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In an eight part judgement the Supreme Court on Monday finally settled the confusion that engulfed businesses over refund of unutilised input tax. The Bnech consisting of Justice DY Chandrachud and MR Shah, held that even though the formulas enumerated under CGST Act might have some anomalies, the Supreme Court is not in a position to strike down a fiscal rule, duly passed by the legislature.

The present writ petitions were filed under Article 226 of the Constitution the High Court of Gujarat and the High Court of Judicature at Madras. The petitioners before the High Court submitted inter alia that,

1. Section 54(3) of CGST Act  allows for a refund of ITC where the accumulation is due to an inverted duty structure;
2. ITC includes the credit of input tax charged on the supply of goods as well as services;
3. Section 54(3) does allows for refund of unutilised ITC when the rate of tax on input services is higher than the rate of tax on output supplies;
4. While Section 54(3) allows for a refund of ITC originating in inputs as well as input services, Rule 89(5) is ultra vires in so far as it excludes tax on input services from the purview of the formula; and
5. In the event that Section 54(3) is interpreted as a restriction against a claim for refund of accumulated ITC by confining it only to tax on inputs, it would be unconstitutional as it would lead to discrimination between inputs and input services. 

Different views of Gujarat and Madras High Court:

By its judgment dated 24 July 2020 in VKC Footsteps India Pvt. Ltd. v. Union of India , the Division Bench of the Gujarat High Court, held that:

“Explanation (a) to Rule 89(5) which denies the refund of “unutilised input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017.”

The High Court therefore directed the Union Government to allow the claim for refund made by the petitioners before it, considering unutilised ITC on input services as part of “Net ITC” for the purpose of calculating refund in terms of Rule 89(5), in furtherance of Section 54(3).

WHEREAS, the Madras High Court via its decision dated 21 September 2020, in Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India and connected cases the Division Bench of the Madras High Court came to a contrary conclusion, after having noticed the view of the Gujarat High Court, which it has declined to follow. The Madras High Court has concluded that

“63… (1) Section 54(3)(ii) does not infringe Article 14.

(2) Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power.”

Supreme Court’s View

The Supreme Court while upholding the validity of Section 54(3) stated that:

 “When there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted. Such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions. If the judiciary were to do so, it would run the risk of encroaching upon legislative choices, and on policy decisions which are the prerogative of the executive.”

However, the Supreme Court suggested the Central Government take steps to fix the anomalies pointed in the formula under Section 89(5). Further, the Supreme Court while upholding the interpretation of Madras High Court stated that:

 “...this Court has only intervened to read down or interpret a formula if the formula leads to absurd results or is unworkable. In the present case however, the formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on 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 Mr Natarjan and Mr 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.”

The Supreme Court held that it’s not the Court’s decision to broaden the definition of ‘input’ to mean services as well, as argued by the assesses.

In lieu of the above the Supreme Court set aside the ruling of the Gujarat High Court, while upholding the ruling of Madras High Court. The Court stated that all appeals from Madras High Court ruling are dismissed, while appeals against the Gujarat High Court decision ought to be allowed.

Case Title: [Union of India v. VKC Footsteps India Private Ltd]
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