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GST UPDATE ON REFUND OF INPUT SERVICES UNDER INVERTED DUTY STRUCTURE ALLOWED BY GUJARAT HIGH COURT:-107/2020-21

GST UPDATE ON REFUND OF INPUT SERVICES UNDER INVERTED DUTY STRUCTURE ALLOWED BY GUJARAT HIGH COURT:-107/2020-21
The newly inserted concept of refund of accumulation of input tax credit on account of inverted duty structure in GST is not free from disputes which is evidenced from the fact that the Rule 89(5) has already been retrospectively amended vide Notification No. 26/2018-Central Tax dated 13th June, 2018. It is to be noted that the amendment made vide Notification No. 21/2018-Central Tax dated 18th April, 2018 in Rule 89(5) of the CGST Rules was given retrospective effect vide Notification No. 26/2018-Central Tax dated 13th June, 2018. The original Rule 89(5) created confusion as regards its applicability to service providers because the formula prescribed mentioned the term “Turnover of inverted rated supply of goods”. However, the amendment was made substituting the above term as “Turnover of inverted rated supply of goods and services” which indicated that service provider is also eligible for filing refund of accumulated credit under inverted duty structure. But as we all know that roses come along with thorns, the retrospective amendment changed the meaning of “Net ITC” used in the formula so as to cover only “inputs” eligible for consideration and not “input services” by way of explanation (a) to Rule 89(5) of CGST Rules. The explanation excluding input services from ambit of Net ITC was challenged before the Hon’ble Gujarat High Court in the case of VKC FOOTSTEPS INDIA PRIVATE LTD. VERSUS UNION OF INDIA which is the subject matter of discussion in the present update.

 

The petitioner contended that the Rule 89(5) restricting the refund of accumulated input tax credit on account of input services under inverted duty structure is ultra vires the provisions contained in section 54(3) of the CGST Act, 2017. This is for the reason that the main Section54(3) refers ‘any unutilised input tax credit’.It was submitted that the expression ‘input taxcredit’ as defined under Section 2(63) meanscredit of input tax. The expression ‘input tax'as specifically defined under Section 2(62) meansthe tax charged on any supply of “goods orservices or both" made to a registered person. Itwas submitted that it is well settled that whenan expression employed in the body of the Act isdefined in the Act, that definition will applywhenever the expression is employed in the bodyof the Act, therefore, the expression ‘input taxcredit’ appearing in main Section 54(3) wouldinclude both i.e., credit on inputs and inputservices as well. It was also submitted that there isno reference/or provision in entire Section 54(3)enabling the Central Government/ Executive toframe / enact Rule in this regard and consequently, Rule 89(5) is non-est and ultra vires section 54(3) of the CGST Act, 2017.

 

The petitioner contended that the Rule 89(5) and 89(4) are on similar lines allowing refund of credit accumulation on proportionate basis with the difference that Rule 89(4) pertains to refund of accumulation in input tax credit on account of exports while Rule 89(5) pertains to refund on account of inverted duty structure. It was contended that when Net ITC for the purposes of Rule 89(4) included inputs and input services both, the same should be considered for Rule 89(5) as well. It was submitted thatgranting refund of input tax credit on inputs anddenying refund in respect of input service, particularly for Rule 89(5) isdiscriminatory and violative of Article 14 of the Constitutionof India and hence bad in law. This discriminatory approach has the impact thatthose industries which areengaged in making outward supplieswholly using inputs would get fullrefund of unutilised input tax creditwhile putting at a disadvantage thoseindustries which substantially use inputservices for making outward supplies.

 

 

 

It was further submitted that it is well settledlaw that Rule made by executive cannot curtail orwhittle down the provisions of the Act. It wastherefore, submitted that explanation (a) to Rule89(5) which confines refund to ‘input credit’ tothe exclusion of ‘input service credit’ alsowhittles down the effect of word “any" used in the phrase'any unutilised input tax credit’ employed inSection 54(3) as “any” would obviously mean "all" inputtax credit including input services.

 

 

The petitioner also submitted that GST was introducedwith the intention of removing the cascadingeffect of taxes by providing for input tax crediton all inputs and input services, which can beused for payment of output tax. In this context, Statement ofObjects and Reasons of the Constitution (122ndAmendment) Act andStatement of Objects andReasons of the CGST Act were referred. Consequently, if refund of input services is denied under inverted duty structure, it would become cost to the assessee, which is not the intention of the legislature.

 

The petitioner also clarified that the phrase “tax on inputs”cannot be interpreted to mean tax on“inputs" only asdefined in Section 2(59)but have to be read as “input tax”as defined inSection 2(62) whichincludes input services within itspurview. Thisinterpretation isfortified by the use of the phrase“tax on output supplies ”also in thesame clause (ii) when considered inthe context of the fact that the Actdoes not define “output” but defines“output tax” in Section 2(82) toinclude tax on both goods and servicesand defines “outward supply“ inSection2(83) to include supply ofgoods as well as services and“supply” in Section 7 to includesupply of both goods and services.

 

It was submitted that amended Rule 89(5) results in perpetual retention/appropriation of unutilised input tax credit on services by theGovernment contrary to the intention of thelegislature as evidenced from the object andscheme of the Act which would therefore amount toindirect levy of tax without authority of lawunder Article 265 of the Constitution of India. Moreover, there is absolutely no rationalefor allowing credit of tax paid on inputservices used or intended to be used inthe course of furtherance of businesswhich can be used for payment of tax butnot allowing refund thereof if suchcreditcannot be utilised on account ofinverted duty structure imposed by theGovernment itself.

 

Controverting the detailed submissions of the petitioner, the revenue department relied upon the decision of Hon’ble High Court of Gujarat in the case of WILLOWOOD CHEMICALS PVT. LTD. VERSUS UNION OF INDIA wherein it was held that the rule making power under section 164 of the CGST Act, 2017 is very wide and includes power to make rules on any or all matters of the Act and also has power to give retrospective effect to the Rules so framed. Hence, the restriction imposed vide explanation to Rule 89(5) was justified as proper.

 

The Hon’ble Gujarat High Court conceded with the interpretation of the term “input tax credit” as accorded by the petitioner and agreed that the explanation to Rule 89(5) is going beyond the provisions contained in section 54(3) of the CGST Act, 2017. The Hon’ble Gujarat High Court placed reliance on the decision given by the Delhi High Court in case ofINTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT.LTD. VS. UNION BANK OF INDIA reported in 2013(29) S.T.R. (Del.)wherein it washeld that the Rule whichgoes beyond the statute is ultra vires and thusliable to be struck down by referring to variousdecisions of the Supreme Court. Reference was also made to Apex Court judgment delivered in the case of BABAJI KONDAJI GARAD V. NASIK MERCHANTS CO-OPERATIVE BANK LTD., (1984)2 SCC 50,wherein it was held that if there is any conflictbetween a statute and thesubordinate legislation, the statuteprevails over subordinatelegislation.

 

The above decision is yet another example for confirming that the statutoryprovision always has precedence over the Rules and must becomplied with.It was promised while implementing the GST Law by the Government that there would be no retrospective amendments but the promises are meant to be broken. As and when lacunae are being noticed in the drafting of provisions in GST Law, it is followed by retrospective amendment by the Government and filing of writ petitions by assesseesbefore the High Court. Now, the question to ponder is that how will assessees avail benefit of this decision, particularly in view of time limit for filing refund claim and the fact that assessees are not permitted to file refund claim for a particular period twice.

 

Moreover, whether the decision will also be nullified by another retrospective amendment in Section 54(3)of CGST Act ignoring the objects? Else, Government will agree and give this legitimate refund to all taxpayers. Another question is whether Gujarat High Court decision will be accepted by all states when writ petitions are pending in their jurisdictional High Courts?
This is solely for educational purpose.
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