UNION OF INDIA & ORS. v. VKC FOOTSTEPS INDIA PVT LTD.

The Judgment of the Court was delivered by E DR DHANANJAYA Y CHANDRACHUD, J. Index* A Introduction ...................................................................... 5 B Factual Backdrop ............................................................ 6 F C Statutory Provisions ......................................................... 8 D Submissions ................................................................... 12 D.1 Union of India .................................................... 12 D.1.1 Part I- Distinction between goods and services 12 G

D.1.2 Part II- Interpretation of Section 54(3) .............. 13 D.1.3. Part III- Legal Propositions ............................... 19 D.2 Assessees .......................................................... 21 *Ed. Note : The pagination in the Index is as per the original judgment. H

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A D.3 Rejoinder by Union of India ................................. 58 E Constitutional Scheme of GST ....................................... 60 F CGST Act ...................................................................... 68 F.1 Definitions .............................................................. 68 B F.2 Section 16 & Section 49 of the CGST Act ............ 71 F.3 Interpretation of Section 54(3) of the CGST Act... 75 F.4 Construing the proviso ............................................ 93 F.5 Constitutional validity: The ultra vires doctrine ... 102 C G Rule 89(5) ..................................................................... 111 G.1 The validity of Rule 89(5) of CGST Rules in exercise of the rule-making power under Section 164 of the CGST Act ............................................................. 112 D G.2 The vires of Rule 89(5) vis-à-vis Section 54(3) of the CGST Act ............................................................. 114 G.3 The validity of the formula prescribed in Rule 89(5)118 H Conclusion ................................................................... 134 A Introduction E

1Copy pinpoint1. Parliament while enacting the Central Goods and Services Tax Act 2017,1 has incorporated a provision for refund of tax in Section 54. Sub-Section (3) embodies a provision for refund of unutilised input tax credit2 in cases involving: F (i) zero rated supplies made without payment of tax; and (ii) credit accumulation “on account of rate of tax on inputs being higher than rate of tax on output supplies”.

2Copy pinpoint2. While envisaging a refund in the latter of the above two situations, Parliament was cognizant of the fact that ITC may accumulate G due to a variety of reasons. However, Parliament envisaged a specific situation where the credit has accumulated due to an inverted duty structure, that is where the accumulation of ITC is because the rate of tax on inputs is higher than the rate of tax on output supplies. Taking 1 “CGST Act” H 2 “ITC”

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[DR DHANANJAYA Y CHANDRACHUD, J.]

legislative note of this situation, a provision for refund has been provided A for in Section 54(3). The Central Goods and Service Tax Rules 2017 3 have been formulated in pursuance of the rule making power conferred by Section 164 of the CGST Act. Rule 89(5) provides a formula for the refund of ITC, in “a case of refund on account of inverted duty structure”. The said formula uses the term “Net ITC”. In defining the expression B “Net ITC”, Rule 89(5) speaks of “input tax credit availed on inputs”. B Factual Backdrop

3Copy pinpoint3. Writ petitions under Article 226 of the Constitution were instituted before the High Court of Gujarat and the High Court of Judicature at Madras. The petitioners before the High Court submitted C inter alia that (i) Section 54(3) allows for a refund of ITC where the accumulation is due to an inverted duty structure; (iii) ITC includes the credit of input tax charged on the supply of goods as well as services; D (iv) Section 54(3) does not restrict the entitlement of refund only to unutilised ITC which is accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies. It also allows for refund of unutilised ITC when the rate of tax on input services is higher than the rate of tax on output E supplies; (v) 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 F (vi) 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.

4Copy pinpoint4. By its judgment dated 24 July 2020 in VKC Footsteps India G Pvt. Ltd. v. Union of India4, the Division Bench of the Gujarat High Court, held that:

3 “CGST Rules” 4 R/ Special Civil Application No 2792 of 2019 H

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A “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).

5Copy pinpoint5. By its judgment dated 21 September 2020, in Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India 5 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… D (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.”

6Copy pinpoint6. The writ petitions challenging the validity of Rule 89(5) on the ground that it is ultra vires Section 54(3)(ii) were dismissed. The divergence between the views of the Gujarat High Court on the one hand, and the Madras High Court on the other, forms the subject matter of this batch of appeals. C Statutory Provisions

7Copy pinpoint7. Section 54 of the CGST Act provides for a refund of ax. Under sub-Section (1) of Section 54, a person claiming a refund of “tax and interest, if any, paid on such tax or any other amount paid” has to make an application within two years of the relevant date. Section 54(3) provides for a claim of refund of unutilised ITC. Sub-sections (1) and (3) of Section 54 provide as follows:

5 H Writ Petition Nos 8596, 8597, 8602, 8603, 8605 and 8608 of 2019

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[DR DHANANJAYA Y CHANDRACHUD, J.]

“Section 54. Refund of tax A (1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed: B Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of Section 49, may claim such refund in the return furnished under section 39 in such manner as may be prescribed. […] C (3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period: Provided that no refund of unutilized input tax credit shall be allowed D in cases other than- (i) zero rated supplies made without payment of tax; (ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies E (other than nil rated or fully exempt supplies), except supplies of goods and services or both as may be notified by the Government on the recommendations of the Council: Provided further that no refund of unutilized input tax credit shall be allowed in cases where the goods exported out of India are F subjected to export duty: Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.” G

8Copy pinpoint8. Rule 89 was originally inserted in the CGST Rules through the Central Goods and Services Tax (Second Amendment) Rules 20176,

6 Notification No.10/2017- Central Tax by the Government of India, Ministry of Finance, Department of Revenue, Central Board Indirect tax and Customs H

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A which came into force on 1 July 2017. Rule 89(4) and Rule 89(5) were in the following terms: “(4) […] (B) “Net ITC” means input tax credit availed on inputs and input services during the relevant period; B […] (E) “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under sub-section (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period; (5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula: - Maximum Refund Amount= {(Turnover of inverted rated supply of goods) x Net ITC ÷ Adjusted Total Turnover} ? tax payable on such inverted rated supply of goods Explanation:- For the purposes of this sub rule, the expressions “Net ITC” and “Adjusted Total turnover” shall have the same meanings as assigned to them in sub-rule E (4).” (emphasis supplied)

9Copy pinpoint9. On 18 April 2018, the Central Goods and Services Tax (Fourth Amendment) Rules 20187 were notified. Rule 89(5) was amended in the following terms F “(5). In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:- Maximum Refund Amount = {(Turnover of inverted rated supply G of goods and services) x Net ITC ÷ Adjusted Total Turnover} ? tax payable on such inverted rated supply of goods and services. Explanation:- For the purposes of this sub-rule, the expressions-

7 Notification No.21/2018- Central Tax by the Government of India, Ministry of Finance, H Department of Revenue, Central Board Indirect tax and Customs

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[DR DHANANJAYA Y CHANDRACHUD, J.]

(a) “Net ITC” shall mean input tax credit availed on inputs A during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules 4(A) or (4B) or both; and (b) “Adjusted Total turnover” shall have the same meaning as assigned to it in sub-rule (4).” B (emphasis supplied) The amendment was with prospective effect. Rule 89(5), as it stands at present, was substituted on 13 June 2018 by the Central Goods and Services Tax (Fifth Amendment) Rules 20188. By the amendment, Rule 89(5) was substituted with the retrospective effect from 1 July C 2017 in the following terms: “(iii) with effect from 01st July 2017, in rule 89, for sub-rule (5), the following shall be substituted namely:- “(5) In the case of refund on account of inverted duty structure, D refund of input tax credit shall be granted as per the following formula:- Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} ? tax payable on such inverted rated supply of goods and services. E Explanation:- For the purposes of this sub-rule, the expressions- (a) Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules 4(A) or (4B) or both; and F (b) Adjusted Total turnover shall have the same meaning as assigned to it in sub-rule (4).”” (emphasis supplied) The above sequence indicates that the definition of the expression G ‘Net ITC’ in Rule 89(5) originally meant “input tax credit availed on input and inputs services”. By the amendment of 18 April 2018, the definition of ‘Net ITC’ was substituted so as to mean ITC availed on 8 Notification No.26/2018- Central Tax by the Government of India, Ministry of Finance, Department of Revenue of Central Board of Indirect Taxes and Customs H

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A inputs, with prospective effect. On 13 June 2018, this definition was made applicable with retrospective effect from 1 July 2017.

10Copy pinpoint10. Before we proceed to analyse the submissions and formulate the points for consideration, it is necessary to emphasise at the outset that one of the core issues in the present batch of cases would turn upon the interpretation of the expression “inputs” in Section 54(3)(ii) of CGST Act and the definition of “Net ITC” in the amended Rule 89(5). During the course of the submissions, in the interest of maintaining clarity, Counsel on both sides used the expression ‘input goods’ while dealing with goods that are used as inputs and ‘input services’ while dealing with services that are used as inputs. We propose to use the same formulation to ensure conceptual clarity while distinguishing between goods which are used as inputs and services which are used as inputs. With this preface, we shall now proceed to deal with the submissions of the parties. D Submissions

D D.1 Union of India D.1.1 Part I- Distinction between goods and services

11Copy pinpoint11. Mr N Venkataraman, learned Additional Solicitor General 9 led the arguments on behalf of the Union Government in assailing the correctness of the decision of the Gujarat High Court (and supporting the decision of Madras High Court). Mr Venkataraman urged that: (i) Goods and services are distinct at a constitutional level. Article 366(12) of the Constitution defines goods, while Section 366(26A) defines services. Under the CGST Act, the expression ‘input’ in Section 2(59) means tangible commodities other than capital goods, while on the other hand ‘input service’ in Section 2(60) means any service used or intended to be used by a supplier for business. Hence, ‘goods’ and ‘services’ and ‘inputs’ and ‘input services’ have distinct definitions; G (ii) Article 366(12A) defines ‘goods and services tax’ to mean any tax on the supply of goods or services or both except taxes on the supply of alcoholic liquor for human consumption;

9 H “ASG”

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(iii) Article 246A, which traces the source of power of taxation and identifies the fields of taxation, empowers the Parliament, the States and Union Territories to impose simultaneous tax both on goods and services. Consequently, though goods and services are brought to tax under a common code, both the Constitution and the statute have maintained a distinction between goods and services. They remain distinct for prescription, treatment and interpretation; (iv) Section 2(62) and Section 2(63) define ‘input tax’ and ‘input tax credit’ which include taxes paid on goods (input goods) and services (input services) either under CGST, State Goods and Services Tax Act10 and Integrated Goods and Services C Tax Act 201711; (v) Input tax means a tax charged both on goods and services. These are taxes paid by a supplier on their outward supplies as defined under Section 2(83) which become inward supply for the recipient under Section 2(67); and D

(vi) The need to integrate both taxes on input goods and input services is to enable credit on a single pool for further cross utilisation on both goods and services. D.1.2 Part II- Interpretation of Section 54(3) E (i) The structure of Section 54(3) is as follows: (a) The opening clause permits a registered person to claim refund of any unutilised ITC at the end of any tax period. (b) The main clause permits: F i. a claim; ii. in the nature of refund; iii. of any unutilized ITC; and iv. at the end of the tax period. G (ii) Section 54(3) contains three provisos, out of which the first proviso falls for interpretation in this case. The three provisos share common features which indicate that these provisos 10 “SGST Act” 11 “IGST Act” H

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A are in the nature of restrictions and not conditions (or qualifications); (iii) The provisos to Section 54(3) should be construed as restrictions for the following reasons: (a) The expression employed in the main clause of Section B 54(3) is ‘claim’ whereas the provisos restrict this ambit by the use of the expression ‘allowed’. The expression ‘allowed’ appears in all the three provisos; (b) The main clause of Section 54(3) uses the expression “any unutilised ITC”. On the other hand, the expression ‘any’ C is conspicuous by its absence in all the provisos; (c) The main clause of Section 54(3) uses the expression “a registered person may claim refund” while on the other hand, the three provisos have employed a restrictive expression or a negative expression, that is, “no refund of D unutilized ITC shall be allowed”; (d) When the main clause used the expression ‘any’, this is expressly restricted by the use of the expression “no refund of unutilised ITC shall be allowed in cases other than”. In other words, the expression ‘any’ has been restricted to E “other than”; and (e) In view of the above, the provisos under Section 54(3) have to be read and interpreted as restrictions and not as qualifications; (iv) The first proviso restricts the refund of unutilized ITC only to two situations and the subsequent two provisos further restrict it to one of the categories out of the two in the first proviso. The two situations contemplated in the first proviso deal with contrasting situations with stark differences: (a) Sub clause (i) of the first proviso deals with zero rated supplies which are exports. Exports of goods and services are not taxable. Hence, the taxes paid either on exported goods or services or on the input goods/input services or both used in the export of such goods and services need to be totally refunded; H

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(b) However, sub-clause (ii) of the first proviso deals with domestic supplies which are taxable outward supplies, in respect of which Parliament has chosen to allow refund of unutilised ITC only to the extent of the ‘credit accumulated on account of rate of tax on inputs’; (v) The first proviso cannot be read as a mere qualification or eligibility for the grant of refund on the entire unutilised ITC comprising input goods and input services by a specified registered person, for the following reasons: (a) The expression used is ‘the credit’ and the accumulation is restricted only on account of ‘inputs’. This cannot be read or interpreted to include input services and capital goods; (b) The proviso limits the grant of refund only to two circumstances and hence the limitation has to be read as it is without extending it to input services and capital goods, specifically since the legislature has not included them; (c) If the intention was to allow refund of unutilised ITC on account of input services and capital goods, in addition to input goods, such an intent would have been conveyed through statutory language, which is missing; E (d) The expression ‘credit’ has to be read along with ‘inputs’ and cannot be read as to extend a refund to input services and capital goods also, which are expressly not referred to in the proviso; (e) ‘The credit’ in sub clause (ii) can go only with the expression ‘inputs’ and excludes accumulation of any credit on account of rate of tax on input services or capital goods; (f) When there is an express inclusion limited only to the credit accumulation arising out of ‘inputs’, it would not be permissible to include input services and capital goods in the face of the statutory provision. What has not been included in the statute should not be included by way of judicial interpretation; (xvi) The reason why Parliament has adopted the expression ‘unutilised ITC’ in the main part of Section 54(3) and the H

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A first proviso, but has chosen to employ only the expression ‘inputs’ is as follows: (a) There is a significant difference between the main provision and the first proviso even in the use of the expression ‘unutilized ITC’. The expression ‘any’ in the main Section is absent in the first proviso with the further limitation that refund of ‘unutilized ITC’ is limited only to two circumstances specified in the proviso; (b) The first situation deals with refund on account of zero- rated supplies which are exports where refund is granted on all the taxes paid on input goods, input services including taxes paid on export supplies. This is evident from Explanation-I to Section 54(3) where the expression refund permits the above; (c) However, when it comes to an inverted duty tax structure, the refund is limited to only one category namely, ‘credit accumulated on account of rate of tax on inputs’; (d) The expression ‘unutilized ITC’ could comprise of taxes paid both on input goods and input services, and the first proviso and the main Section necessarily have to employ the expression ‘unutilized ITC’ to take care of zero-rated supplies which are exports under the first category; (e) When it comes to an inverted tax structure, it is limited only to ‘inputs’. It is a common fact that unutilized credit arising out of input services also partakes the character of unutilized ITC; (f) Parliament has rightly used the expression ‘unutilised ITC’ both in the main clause and in the first proviso to deal with zero rated supplies and restricted refund to those arising out of ‘inputs’ when it comes to an inverted structure; G (g) Parliament could not have used the expression ‘inputs’ in the main clause and first proviso as this would act as a disability to zero rated supplies where Parliament intended to grant a refund arising out of both input goods and input services; H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

(h) Parliament has therefore appropriately employed the A expression ‘unutilized ITC’ in the main clause and the first proviso and has used the limited expression ‘inputs’ in sub-clause (ii) to the first proviso in the inverted structure; (vii) Explanation-I to Section 54(3) defines refund in three parts: B (a) When it comes to zero rated supplies on exports, it extends the refund to ‘inputs’, ‘input services’ and also taxes paid on zero rated supplies of goods or services or both; (b) When it comes to deemed exports, it restricts the refund of tax only on the supply of goods; C

(c) When it comes to inverted structure, it limits it as provided in the proviso to Section 54(3). This is one more reason to read the proviso to Section 54(3), as a restriction and not as a qualification. If the intent of Parliament was to grant a refund arising both out of input goods and input services D even in the case of inverted tax structure, it would have defined refund in Explanation-I at par with zero rated supplies and there was no need to limit it only to one situation of the credit accumulation arising on account of ‘inputs’. E D.1.3. Part III- Legal Propositions (i) Article 265 of the Constitution provides that no tax shall be levied or collected except by authority of law. There being no challenge either to the levy or collection of taxes in these cases, taxes paid into the coffers of the Union Government F or the States become the property of the Union/States; (ii) The refund of taxes is neither a fundamental right nor a constitutional right. The Constitution only guarantees that the levy should be legal and that the collection should be in accordance with law. There is no constitutional right to G refund. Refund is always a matter of a statutory prescription and can be regulated by the statute subject to conditions and limitations; (iii) Even in the case of an illegal levy or a levy which is unconstitutional, the decision of the nine judges Bench in H

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A Mafatlal Industries Limited v. Union of India12 held that the right of refund is not automatic. The burden of proof lies on the claimant to establish that it would not cause unjust enrichment; (iv) Though tax enactments are subject to Articles 14 and B 19(1)(g) of the Constitution, this is subject to two well-settled principles: (a) Discriminatory treatment under tax laws is not per se invalid. It is invalid only when equals are treated unequally or unequals are treated equally. Both under the C Constitution and the CGST Act, goods, services, input (goods) and input services are not one and the same. These are distinct species, though covered by a common code; and (b) The legislature is entitled to the widest latitude when it identifies categories of classification and unless things constituting the same class are treated differently without a rationale, the provision cannot be declared as unconstitutional; (v) The doctrine of reading down is employed to narrow down the scope of a proviso under challenge, when it may otherwise be unconstitutional. The doctrine cannot result in expansion of a statutory provision for refund which would amount to rewriting the legislation; (vi) Accepting the submission of the assessees that goods and services must be treated at par can lead to drastic consequences in terms of: (a) rates of taxes; (b) concessions, benefits and exemptions; (c) intervention in the areas of political, economic and legislative policies; (vii) Refund of taxes is one form of granting exemption;

12 H 1997 (5) SCC 536

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[DR DHANANJAYA Y CHANDRACHUD, J.]

(viii) Once a refund is construed as a form of exemption from A taxes, the provision has to attract strict interpretation; (ix) Exemptions, concessions and exceptions have to be treated at par and must be strictly construed; (x) ITC is not a matter of right and the burden of proof is on the assessee to establish a claim for a concession or benefit; B

(xi) The manner in which a proviso can be construed has been elucidated in the precedents of this Court. A proviso may not be only an exception but may constitute a restriction on the operation of the main statutory provision; and C (xii) A legislative amendment which reflects a policy choice is not subject to judicial review.

12Copy pinpoint12. Mr Balbir Singh, learned ASG has adopted the submissions of Mr N Venkataraman, learned ASG. D.2 Assessees D

13Copy pinpoint13. Mr V Sridharan, learned Senior Counsel appearing on behalf of the assessee13 submitted: (i) The assessee is, inter alia, engaged in the manufacture and supply of footwear which attracts output tax (goods and services tax14) at the rate of 5%; E

(ii) The assessee, inter alia, procures input goods such as synthetic leather, PU Polyol and input services such as job work service, goods transport agency service on payment of applicable GST for use in the course of business and avails ITC on the GST paid thereon. A majority of the input F goods and input services attract tax at the rate of 12% or 18%; (iii) The rate of GST paid by the assessee on procurement of input goods and input services is higher than the rate of tax payable on their outward supply of footwear. Therefore, G despite utilization of credit for payment of GST on outward supply, there is an accumulation of unutilized ITC in the electronic credit ledger of the assessee; 13 Appearing in SLP (Civil) No 14801 of 2020 14 “GST” H

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A (iv) The assessee applied for refund of such unutilised accumulated ITC under Section 54(3) of the CGST Act read with Rule 89(5) of the CGST Rules; (v) Rule 89(5) of the CGST Rules as originally enacted provided for refund of ITC availed on both inputs (that is input goods) B and input services and was in line with Section 54(3) of the CGST Act. Accordingly, the assessee was granted refund of such unutilised ITC; (vi) Rule 89(5) was substituted by Notification No. 21/2018- CT dated 18 April 2018 prescribing a revised formula for C determining the refund on account of inverted duty structure. The above substitution was given retrospective effect from 1 July 2017 by Notification No. 26/2018-CT dated 13 June 2018; (vii) The revised formula inter alia excludes ‘input services’ D from the scope of ‘Net ITC’ for computation of the refund amount under the said Rule; (viii) The substituted Rule 89(5) of the CGST Rules denies refund on the unutilised ITC availed on input services and allows relief of refund of ITC availed on input goods alone; E (ix) The Revenue is relying on amended Rule 89(5) to contend that refund will not be allowed on taxes paid on input services; and (x) The Revenue is allowing refund of accumulated ITC of tax paid on input goods such as synthetic leather, and PU Polyol. F Further, the Revenue is allowing accumulation of ITC paid on procurement of input services such as job work service and goods transport agency service. However, the refund of accumulated unutilised ITC paid on input services is being denied and refund already granted has been recovered from the assessee. G

14Copy pinpoint14. Mr Sridharan urged that Rule 89(5) of the CGST Rules, to the extent to which it denies refund of ITC relatable to input services, is ultra vires Section 54. The submission has been premised on the following propositions: H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

(i) GST is a destination-based consumption tax. The fundamental principle of GST laws worldwide is that it is a multistage tax. Each point in a supply chain is potentially taxed. However, suppliers are entitled to avail credit of taxes paid at an anterior stage. This feature of GST leads to its description as being a tax on value addition, with the final consumer alone ultimately bearing the tax. The GST laws enacted in India are also based on this principle; (ii) In All India Federation of Tax Practitioners v. Union of India15, this Court held that excise duty, service tax and value added tax legislation provide for taxes on value addition and are destination based-consumption taxes. These are not charges on the business but on the consumer. Though the erstwhile tax legislation, prior to the enforcement of the Constitution (One Hundred and First Amendment) Act 2016, was based on the principle of value addition and consumption tax, there was no seamless flow of credit between Central D and State levies. This anomaly was sought to be addressed by the constitutional amendment and by the legislation which has been enacted in pursuance of it; (iii) The purpose of the One Hundred and First Constitutional Amendment was: E (a) to replace a number of indirect taxes being levied by the Union Government and the State Governments; (b) to obviate and remove the cascading effect of taxes; and (c) to provide for a common national market for goods and F services. (iv) The Statement of Objects and Reasons accompanying the bill introducing the CGST Act also emphasised that there would be a seamless transfer of ITC from one stage to another in the chain of value addition; G (v) These principles reaffirmed the guidelines issued by the Organisation of Economic Co-operation and Development which emphasise that

15 2007 (7) SCC 527 H

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A (a) value added tax systems are designed to tax final consumption; (b) only the consumers should bear the tax burden; and (c) the main characteristic of a value added tax is of preserving neutrality in the value chain. B (vi) Compelling economic and fiscal realities necessitated the levy of value added tax like GST in place of traditional excise duties, service tax, sales tax and other legislation; (vii) In a tax regime which was not based on value added tax, C ensuring refund of tax paid at various stages of manufacturing would be cumbersome and complicated. It was to obviate the problems of the earlier regime that GST legislation was enacted by various countries including India to fully effectuate the principle underlying value-added destination-based consumption tax; D (viii) The situation in which the quantum of input taxes exceeds output tax is an anomaly, aberration and distortion resulting from various sources of taxes and conflicts with the fundamental principles of GST. The impact of these distortions can be revealed by practical examples involving situations such as (a) Intermediate products attracting a lower rate of tax; and (b) Intermediate products attracting a higher rate of tax. (ix) As a result, varied situations of economic distortion resulting from a cascading effect of taxes in the form of unabsorbed ITC emerged due to variations in the rate of taxes. This is against the basic tenets of GST. GST being a consumption tax, postulates that the only tax in the entire chain should be the tax charged to the end customer without any ‘sticking’ or unabsorbed ITC; G (x) Government may in the public interest impose lower rates of tax on products such as fertilizers, tractors and lower-price footwear. The objective of taxing such goods at a lower rate is frustrated if inputs for making the final products are taxed at a higher rate and no refund of unutilized credit is granted. H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

Refund of unutilised7 ITC seeks to achieve the objective of A value-added consumption-based taxation in its true sense; (xi) Cognizant of the anomaly resulting from inverted duty structures, the erstwhile State Value Added Tax legislations provided for refund of unutilized ITC, even before the GST legislation saw the light of the day; B (xii) A near perfect GST legislation provides for refund of ITC in a situation involving an inverted duty structure. The provisions for refund ensure that anomalies in tax rates do not result in distortions to the fundamental features of GST which remains a true consumption tax. ITC may accumulate for a variety of reasons including (a) inverted duty structure, that is, GST on output supplies is less than the GST on the input supplies; (b) stock accumulation; (c) capital goods; and (d) partial reverse charge mechanism for certain services; (xiii) The cascading effect or sticking credit may arise on account of higher taxes paid on input goods or input services. Refund of unutilized ITC will ensure the elimination of the cascading effect of taxes in a true sense; (xiv) Section 54(3) has been enacted to achieve the objective of removing the cascading effect of unutilized ITC. Section E 54(3) provides for refund of “any unutilised input tax credit” but the refund is available in only two situations namely, (a) zero rated supplies; and (b) inverted duty structure. The quantum of refund is provided by the main part of Section 54(3) which stipulates the refund of any unutilised ITC. This includes credit availed on input goods as well as on input services having regard to the definitions contained in Sections 2(62) and 2(63); (xv) The proviso only provides for cases in which the refund under the main provisions of Section 54(3) will be available. Once the requirement of inverted duty structure in proviso (ii) is fulfilled, the entire unutilised ITC has to be refunded. The reason why proviso (ii) defines the inverted duty structure with reference to only input (goods) vis-a-vis output supplies may be that while services (barring a few) were leviable to tax at 18 per cent, goods were subject to various categories H

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A of rates. If input services were also considered for determining inverted duty structure, refund may be required to be granted practically to all the assessees. Hence, the legislature defined inverted duty structure only with reference to ‘inputs’ (input goods). However, once a case fulfils the condition of an inverted duty structure, refund of the entire B unutilised ITC which is attributable to inverted duty structure supplies is allowed, including the credit availed on input goods and input services; (xvi) A circular has been issued on 31 December 2018, being Circular No. 79/53/2018-GST by the Central Board of C Indirect Taxes and Customs16. In a situation where GST on some inputs is higher than the rate of GST applicable on the output supply, while the rate of GST on other inputs is lower than the GST on the output supply, the circular provides that refund will be granted by taking the ITC availed on all inputs, D including input services, which attract a lower rate of tax than on output supply. The circular, in other words, does not treat Section 54(3) read with the proviso (ii) as qualifying the extent of refund but only as a pre-condition to qualify for the grant of refund; E (xvii)Proviso (ii) to Section 54(3) only lays down ‘cases’ where refund is eligible but it does not define the quantum of refund. This will be evident from the following: (a) The quantum of refund is provided in the main segment to Section 54(3). The expression “any” unutilised ITC means all unutilised ITC; (b) The definitions of ‘input tax credit’ under Section 2(63) and ‘input tax’ in Section 2(62) would indicate that both input goods and input services are included; (c) The proviso indicates the ‘cases’ in which refund will be eligible. The expression ‘cases’ means situations or circumstances; (d) Clause (ii) of the first proviso commences with the expression “where” which signifies that what follows will be a situation or aspect of something; 16 H “CBIC”

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(e) The statutory provision must be read as a whole and in the context of other provisions. All the three provisos refer to cases in which refund is allowed or, as the case may be, not allowed and do not refer to the quantum of refund; (f) Clause (ii) of the proviso refers to “the credit”. The use of the definitive article clearly indicates that the reference is to unutilised ITC already mentioned in the main part of Section 54(3). The expression ‘the’ signifies one particular sum or credit and any attempt to bifurcate it into credit on input goods and input services will produce anomalous results; C (g) The expression ‘accumulated’ signifies the credit balance which is unutilized after credit has been availed and utilised for making payments on output tax on outward supplies; (h) Clause (ii) of the proviso uses the words “on account of” which means by reason of or because of. By stipulating that the proviso provides for the quantum of refunds, the Revenue is attempting to substitute the words “on account of” with “to the extent of”; (i) The submission of the Revenue cannot be accepted because clause (ii) of the proviso refers to the rate of tax. To accept the interpretation of the Revenue, the words “and only to the extent” will have to be added to the proviso; (j) Though the CGST Act makes a distinction between ‘inputs’ and ‘input services’, this is only relevant at the stage prior to the availment of credit, namely to determine the eligibility of credits under Sections 16 and 17 of the CGST Act. After the credit has been availed, it goes in a common pool from which the credit is utilised for making payment for output tax. Utilization happens from the entire credit available for the tax period in this common pool and it cannot be co- related to ITC availed on particular input goods or input services. The balance is the unutilised ITC at the end of the tax period. At this stage, it is not possible to determine whether the balance pertains to ITC availed on input goods or on input services; and H

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A (k) Alternatively, the words, “rate of tax on inputs” must be read to include whatever goes in the making of output supplies namely, both input goods and input services. (xviii) Explanation (1) to Section 54 covers four cases of refund: (a) refund of tax paid on zero-rated supplies of goods or B services; (b) refund of tax paid on input goods or input services used in making zero rated supplies (where no output tax is paid); (c) refund of tax on the supply of goods regarded as deemed exports; (d) refund of unutilised ITC under sub- Section (3). In the case of (a) above, the legislature has used the expression “goods or services”; in the case of C (b), “inputs or input services”; in the case of (c), “goods or services”. However, in respect of refund of unutilised ITC, it has only been provided that the refund will be granted as provided under sub-Section (3). The explanation does not restrict the refund only to credit availed on input goods in the case of an inverted rated structure; (xix) Rule 89(5) by confining refund of unutilised ITC on input goods and denying refund of ITC on input services curtails the ambit of Section 54(3) and is hence ultra vires: (a) Rule 89(5) originally provided for refund of ITC paid both on input goods and input services but it was amended with retrospective effect to restrict refund only to ITC availed on input goods; (b) After the amendment in terms of the formula, the ratio of proportionate turnover is applied only to ITC availed on input goods. However, after arriving at the proportionate value, the entire amount of tax paid on output supplies is deducted. The formula erroneously assumes that the entire output tax will be paid from ITC availed on input goods and the credit on input services will not be utilised for payment of output tax. If the rule took into computation ITC availed on both input goods and input services, both parts of the formula would be comparable and would result in a correct amount of unutilised ITC attributable to an inverted duty structure. The rule is ultra vires Section 54(3) since it restricts the computation of refund only by taking H

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into account the credit availed on input goods. Section 54(3) A provides for entitlement to refund, its quantum and the cases in which the refund is to be granted. Section 54(3) being a code in itself, there is no reference to a provision enabling the Government to frame rules in this regard. Hence, with reference to Section 54(3), any exercise of B the rule making power is unwarranted; (xx) The general rule making power conferred by Section 164(1) is to carry out the provisions of the CGST Act and cannot save the offending provisions of the Explanation to Rule 89(5): C (a) Accumulation of credit may occur due to various reasons such as absence of outward supplies in a tax period, supplies made at a loss, bulk purchase of inputs, excess opening balance of credit, and change in the rate of tax during the tax period; D (b) A rule which provides for the identification of unutilised ITC which is attributable to supplies having an inverted duty structure and bifurcating it from credit accumulating due to other causes would be for the purpose of carrying out the provisions of the CGST Act; E (c) A rule may provide a proportionate formula for determining the pro-rata amount of credit relatable to the inverted duty structure vis-a-vis total turnover. Such a formula may be needed where the assessee is making supplies involving an inverted duty structure as well as supplies not involving it; F (d) Where the entire supplies made by assessee are by way of export, the entire ITC is refundable under proviso (i). However, where an assessee is engaged in exporting goods and in domestic supplies, the assessee should be eligible for claiming refund from ITC attributable to exports while not being entitled to cash refund on ITC relatable to domestic G supplies. In such cases where an assessee makes both domestic supplies as well as exports, a formula may be required to estimate the ITC relatable to exports which alone can be refunded to the assessee in a similar manner if an assessee has output supplies. Where an assessee has output H

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A supplies having an inverted duty structure and output supplies not having an inverted duty structure, refund is to be given only for the former and not for the latter. The formula would be required for that purpose. Rule 89(4) relating to export adopts pro-rata of export turnover to total turnover as the basis. Rule 89(5) is similarly enacted to deal with an assessee having inverted duty structure supplies and other supplies not having an inverted duty structure. This should be the sole purpose of the formula for Rule 89(5); (e) However, Rule 89(5) in the garb of fixing a formula for determining pro-rata the amount of credit relatable to the inverted duty structure vis-à-vis total turnover has restricted the refund to ITC on input goods by denying it on input services. This has been done by defining ‘Net ITC’ to mean ITC availed on all ‘inputs’, thus overlooking ITC relatable to input services. Such a rule cannot be treated as one for carrying out the purpose of the CGST Act; (xxi) A delegated legislation can be struck down as ultra vires of a principal statute. The laying of delegated legislation before Parliament does not confer any validity on such ultra vires rules. The process of laying rules before E Parliament and making them subject to modification or annulment cannot be equated with legislation which has the assent of the President, or the Governor, as the case may be. The doctrine of ultra vires will apply even if a resolution is passed by Parliament approving or modifying the rules. Though, the CGST Rules have been laid before F Parliament, any part which is ultra vires the CGST Act is liable to be struck down; (xxii) The fact that the rules have been recommended by the Goods and Services Tax Council17 does not elevate them to the status of a statute enacted by the legislature. The G recommendations made by the GST Council under Article 279A(4) of the Constitution take effect only after they have been incorporated in the legislation passed by the Parliament or the State legislature. The CGST Act and SGST Act have been enacted on the recommendations of the GST H 17 “GST Council”

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Council, in exercise of the power under Article 279A, while the CGST Rules have been framed on the recommendations of the GST Council in exercise of the powers conferred by Section 2(87) and Section 164 of the CGST Act. There is a clear distinction between laws enacted by the legislature and delegated legislation. A rule made on the recommendation of the GST Council must be in consonance with the relevant legislation, failing which it would be ultra vires; (xxiii) Section 54(3) grants a refund of the entire unutilised ITC in the case of an inverted duty structure irrespective of whether the credit pertains to input goods or input services. C The amendment made in Rule 89(5) which restricts the refund of unutilised ITC availed only on ‘inputs’ is ultra vires Section 54(3); and (xxiv) By virtue of the doctrine of severability that portion of Rule 89(5) which is ultra vires may be struck down. This would not constitute judicial legislation. The challenge to the vires of Rule 89(5) is only because of the definition of ‘Net ITC’ in the explanation to the rule. The explanation defines net ITC to mean ITC availed on inputs during relevant period. Section 54(3) allows refund of any unutilized ITC and not only credit on input goods. Consequently, only if the expression “on inputs” employed in Explanation (a) to Rule 89(5) is struck down, will Rule 89(5) be in line with Section 54(3).

15Copy pinpoint15. Mr Sujit Ghosh, learned Counsel18 submitted that F (i) The meaning of the expression “unutilised ITC” is credit on goods as well as services (which remains after paying output tax) in view of the definitions contained in Section 2(63) read with Section 2(62) of the CGST Act; (ii) In Explanation-I to Section 54, the expression ‘refund’ qua G zero rated supplies (a) is an inclusive definition which refers to unutilized ITC qua Section 54 (3); 18 Appearing in SLP (Civil) Nos 1552-1557 of 2021 H

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A (b) covers a refund on both input goods and input services for the purpose of Section 54(3); (c) in relation to zero rated supplies, the expression refund in Explanation-I to Section 54 is clarificatory though it uses the words “inputs” and “input services”; B (d) The right to refund in the case of zero-rated supplies arises in Section 16(3)(a); (e) The provision uses the phrase “refund of unutilised ITC in accordance with Section 54”; and

C (f) The meaning of the term ‘refund’ for both export and domestic supplies is one and the same. (iii) The construction of Section 54(3) must be based on the following circumstances: (a) The substantive part deals with the quantum of refund. The D proviso is not a restriction but merely prescribes threshold conditions; (b) Threshold conditions are evident from the use of the expression “in cases”; (c) Each of the three provisos lays down (i) situations; and (ii) E conditions, as evident from the following table:

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(iv) The object and purpose of Section 54(3) must be borne in A mind: (a) The purpose of the provision is to give effect to the doctrine of equivalence or neutrality which is the basic objective of the GST and this is sought to be achieved by granting seamless credit through Section 16; B (b) The legislative background and preparatory material duly support the purpose of the legislation; (c) The State does not want the taxpayers to suffer the ill effect of tax cascading solely because of its decision to offer a reduced rate of tax on outputs, relative to the tax rate on C inputs; (d) In the case of the petitioner which is engaged in providing services to Chennai Metro Rail, the original rate of output tax used to be 18 per cent while the input tax on goods and services was between 18 per cent to 28 per cent. As a D result of Notification No. 1/2018 and a corresponding State notification, the rate of tax on output supplies, namely construction of mono rails and metro rails, was reduced to 12 per cent; (e) Section 54(3) is not intended to cover a situation where the inverted duty structure is created by assessee due to its own actions such as discount/distress/non-supply as distinguished from the rate structure created by the State; (f) The object of achieving tax neutrality is sought to be implemented for the first time through the anti-profiteering measure embodied in Section 171; (v) The international jurisprudence on GST and tax neutrality postulates that such taxes are not a permanent cost to the business and that businesses are pass through entities. The essential character is of an economically neutral tax through G a seamless flow of credit; (vi) A contextual interpretation of Section 54(3) must look at the overall scheme of the statute. The substantive part of Section 54(3) deals with the quantum of credit which is amplified by three attributes: H

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A (a) it connotes a finite sum and thus a quantum, since a time period is prescribed for identifying such quantum by the use of the phrase “at the end of any period”; (b) Section 54(3) needs to be read contextually with sub- Sections (4), (5) and (6) of Section 49 and Rule 86(3) and B Rule 89(3); and (c) Both the GST Council and the Union Government also understood that the quantum of refund was the entire unutilised ITC and not only ITC accumulated on account of input goods. This is evident from Notification No. 5/2017 C dated 28 June 2017. If the exception contemplated in clause (ii) of the first proviso to Section 54(3) contemplates denial of the entire basket of unutilised ITC (as argued by the State) a fortiori the first part of clause (ii) should be presumed to include refund of the entire basket of unutilised credit. This is because unless the first part of clause (ii) did D not entitle refund of the entire basket of ITC, carving out an exception for denial of the entire basket of ITC in the latter part would be absurd. (vii) The expression ‘claim’ means a demand made of right, calling upon another to pay something which is due. E Accordingly, a claim in the context of Section 54(3) is a demand for enforcement of a right of refund which becomes due. The entitlement to the right is not through the process of allowance of the claim but instead, the enforcement of the right is through the process of allowance. The F entitlement to the right of the entire basket of credit accrues from the substantive provision and its enforcement happens through the proviso; (viii) The expression ‘allowed’ should be interpreted to mean verification of the claim and its sanction. Allowed cannot G mean the ‘creation of an entitlement’ or else the main provision of Section 54(3) would become redundant; (ix) The phrase “wholly on account of” is conspicuous by its absence in proviso to Section 54(3);

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(x) The absence of the word ‘any’ in the proviso is not fatal. A Despite the absence of ‘any’, the words “unutilised ITC” refer to credit on goods and services both; (xi) The proviso to Section 54(3) merely prescribes the condition and does not deal with the quantum of refund since the quantum is prescribed by the substantive provision. The B proviso is not an exception to the substantive part since it makes a reference to the substantive condition to be satisfied. Both must be construed harmoniously. Thus, the main provision of Section 54(3) confers an entitlement to the refund of the entire unutilised ITC and the proviso only seeks to provide the condition and not to obliterate the main C provision. The better view is that the entitlement is created of the quantum of refund by the main provision while the proviso only indicates the conditions to be satisfied; (xii) The convergence of credit takes place at the stage of availing and not at the stage of utilization; D

(xiii) The CGST Act contemplates that conditions and restrictions are two distinct concepts; (xiv) If the proviso was meant to deal with the quantum of refund, Parliament would have separately carved out a substantive provision for zero rated supplies and a separate provision for domestic supplies. Since that has not been done, both cases derive their entitlement to refund of unutilised ITC through the substantive provision; (xv) Section 54(3) is not akin to an exemption but is aimed at achieving tax neutrality; (xvi) Reliance on the decision of the nine judge Bench in Mafatlal Industries Limited v. Union of India (supra) is out of context since what is being claimed as a refund is not contrary to the statutory drill, but a refund through an appropriate construction of the statute; (xvii) The main submissions, in summation, are that: (a) The expression ‘input’ in the proviso if read contextually, and not by the strict statutory definition, would cover both input goods and input services; H

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A (b) Grammatically ‘input’ covers labour and material and is opposite to ‘output’; (c) Use of the word “output supplies” as opposed to the defined expression “outward supplies” (Section 2(83)) emphasises the legislative intent to use common parlance words; B (d) The substantive part of Section 54(3) should be construed to provide for the quantum of refund of the entire basket of credit and the proviso should be construed merely as a threshold condition that an “inverted duty structure” should exist qua goods; C (e) If the above propositions are not acceptable, there would be an invidious discrimination between input goods and input services violating Articles 14 and 19; and (f) The only way to save the provision in such a case is by (i) reading down the word “input” in the proviso to include both goods and services or (ii) interpreting the proviso as laying down conditions and the quantum of refund being prescribed by the main part of Section 54(3); or (iii) striking down/severing the offending portion; (xviii) The doctrine of reading down the words of the statute to save its constitutional validity also includes reading up. If two interpretations are possible, the one which ensures that the provision is constitutionally valid must be adopted. Even otherwise, if the phrase “on inputs being higher than rate of tax on output supplies” is struck down, the impermissible classification between input goods and input services can be severed, thereby enlarging the class. Under such circumstances Section 54(3) as re-cast should read as follows: “(3) Subject to provisions of Sub-section 10, a registered person may claim refund of any unutilized input tax credit at the end of any tax period:- PROVIDED THAT no refund of unutilized input tax credit shall be allowed in cases other than- (i) Zero rated supplies made without payment of tax; H

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(ii) Where the credit has accumulated on account of rate of tax (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council.” (xix) All registered persons demanding refund on account of inverted duty structure for input goods and input services form a part of the same class and seek equality of privileges in terms of Article 14: (a) Class legislation i. The class consists of all registered persons possessing unutilised ITC whether or not they are engaged in domestic supplies or exports; ii. The species consists of (i) exporters and (ii) domestic suppliers where unutilised credit arises due to an inverted duty structure; iii. Discrimination inter se the species or sub-species of the same class would be a class legislation which is hit by Article 14; iv. To form a part of the same class, the claimant’s position should be substantially similar or in like circumstances, and conditions need not be identical; and v. In order to ascertain whether the persons are similarly placed one must look beyond classification and into the purpose of the law. F (xx) Goods and services, though defined separately, are treated substantially in a similar manner in several aspects both in the Constitution and in the CGST Act; (xxi) In examining discriminatory treatment, it is the real effect of the provision which must be considered: G (a) The real effect of the provision is to create an economy which does not perpetuate a harmonized structure of GST or a harmonized national market for goods and services, which is contrary to the constitutional object of GST as provided in Article 279A(6); and H

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A (b) The effect that goods are tangible while services are intangible does not bear any reasonable relation to the object of the legislation or to Article 279A(6). According to the submission, equal laws in respect of refunds of taxes in cases involving an inverted duty structure would have to be applied to everyone in the same situation whether dealing in input goods or input services. Since the purpose of GST is to achieve tax neutrality, equivalence and anti-profiteering, their position is substantially the same. The taxable event, person, measure of tax, machinery, penal and prosecution provisions are substantially the same. Hence the denial of the privilege of refund to input services is arbitrary. The classification which is found to be valid in a given frame of reference may be invalid in a different frame. From a revenue harvesting perspective, goods and services may be treated as different. However, from the perspective of neutrality and achieving a true consumption tax, goods and services cannot be treated differently; (xxii) The limitation on the power of judicial review of tax legislation on grounds of ‘wide latitude’ is subject to exception. The submission is that after treating tax on input goods and input services in an identical fashion by granting credit (to achieve neutrality) and making the entire credit as a part of homogeneous basket, granting refund to input goods and not to input services (from that basket) is a colourable device to set at naught the doctrine of neutrality. The State having reduced the rate of tax on output supplies F (leading to an inverted structure) the intent behind the refund was to reduce the tax burden on the consumer. Denying refund on input services would lead to an indirect impact on the very consumer that the State wanted to benefit in the first place. Moreover, the State has made no distinction between input goods and input services at the time of granting G credit, thereby declaring an intent to achieve tax neutrality. The denial of refund on input services obliterates that intent and runs contrary to the purpose of the legislation; and (xxiii) Denial of interest in the case of input services would be an unreasonable restriction and would not be saved by Article H 19(6).

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16Copy pinpoint16. Mr Arvind Datar, learned Senior Counsel19 urged the following submissions: (i) An interpretation of Section 54(3) first proviso (ii) which leads to disallowance of credit on input services is impermissible as, firstly, Articles 269A and 279A introduced by the One Hundred and First Constitutional Amendment seek to harmonise goods and services and remove the cascading effect of taxes. Secondly, the Statement of objects and reasons associated with the constitutional amendment and the Bill introducing the CGST Act emphasised the need to treat goods and services as one combined category. The concept of one nation one tax introduced by GST laws cannot be ignored only at the time of refund; (ii) The proviso to Section 54(3) speaks only of categories of cases where refund would be available. It does not speak of a restriction on the quantum of refund. This is for the following reasons: D

(a) The quantum is determined by the main sub-section (3), which speaks of “refund of any unutilised input tax credit”; (b) The first proviso employs the word “cases” [“no refund of unutilised input tax credit shall be allowed in cases other than”] thus making it clear that it only lists categories of cases, and does not deal with quantum of credit; (c) The first proviso does not mention “credit to the extent of” or “credit of an amount equal to” or any other such wording indicative of quantum; (d) Where the legislature intended to advert to the quantum, it has used the words “amount claimed as refund” in the 4th proviso – such is not the phrase employed in the first proviso; G (e) The second and third provisos too refer only to ‘cases’ – it is thus clear that first, second and third provisos are intended to deal with cases and are in nature of conditions, while it is only the fourth proviso which adverts to the 19 Appearing in SLP (Civil) No 589 of 2020 H

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A quantum and there again not to restrict the quantum but only to refer to the amount claimed as refund under the main sub-section (3); and (f) It has been the Union Government’s case that every word has been carefully chosen in Section 54(3) first proviso B (ii). It follows that where the provision speaks the language of categories (i.e. ‘cases’) and not the language of quantum (i.e. ‘amount’), it cannot be read as any restriction of quantum. (iii) The word ‘inputs’ in the first proviso (ii) of Section 54(3) C refers to the aggregate of goods and services that are used in output supplies. In the context of the first proviso (ii), the word ‘inputs’ has not been used to refer only to input goods. The word employed in the proviso is “input(s)” whereas definition of ‘input’ under Section 2(59) refers to goods alone; D (iv) The accumulation (of ITC) is because the total GST on all the inputs (goods or services or both) is more than the GST payable on the output supplies. The reference is to all the inputs used to produce the output supplies;

E (v) The word “inputs” in Section 54(3) first proviso (ii) cannot be restricted to goods because the CGST Act/ SGST Act treats goods as services. For instance, transfer of right in goods without transfer of title is deemed as “Supply of Services” as per Clause 1(b) of Schedule II, which reads as follows: F “b. any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services;” (vi) Similarly, “Works Contract” as defined in Section 2(119) of the CGST Act is deemed as per Clause 6(a) of Schedule G II as “Supply of Services” although it involves the supply of goods. Section 2(119) and the relevant portion of Schedule reads thus: “Section. 2(119) “works contract” means a contract for building, construction, fabrication, completion, H

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erection, installation, fitting out, improvement, A modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract” B Clause 6(a) of Schedule II provides: “6. Composite supply The following composite supplies shall be treated as a supply of services, namely:— C works contract as defined in clause (119) of section 2.” (vii) Further, Article 366(29A) of the Constitution, which provides for tax on sale or purchase of goods and which treats six kinds of supplies as deemed sales of goods, pertains to and is part of the erstwhile Entry 54 of List II which deals only D with goods. Article 366(29A) reads as follows: “(29A) tax on the sale or purchase of goods includes (a) a tax on the transfer, otherwise than in pursuance of a contact, of property in any goods for cash, deferred payment or other valuable consideration; E (b) a tax on the transfer of property in goods (whether as goods or in some other form) invoked in the execution of a works contract; (c) a tax on the delivery of goods on hire purchase or any system of payment by instalments; F

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated G association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or H

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A any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;” (viii) Chapter V (Section 16 to 21) of the CGST Act does not make any distinction between credit of input tax on goods or services. Under Section 17 of the CGST Act, the input tax on both the goods and services used in exempt supplies or other classes of supplies specified therein, are not permitted to be availed as ITC. The remaining/ balance input tax is eligible to be availed as ITC, which remains in the electronic credit ledger of the taxpayer. After utilizing such ITC in terms of Section 49 of the CGST Act (towards output GST on supply of goods or services or both), which too makes no distinction between ITC accumulated on account of input goods or input services, the balance is to be refunded in accordance with Section 54(3) of the Act. The relevant portion of Section 49 reads thus: E “49. […] (6) The balance in the electronic cash ledger or electronic credit ledger after payment of tax, interest, penalty, fee or any other amount payable under this Act or the rules made thereunder may be refunded in accordance with the provisions of section 54’’ (ix) There is no distinction between ITC on goods or services either at the time of availing or taking of the credit or at the time of utilization of credit. Therefore, it could not have been the intention of the Parliament to differentiate between the two only at the time of refund in the case of an inverted duty structure envisaged under clause (ii) to the first proviso to section 54; (x) Without prejudice to the above submissions and assuming that the words “inputs” means only input goods and not input services, it is stated that even proceeding on the basis H

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that the use of the words “on account of” suggests the A requirement of a causal relationship between the higher rate of input goods and the accumulation of credit, once such a relationship is present, then the entire accumulation is available as refund, rather than just the portion relatable to input goods. To elaborate: B (a) Parliament did not state “the credit has accumulated solely/ only/entirely on account of rate of tax on inputs being higher than the rate of tax on output supplies.”; (b) Thus, all that is required is that there is accumulation and that the tax on input goods is higher than the output supplies. C If these two criteria are met, it follows logically that at least some portion of the accumulation would be on account of the higher rate of input services; and (c) Thereupon, the entire accumulation would be available as refund in line with the main sub-section (3); and D (xi) The impugned notifications/delegated legislation, Notification No. 21/2018-CT (amending Rule 89(5)) dated 18 April 2018 and Notification No. 26/2018 (retrospectively amending Rule 89(5)) dated 13 June 2018, by disallowing the refund of ITC of tax on input services in an inverted duty structure E scenario is not only ultra vires Section 54(3) proviso but also beyond the scope of powers of the delegate i.e. the Central Government, because such a restriction is a typical policy change which could not have been done through a delegated legislation. F

17Copy pinpoint17. Appearing on behalf of intervenor, Mr G Natarajan, in the course of his submissions urged (for the purpose of his submissions) that he does not dispute the position that under Section 54(3) read with rule 89(5), refund of ITC accumulating only on account of “input goods” is eligible for refund and the credit accumulated on input services is not entitled for refund. Based on this hypothesis, the submissions of the G learned counsel are thus: (i) The formula which has been prescribed in Rule 89(5) seeks to identify the quantum of ITC availed on inputs attributable to the outward supplies having an inverted rate structure. From the quantum of ITC on inputs, the tax payable by the H

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A supplier on the supplies having an inverted rated structure is reduced to arrive at the quantum of the credit accumulating on account of the inverted rate structure, which is available for refund; (ii) In the formula which is prescribed under Rule 89(5), while reducing the “tax payable on such inverted rated supply of goods or services” the tax payer should be allowed to first utilise the ITC accumulated on account of input services, which is otherwise not eligible for refund; (iii) If the formula prescribed under Rule 89(5) is not read down in this manner, it will lead to gross inequality between taxpayers having only inverted rated supplies and taxpayers who also have other supplies; and (iv) The formula in Rule 89(5) should hence be read down by stipulating that while calculating the refund entitlement as the difference between Net ITC and tax payable on such supplies having inverted rated structure, the tax payable after utilising the ITC availed on input services attributable to inverted rate supplies for payment of the tax should be reckoned.

18Copy pinpoint18. During the course of his oral submissions Mr Natarajan further elaborated on the above submissions by urging that (i) Rule 89(5) suffers from the vice of treating unequals equally. This happens because a discrimination results between assessees who have only inverted rated supplies and those who have other supplies; (ii) ITC is available both on input goods and input services; (iii) At the end of every tax period, it is possible to note how much ITC has arisen from input goods or input services. However, once a credit in the electronic ledger is utilised, it is not possible to bifurcate what remains between input goods and input services; (iv) In the above backdrop, the manufacturer should be allowed to utilise the ITC on input services first for the payment of taxes; and H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

(v) The formula, as it stands, presumes that the outward tax A liability is paid out of the ITC accumulated only on account of input goods. Thus, what is granted by the statute in Section 16 is indirectly taken away by the formula prescribed in the rule. Thus, an order of utilization of credit should be provided for payment of taxes to avail of credit on input services. In B other words, in the formula in Rule 89(5) the following words should be read in at the end: “after utilising the input tax credit on input services pertaining to such inverted rate supply of goods and services.”

19Copy pinpoint19. Appearing for another intervenor20, Mr Shraff, learned Counsel submitted that- C

(i) If the Explanation (a) to Rule 89(5) is ultra vires Section 54(3), unutilised ITC should include capital goods in addition to input goods and input services; (ii) The electronic ledger makes no distinction between input D goods and input services. The credit arises under integrated tax, central tax and state tax. The electronic ledger represents a collective credit of input goods, input services and capital goods; (iii) The inequality arises because small and medium enterprises E (SMEs) with one product, facing an inverted rate structure, would get a lesser amount while availing refund whereas large companies with multiple products would get refunds violating Article 19(1)(g); and (iv) The retrospective amendment to Rule 89(5) takes away vested or accrued rights.

20Copy pinpoint20. Mr Uchit Sheth, learned Counsel21 has urged the following submissions: (i) Once tax credit is claimed and credited into the electronic credit ledger, it forms a consolidated pool of credit, making it impossible to segregate into credit for input goods and credit for input services. Hence, it is not possible to ascertain

20 IA 56717/2021 21 Appearing in SLP (Civil) Nos 2973 of 2021, 16003 of 2020, 677 of 2021 and 1340 of 2021 H

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A the source of unutilized ITC. The proviso to Section 54(3) only lays down a condition precedent for claiming ITC and once the condition is fulfilled, then refund is admissible on the entire amount of unutilized input ITC; (ii) The amended formula in Rule 89(5) stipulates maximum B refund permissible by deducting output tax from the Net ITC qua inputs goods. In other words, it is presumed that output tax is first adjusted against ITC pertaining to input goods and thereafter qua input services. There is no basis for such hierarchy in utilization of tax credit and the anomaly arises because of an incorrect interpretation of Section 54(3) C of the Act by the rule making authority; (iii) Section 49(6) of the Act provides that the balance in the electronic cash ledger or electronic credit ledger after payment of tax, interest, penalty, fee or any other amount payable is to be refunded in accordance with Section 54. D The legal obligation is to refund the balance in the ledger if the conditions specified in Section 54 are fulfilled. There is no legal basis for the artificial dissection of such a balance; (iv) If the rate of tax on inputs is higher than the rate of tax on output supplies, the entire unutilized ITC is “on account” of E such circumstance and the entire balance of tax credit is required to be refunded. The expression ‘on account of’ cannot be read to mean ‘to the extent of’ particularly when it is not possible to compute the unutilized ITC attributable to input goods or services; F (v) There are two different connotations of the term ‘input’. The first distinguishes it as goods vis-a-vis services while the second distinguishes it from output. The expression ‘input tax’ and ‘input tax credit’ have been defined to include tax in respect of both goods as well as services and there is G no phrase called “input service tax credit”. The expression ‘inputs’ in the proviso to Section 54(3) has been used in the second sense to distinguish it from output; and (vi) GST is a destination-based consumption tax and the imposition of the tax is on supply. A supplier is liable to pay tax only to the extent it is payable on the output supply of H