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  • Rule 89(5) of CGST Rules upheld by Supreme Court.

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Rule 89(5) of CGST Rules upheld by Supreme Court.

Courtesy/By: Aman Jaisawal  |  13 Sep 2021     Views:525

The Supreme Court on Monday upheld the validity of Rule 89(5) of the Central Goods and Service Tax Rules, 2017 (CGST Rules) which prescribes a formula excluding the refund of ‘unutilized input tax’ paid on ‘input services’ as part of ‘input tax credit' (ITC) [Union of India v. VKC Footsteps India Private Ltd].

A Bench of Justices DY Chandrachud and MR Shah held that while the formula suffers from anomalies, it cannot be a ground to strike down a fiscal rule which has been framed in exercise of the power of delegated legislation.

The Court held the Rule and overturned a 2020 judgment of the Gujarat High Court which had held that Rule 89(5) was ultra vires Section 54 (3) of the CGST Act, 2017.

The Court also affirmed the Madras High Court ruling in Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India in this regard.

Section 54(3) embodies a provision for refund of unutilized ITC in cases involving: (i) zero-rated supplies made without payment of tax; and (ii) credit accumulation “on account of rate of tax on inputs being higher than the rate of tax on output supplies i.e. an inverted duty structure.

Rule 89(5) provides a formula for the refund of ITC, in “a case of refund on account of inverted duty structure.

Section 54(3) does not restrict the entitlement of refund only to unutilized 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 unutilized ITC when the rate of tax on input services is higher than the rate of tax on output supplies;

However, while Section 54(3) allows for a refund of ITC originating in inputs as well as input services, Rule 89(5) excludes tax on input services from the purview of the formula.

This formed the crux of the challenge instituted before Gujarat and Madras High Courts.

The Gujarat High Court ruled that Rule 89(5) to the extent it denies the refund of “unutilized input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires Section 54(3).

The Madras High Court, however, came to the contrary conclusion in Tvl. Transtonnelstroy Afcons Joint Venture after having noticed the view of the Gujarat High Court, which it declined to follow.

Before the Supreme Court, it was contended on behalf of the assessees that the formula creates a distinction between suppliers having a higher component of input goods than those having a higher component of input services, and must be read down accordingly.

Additional Solicitor General N Venkataraman, appearing for the Central government, conceded that certain inadequacies might exist in the formula.

However, he sought to justify the need for a formula in Rule 89(5). The ASG submitted that under the scheme of the CGST Act, the accumulated ITC arising out of input goods and input services is booked into the electronic credit ledger and is to be utilized thereafter for payment of tax on outward supplies on goods and services in accordance with Section 49 of the CGST Act. Once payments are made from the electronic ledger, the remaining quantum of unutilized ITC becomes one homogeneous nucleus and it is impossible to attribute the unutilized ITC to its source, that is, it cannot be identified whether the balance unutilized ITC is arising from input goods or input services.

In order to bifurcate the unutilized ITC into input goods and input services for the purpose of granting refund in accordance with Section 54(3)(ii) on ITC on inputs, Rule 89(5)3 has resorted to prescribing a formula to legally dissect the unutilized ITC. The ASG urged that the prescription of formulae to artificially determine refund or utilization is a common practice in the field of taxation and was used prior to the enactment of the CGST Act in MODVAT/CENVAT Rules for determining the quantum of eligibility of credit. Another instance is Rule 42 and 43 of the CGST Rules 2017 which provide specific formulae in restricting the ITC when a registered supplier uses input goods, input services, and capital goods for purposes of business and other than business purposes, he pointed out.

Having justified the need for a formula, the ASG then argued that a formula prescribed by delegated legislation may not be perfect and may have certain aberrations. However, wide discretion is given to the policymakers in this regard, and only if the formula is arbitrary and violative of Article 14 of the Constitution, can it be struck down, he contended.

The Supreme Court accepted the ASG’s argument and held that the justification of the formula under Rule 89(5) given by the ASG to create a legal bifurcation is valid.

The purpose of the formula in Rule 89(5) is to give effect to Section 54(3)(ii) which makes a distinction between input goods and input services for grant of refund. Once the principle behind Section 54(3)(ii) of the CGST Act is upheld, the formula cannot be struck down merely for giving effect to the same, the Court held.

These are aspects that need to be considered and iron out by the government and not for the Court to exercise judicial review.

 

 


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Courtesy/By: Aman Jaisawal  |  13 Sep 2021     Views:525

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