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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
FACTS
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
  1. Whether Section 54(3)(ii) of the CGST Act is ultra vires of Article 14 of the Constitution?
  2. 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?
  3. Whether the words input services may be read into the word “inputs” by resorting to the interpretive principle of reading down the statute?
  4. 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?
  5. 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?
  6. 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?
  7. 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?
  8. Whether Rule 89(5) of the CGST Act Rules, as amended, is ultra vires Section 54(3) of the CGST Act
  9. 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.
Accordingly, in all the four elements mentioned the treatment given to Goods and Service is similar. The mere difference between the goods and the services under GST is done for the purpose of administrative convenience.  
The Respondents contended that the classification of the registered persons into those who are availing input services and input goods is justified as there is a difference between goods and services which is contemplated by both; the Constitution and the CGST Act.
The amendment to Rule 89(5) is valid and is not violative of Section 54(3)(ii) of the CGST Act and Article 14 of the Constitution of India for the following reasons:
1. There is a clear distinction between goods and services as given under Article 366(12) and 366(26) (A) of the Constitution of India respectively.
2. Section 54(3)(ii) of the CGST Act should be interpreted using the literal rule of interpretation and the department must be given the benefit of any ambiguity arising therein.
3. Clause (ii) to the proviso of Section 54(3) of the CGST Act does not lay out two conditions for availing ITC in the case of inverted duty structure rather it curtails the scope of sub-section (3). Additionally, the proviso not only mentioned the class pf persons, but also the source of unutilised credit and the quantum.
4. The use of the word on account of in Section 54(3)(iii) of the CGST Act suggests that only accumulated ITC with respect to input goods is included in the ambit of the provision and it explicitly excludes input service.
5. While interpreting a tax statue equity cannot be a relevant consideration and reference to the common meaning should be made when the statue is silent. In the present case the CGST Act defines ‘input’ under Section 2(59) of the CGST Act, which includes only goods in the definition.
6. One of the reasons for not including the input services under the provision is because tax evasion is more in the case of service.
DECISION AND FINDINGS 
1. Rejecting the observation of the Gujarat High court in VKC Footstep
The Court referred to the judgement of Gujarat High Court in the case of VKC Footstep Pvt. Ltd. v. Union of India wherein the Court held that clause (ii) of the proviso includes both supply of goods and services and therefore Rule 89(5) of the Rules which restricts the refund of ITC in the case of input service is not valid.
However, the Court did not accept the view of the Gujarat High Court as in the view of the Court the Gujarat High Court did not take into consideration the proviso to Section 54(3) of the CGST Act.
2. Interpretation of Section 54(3)(ii) of the CGST Act read with Rule 89(5)
The Court decided to start with the literal interpretation of Section 54(3)(ii) of the CGST Act. The Court observed that the Parliament has used “double negative” in the proviso making it clear that the two conditions are required to be met.
Further, the Court observed that proviso limits the scope of Section 54(3) of the CGST Act by “limiting the source/type and, consequently, quantity of unutilised input tax credit in respect of which refund is permissible.” The Court also noted that the proviso limits the scope of Section by limiting the refund of credit of ITC to those registered persons who have availed input goods.
Rule 89(5) is amended to make it in line with Section 54(3)(ii) of the CGST Act so as to provide refund of accumulated ITC only in case of input goods, whereas prior to amendment refund was available in case of input services as well.
Further, as per Section 164 of the CGST Act the provision can be amended with a retrospective effect. Thus, Rule 89(5) of the CGST Rules, 2017 is in conformity with Section 54(3) of the CGST Act.
3. Meaning of Inputs
The Court observed that while interpreting any legislation the first reference should be made to the statutory definition. Thus, in the present case, reference should be made to the term “inputs” as defined in Section 2(59) of the CGST Act.
The definition states that “any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business”.
Accordingly, the explanation to Section 54 of the CGST Act makes a special reference to the term “inputs” and “input services” so as to distinguish between them.
4. Refund of ITC
The Court observed that as per the Petitioners, ITC is an inherent right available to the registered person. However, the Court refused to accept the same as the Court was of a view that ITC is in the nature of set-off tax liability. The purpose of including the mechanism of ITC in GST regime is to remove the cascading effect.
Further, the nature of ITC is clearly to provide benefit and the same cannot be considered as a medium for claiming excessive taxes that were paid in the inverted duty structure.
5. On the issue of Classification
The Court in view of the arguments made by the Petitioner observed that allowing refund of ITC to registered persons who are availing ITC on input goods and not allowing the same on input services amounts to violation of Article 14 of the Constitution of India. On the other hand, the Court also noted that the contention of the Respondent that such a classification is made in the statue and the Constitution.
Accordingly, the Court observed that right to refund of ITC is purely a statutory decision and cannot be availed except by the way of a statutory provision. In view thereof, the Court relied on Satnam Overseas Exports v. State of Haryana (2003) 1 SCC 561 wherein it was held that –
“It is a settled proposition of law that in the matter of taxation, the legislature has greater latitude to give effect to its policy of raising revenue and for that purpose selecting the goods for taxing. The classification of goods based on the policy of taxing some goods and leaving others outside the net of taxation cannot be assailed as violative of Article 14 of the Constitution.”
The Court observed that in the case of taxation, the Legislature has more power to make classification than in other legislations. Further, the Court observed that the wider objective of the GST laws is to treat goods and services in a like manner. However, we have to accept that it is an evolving process and it will take time.
ITC is available with respect to both goods and services and the restriction is only with respect to refund which may be provided in future like the previous tax regime.
AMLEGALS REMARKS 
The Court rejected all the writ petitions and held that Section 54(3)(ii) of the CGST Act does not infringe Article 14 of the Constitution of India and refund is a statutory right.
Accordingly, the Court adopted a literal rule of interpretation while interpreting Section 54 of the CGST Act and considered that in taxation statue the legislature can make classification so as to ensure the revenue of the State.
Based on the GST framework, there exists a difference between goods and services which goes against the spirit of the GST law which is seamless flow of credit. Therefore, in view of the facts and circumstances of the present case, the refund would not be granted for input services and capital goods, which would definitely lead to a blockage of the working capital required. This will eventually lead to non- utilisation of such funds in the business.
This judgment has put tax payers in an unfavourable situation by opening a battle for refund of ITC. Therefore, GST Council should come out with an amendment with retrospective effect otherwise the Revenue will use such judgments as a measure to deny refund of ITC availed and not utilized or else the issue may reach to the Apex Court in future. 
 
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