Goods & Services Tax (GST) in IndiaRestriction on Refund of Unutilized ITC of Exported Goods is Unconstitutional

The Hon’ble Karnataka High Court, in M/s. Tonbo Imaging India Pvt Ltd v Union of India [Writ Petition No. 13185 of 2020 decided on 16.02.2023], held that Rule 89(4)(c) of Central Goods and Service Tax Rules, 2017 (hereinafter referred to as the “CGST Rules”) which restricts the refund of unutilized ITC on the the exports made under LUT Model to 1.5 times value of like goods supplied domestically; to be unconstitutional and ultra vires of the provisions of the GST law.

FACTS

M/s Tonbo Imaging India Pvt Ltd (hereinafter referred to as “the Petitioner”) is engaged in designing, developing, building and deploying various types of advanced imaging and sensor systems to sense, understand and control complex environments. The Petitioner is also engaged in developing micro-optics, lower power electronics and real-time vision processing to design imaging systems designs for real world applications.

The Petitioner exported numerous customised products during the period of May 2018 to March 2019. Since exports made by the Petitioner were “zero rated supply” under Section 16 of the Integrated Goods and Services Act, 2017 (hereinafter referred to as the “IGST Act”), the Petitioner filed refund applications with the Revenue Department (hereinafter referred to as the “Respondent”) on 25.05.2020, 27.05.2020 and 28.05.2020 and claimed refund of unutilized input tax credit under Section 54(3)(i) of the Central Goods and Services Act, 2017 (hereinafter referred to as the “CGST Act”) read with Rule 89 of the CGST Rules.

The Central Board of Indirect Taxes and Customs (hereinafter referred to as the “CBIC”) vide Notification No. 16/2020 Central Tax dated 23.03.2020 amended Rule 89(4)(c) of the CGST Rules to be brought into effect from 23.03.2020. It restricted the refund of exports made through Letter of Undertaking model (“LUT Model”) to a maximum of 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier.

Accordingly, the Respondent issued Show Cause Notices (hereinafter referred to as the “SCN”)  dated 27.05.2020, 03.06.2020 and 04.06.2020 stating that the refund claims could not be considered as, the Petitioner had failed to provide the  proof, which was required to be given in terms of the amended Rule 89(4)(c) of the CGST Rules.

The Respondent rejected the refund claims of the Petitioner vide  order dated 30.06.2020 (hereinafter referred to as “the Impugned Order”) Hence,

aggrieved by the Impugned Order, the Petitioner filed a petition before the Karnataka High Court (hereinafter referred to as “High Court”).

ISSUES BEFORE THE KARNATAKA HIGH COURT

Whether Rule 89(4)(c) of the CGST Rules is liable to be held unconstitutional, as it is violative of Articles 19(1)(g) and 14 of the Constitution and ultra-vires to the provision of GST law?

CONTENTIONS OF THE PARTIES

The Petitioner contended that Rule 89(4)(C) of the CGST Rules is ultra vires to Section 54 of the CGST Act read with Section 16 of the IGST Act.  It was argued that the very intention of the zero-rating it to make the entire supply chain of “exports” tax free, i.e., to fully ‘zero-rate’ the exports by exempting them from both input tax and output tax; accordingly, Section 16(3) of the IGST Act allows refund of input taxes paid in the course of making a zero-rated supply, i.e., supplies which cover exports as well as supplies to SEZs.

It was further contended that Rule 89(4)(C) of the CGST Rules is violative of Articles 14 and 19(1)(g) of the Constitution of India, as the quantum of refund of unutilized input tax credit (hereinafter referred to as “ITC”)  is restricted only in cases falling under Section 16(3)(a) of the IGST Act.

The Petitioner submitted that the restriction is imposed in cases where the export of goods is made without payment of duty under a Bond/LUT. However, no such restriction is imposed on cases falling under Section 16(3)(b) of the IGST Act, i.e., in cases where the export of goods is made after payment of duty.

It was claimed that the amended  Rule 89(4)(C) of the CGST Rules is arbitrary and unreasonable, as it has no rational nexus with the objective of the Section 16 of the IGST Act. The provision of Section 16 of the IGST Act seeks to make exports tax-free by “zero-rating” them whereas,  the amended Rule 89(4)(C) of the CGST Rules restricts the refund of ITC available on such exports.

On the contrary, the Respondent submitted that the petition was not maintainable and was liable to be dismissed. It was contended that the Petitioner did not submit the proof as sought by the amended provisions of Rule 89(4)(c) of the CGST Rules and hence, the refund of ITC cannot be given.

DECISION AND FINDINGS

The High Court held that the amended Rule 89(4)(C) of the CGST Rules was illegal, arbitrary, unreasonable, irrational, unfair, unjust, and ultra vires to Section 16 of the IGST Act and Section 54 of the CGST Act. The High Court observed that the exports are rendered to be “zero-rated supply” and hence, are exempted from input as well as output tax. Moreover, Section 16(3) of the IGST Act allows refund of ITC for exports as well as supply to SEZ units, hence, the amended provision of Rule 89(4)(c) of the CGST Rules cannot override the parent legislation i.e., the IGST Act.

The High Court further explained that the amended Rule 89(4)(c) of the CGST Rules is violative of Article 14 and Article 19(1)(g) of the Constitution of India as the refund of unutilized ITC is restricted only in cases where export of goods is made without payment of duty under a Bond/(LUT). It does not restrict the refund of unutilized ITC in the cases where the export of goods is after the payment of duty. Hence, the discrimination of restriction of refund of unutilised ITC does not have a reasonable nexus with the objective of the GST law.

The High Court opined that the words “like goods” and “similarly placed supplier” used in the amended Rule 89(4)(c) of the CGST Rules is not defined anywhere. Hence, it is a very open-ended and vague provision and can lead to problems regarding interpretation.

The High Court further held that the object of “zero-rated supply”  would be lost if exports are subjected to the levy of GST. Moreover, it is contradictory to the objectives of the provisions of Section 16 of the IGST Act read with Section 54 of the CGST Act.

Thus, Court held that Rule 89(4)(c) of the CGST Rules is arbitrary and unreasonable and also unconstitutional. Hence, quashed down the amended Rule 89(4)(c) of the CGST Rules.

AMLEGALS REMARKS

The High Court has correctly held Rule 89(4)(c) unconstitutional as a rule restricts the exporters from claiming a refund of unutilized ITC in case the export is done by LUT model as a rule restricts the refund claim of unutilized ITC on the export of goods under LUT to the lower of actual value or 1.5 times the value of the same goods domestically supplied by the assessee.

The main objective of rendering exports as “zero-rated supply” was to exempt the exports from the levy of GST. It is a trite law that no amendment can be in violation of the objective of the statue. Moreover, the restriction of refund of ITC is based on the export of goods done with the payment of duty or without payment of duty which is arbitrary and violative of the fundamental rights of the Constitution of India.

– Team AMLEGALS assisted by Ms. Maneesha S (Intern)

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