”
- 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.
Conclusion:
- The supreme court has 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.
- 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 ultra vires. In its decision in VKC Footsteps India Pvt. Ltd., 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 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. except for a brief reference.
Judgement:
Having considered this batch of appeals, and for the reasons which have been adduced in this judgment, the Supreme Court affirm the view of the Madras High Court and disapprove of the view of the Gujarat High Court. The SC ordered and directed as under,
“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. and connected cases are allowed and the judgment shall be set aside”.
