In a major setback to the tax payers, the Madras High Court in its recent order has dismissed the plea of the petitioners challenging the denial of unutilised Input Tax Credit (ITC) refund on ‘input services’ under ‘inverted duty structure’.
As many as 6 writ petitions were filed to seek the answer to the question whether the petitioners are entitled to a refund of the entire unutilised input tax credit (including credit on input services) that each of them has accumulated on account of being subjected to an inverted duty structure
In certain cases, the constitutional validity of Section 54(3)(ii) of the CGST Acts impugned, whereas, in others, a declaration is prayed for that the amended Rule 89(5) of the CGST Rules is ultra vires Section 54 of the CGST Act and the Constitution of India. As a corollary, a declaration of entitlement to refund is also prayed for in some cases.
Arguments of the Petitioner:
The case of the Petitioners is that they are entitled to a refund of the entire unutilised input tax credit, irrespective of whether such credit accumulated on account of procurement of input goods and input services by paying tax at a higher rate than that paid on output supplies.
The counsel for the petitioner contended that the proviso to Section 54(3) should be construed by bearing in mind the context. The proviso to Section 54(3) specifies two classes of registered persons who are entitled to refund.
The first class is persons who have zero-rated supplies, namely, exporters of goods and services. The second class is relevant for the purposes of this case and consists of persons who have accumulated unutilised credit on account of being subject to an inverted duty structure, i.e. the rate of tax on input goods and input services procured by them is higher than the rate of tax on their output supplies..
Arguments of the Revenue:
The case of the Union of India and the Tax Department, both at the Central and State level, is that refund of unutilised input tax credit is permissible only in respect of the quantum of credit that has accumulated due to the procurement of input goods at a higher rate than that paid on output supplies, and that credit accumulation on account of procuring input services at a rate of tax higher than that paid on output supplies is liable to be disregarded for refund purposes.
Order of Madras High Court:
The division hedge bench headed by Chief Justice A.P. Sahi held that Section 54(3)(ii) does not infringe Article 14.
“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,” the court said.
The court clarified that there is no necessity to adopt the interpretive device of reading down so as to save the constitutionality of Section 54(3)(ii).
The court noted that 54(3)(ii) curtails a refund claim to the unutilised credit that accumulates only on account of the rate of tax on input goods being higher than the rate of tax on output supplies.
In other words, it qualifies and curtails not only the class of registered persons who are entitled to refund but also the imposes a source-based restriction on refund entitlement and, consequently, the quantum thereof.
The court further clarified that as a corollary, Rule 89(5) of the CGST Rules, as amended, is in conformity with Section 54(3)(ii). Consequently, it is not necessary to interpret Rule 89(5) and, in particular, the definition of Net ITC therein so as to include the words input services.
Therefore the court dismissed all the petitions challenging the constitutional validity of Section 54(3)(ii) and Rule 89(5) of the CGST Rule.
Concluding remarks:
The above judgment of Madras High Court is in in complete contrast of landmark judgment earlier pronounced by Gujarat High Court , in the case of VKC Footsteps India Pvt. Ltd . Versus Union of India & 2 other(s), wherein the respondents were directed to allow the claim of the refund made by the petitioners considering the unutilised input tax credit of “input services” as part of the “net input tax credit”(Net ITC) for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules,2017 for claiming refund under Sub-section 3 of Section 54 CGST Act,2017.
We can say that now on the above issue we enter the next round of battle i.e. before Supreme Court. At the same time , the conflicting judgements from the two High Courts on the same issue would mean wide ranging ramifications for all and nightmarish situations at the ground level.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
