While observing that the formula prescribed by Rule 89(5) of the Central Goods and Service Tax Rules, 2017 (CGST Rules) suffers from anomalies, the Supreme Court says it cannot be a ground to strike down a fiscal rule that has been framed in exercise of the power of delegated legislation.
Hearing a batch of appeals on Monday, the bench of justice DY Chandrachud and justice MR Shah upheld the validity of Rule 89(5) of CGST Rules. The Rule prescribes a formula excluding the refund of ‘unutilised input tax’ paid on ‘input services’ as part of ‘input tax credit’ (ITC).
In its order, the bench says, “In the present case, the formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on the accumulation of unutilised ITC. It is merely the case that the practical effect of the formula might result in certain inequities.”
“The reading down of the formula as proposed by senior counsels G Natarajan and V Sridharan by prescribing an order of utilisation would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Accordingly, we shall refrain from replacing the wisdom of the legislature or its delegate with our own in such a case. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same,” the apex court says.
The Supreme Court heard a batch of appeals filed challenging the ruling from Gujarat High Court (HC) and Madras High Court on the validity of Rule 89(5).
Considering unutilised ITC on input services as part of ‘net ITC’ to calculate refund in terms of Rule 89(5), in furtherance of Section 54(3), the Gujarat HC on 24 July 2020 asked the Union government to allow the claim for a refund made by the petitioners. The High Court noted the definition of ITC in Section 2(62) and held that by restricting the refund only to input goods, Rule 89(5) had acted ultra vires Section 54(3).
By its judgement on 21 September 2020, in Tvl Transtonnelstroy Afcons Joint Venture vs Union of India and connected cases, the division bench of the Madras High Court came to a contrary conclusion. After noticing the view of the Gujarat HC, the Madras HC declined to follow it while 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.
In its order, the Supreme Court says, “Having considered this batch of appeals, and for the reasons which have been adduced in this judgment, we affirm the view of the Madras High Court and disapprove of the opinion of the Gujarat High Court.”