Refund of ITC is not available for input services under Inverted Duty Structure
HIGH COURT OF MADRAS
Tvl. Transtonnelstroy Afcons Joint Venture v. Union Of India
Writ Petition no. 8596 of 2019 | Date: 21.09.2020
The Madras High Court decided 21 writ petitions under Article 226 of the Constitution of India. Each writ petition had some common factual background and therefore to avoid any unnecessary repetition only relevant facts common in all the writ petitions are discussed hereunder.
The Petitioners claimed that they were entitled to the refund of accumulated Input Tax Credit (hereinafter, ITC) in the inverted duty structure under Section 54(3)(ii) of the Central Goods and Service Act, 2017 (hereinafter, CGST Act).
An inverted duty structure refers to a situation wherein the rate of tax on input goods/services is more than the output supplies.
It follows that due to difference in tax rates the registered person is unable to adjust the available ITC against the tax paid on output supplies. On the other hand, the Respondents claimed that unutilised ITC is available only when tax rate is higher in case of input goods but not in case of input services.
ISSUES BEFORE THE HIGH COURT
- Whether Section 54(3)(ii) of the CGST Act is ultra vires of Article 14 of the Constitution?
- Whether it is necessary to read the word “inputs” in Section 54(3)(ii) of the CGST Act as encompassing both goods and services so as to ensure that the said provision is not struck down?
- Whether the words input services may be read into the word “inputs” by resorting to the interpretive principle of reading down the statute?
- Whether the words input services may be read into Section 54(3)(ii) of the CGST Act as an exception to the general rule of casus omissus?
- Whether the proviso to Section 54(3) of the CGST Act qualifies and curtails the scope of the principal clause to the limited extent of specifying the two cases in which registered persons become eligible for a refund of the unutilised input tax credit?
- Whether sub-clause (ii) of the proviso merely stipulates the eligibility conditions for claiming a refund of the unutilised input tax credit or whether it also curtails the entitlement to refund to unutilised input tax credit from a particular source, namely, input goods and excludes input services?
- Whether the rule making power under Section 164 of the CGST Act empowers the Central Government to make Rule 89(5) of the CGST Act Rules as amended?
- Whether Rule 89(5) of the CGST Act Rules, as amended, is ultra vires Section 54(3) of the CGST Act
- Whether the definition of the term Net ITC, as contained in Rule 89(5), is liable to be read as encompassing both input goods and input services?
CONTENTION OF THE PARTIES
The Petitioners contended that the Petitioner were carrying out business wherein tax rate on input goods and input supplies is more than the tax rate on output supplies as a result of which there is accumulated credit of ITC. However, due to the amendment to Rule 89(5) of the CGST Rules, 2017 the Petitioners are not able to claim the credit of unutilised credit where tax on input supplies is more than the tax on output supplies.
Accordingly, the Petitioners are entitled to claim the accumulated ITC with respect to input supplies as well. To substantiate the claims, the Petitioners argued as under:
1. The object of Section 54 of the CGST Act is to enable a registered person to claim the unutilised ITC. Section 54(3) of the CGST Act is to be understood in a language that clearly enables a registered person to obtain a full refund of all accumulated unutilised ITC. Therefore, the proviso to Section 54(3) of the CGST Act should be interpreted only after taking into consideration the context.
2. The rule making power under Section 164 of the CGST Act is to provide for the object of the CGST Act and not to provide for disabilities.
3. Section 54(3) of the CGST Act provides for claim of unutilised ITC and the proviso to the sub-sections only specifies the two conditions under which ITC will be available. Firstly, in the case of zero-rated supply and Secondly, in the case of inverted duty structure. Accordingly, when the main provision allows for accumulated ITC in the inverted duty structure, the same cannot be denied by enacting Rule 89(5) of the CGST Rules, 2017.
4. The Petitioner vehemently argued that the word ‘Input’ as used in Section 2(59) of the CGST Act should not be used for the purpose of interpreting Section 54(3)(ii) of the CGST Act. Thus, as per the Petitioners the Court must not rely on the statutory definitions but on the meaning of the word used in the common parlance.
5. The Petitioners argued that Clause (ii) to the proviso of Section 54(3) of the CGST Act is violative of Article 14 of the Constitution as it creates class. The reason for the same is that only those registered persons who are using input goods are able to claim ITC in the inverted duty structure, whereas those registered persons who are availing input service is not given the refund of accumulated ITC in the inverted duty structure although both the persons are involved in the same business.
6. The decision to allow the refund of ITC in case of input goods and not in the case of input service is devoid of any valid justification as their exists four elements of GST law:
- Taxable event;
- Taxable person;
- Rate of tax; and
- Measure of tax.