AUGUST 03 , 2020

By CA Pritam Mahure

IN the case of VKC Footsteps India Pvt. Ltd. - 2020-TIOL-1273-HC-AHM-GST the Hon'ble Gujarat High Court upheld the taxpayers' right to claim refund of inverted duty structure even in respect of 'input services'.

What the Hon'ble Gujarat High Court held?

Some of the key observations of the Hon'ble Gujarat High Court In the case of VKC Footsteps India are as under:

'23. … Therefore, as per provision of sub-section 3 of Section 54 of the CGST Act, 2017, the legislature has provided that registered person may claim refund of "any unutilised input tax", therefore, by way of Rule 89(5)of the CGST Rules, 2017, such claim of the refund cannot be restricted only to "input" excluding the "input services" from the purview of "Input tax credit".

24. …, the intent of the Government by framing the Rule restricting the statutory provision cannot be the intent of law as interpreted in the Circular No.79/53/2018GST dated 31.12.2018 to deny the registered person refund of tax paid on "input services' as part of refund of unutilised input tax credit.

25. We are of the opinion 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.'

Revenue may take the case to the next level?

It is certain that Revenue is going to appeal and may argue on the following lines.

What Section 54 (3) and Proviso states?

Section 54 (3) reads as under:

'(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 unutilised input tax credit shall be allowed 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 (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.'

What is relevance of Proviso?

The Apex Court in the case of S. Sundaram Pillai v. V.R. Palhaphiraman [AIR 1985 SC 582] held that a proviso is intended to limit the enacted provision so as to except something which would have otherwise been within it or in some measure to modify the enacting clause.

It can be observed that Section 54 (3) is enabling provision for refund. However, specifically through a proviso it is stated that "Provided that no refund of unutilised input tax credit shall be allowed in cases other than…".

In the case of U.K. Gas Plant Manufacturing Co. v. Emperor, AIR 1947 PC 38 it was observed that the affirmative words stand at a weaker footing than negative words for reading the provision as mandatory. It can be observed that the aforesaid Proviso uses strong 'negative' word (i.e. 'no refund') as well as strong positive words 'shall be', indicating a mandatory force.

Accordingly, as the Proviso and the terminology therein indicates an exception, the refund needs to be allowed only if the case fits the said exception. Consequently, refund should be restricted to the extent provided in Proviso rather than section 54 (3) of CGST Act.

What is the 'quantum' of refund a taxpayer is entitled to receive?

Proviso to Section 54 (3) states "Provided that no refund of unutilised input tax credit shall be allowed in cases other than -". While section 54 (3) provides for maximum limit, however, Proviso limits the amount as discussed hereafter.

From a reading of the Proviso, it can be observed that refund is only permissible in specified cases as provided in sr. no. (i) and (ii) of the Proviso. In case of sr. no. (i) i.e. 'zero-rated supplies made without payment of tax', the terminology does not provide for any restrictions and thus, refund of 'unutilised input tax credit' can be stated as available in case of zero-rated supplies.

However, from sr. no. (ii) of Proviso, it can be observed that, unlike sr. no. (i) the terminology is specific and restrictive. Sr. no. (ii) reads as '(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies…'. Herein the important terms are:

a. Where 'the' 'credit'

b. Has accumulated 'on account of'

c. Rate of tax on 'inputs' being higher than the rate of tax on output supplies

Lets decode these terms in detail -

'The' 'credit'

Use of 'the' before term 'credit' may not be missed. The Apex Court in the case of Shri Ishar Alloy Steels Ltd vs Jayaswals Neco Limited [2001 3 SCC 60] observed that "The" is the word used before nouns, with a specifying of particularising effect opposed to the indefinite or generalising force of "a" or "an" … "The" is always mentioned to denote particular thing or a person." Given this, it may be stated that 'credit' referred herein is specific than generic.

Further, it can be observed that the terminology in sr. no. (ii) of Proviso is not 'input tax credit' but 'the credit'. In the case of The Member, Board Of Revenue vs Arthur Paul Benthall [1956 AIR 35] it was held that when two words of different import are used in a statute in two consecutive provisions, it would be difficult to maintain that they are used in the same sense.

Accordingly, it may not be possible to state that term 'the credit' and 'input tax credit' are same. Thus, refund may relate to 'the credit' (and not 'input tax credit') accumulated 'on account of' inputs as discussed below.

'On account of'

As per sr. no. (ii) of the Proviso, the credit should be accumulated 'on account of' ' rate of tax on inputs being higher than the rate of tax on output supplies'. Herein the term 'on account of' can be understood as by reason of or because of.

The Legislature have deliberately used the expression 'on account of' and has thereby shown intention to grant refund only on 'inputs'. Therefore, in case of 'refund' of inverted duty structure, it is critical to trace the source of the credit as it should be generated 'on account of' inputs and not to 'input tax credit'. To simply put, there must be a direct nexus between the credit and the 'rate of tax on inputs being higher than the rate of tax on output supplies'.

Thus, it means if there is any credit arising 'on account of' the reason provided, in sr. no. (ii) i.e. 'rate of tax on inputs being higher than the rate of tax on output supplies', then only refund is permissible as well as to that extent only.

Thus, the entitlement for refund should be sourced from the Proviso itself rather than the enabling provision. Accordingly, it may be stated that sr. no. (ii) does not only provide 'when' refund will be available but also the 'quantum' of refund.

Intent of Legislature

The Apex Court in the case of Kasturi And Sons Ltd -2002-TIOL-2734-SC-IT held that "In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used"

Further, in Universal Ferro & Allied Chemicals Ltd. - 2020-TIOL-73-SC-CX-LB the Apex Court observed that 'It is a settled principle of law that while interpreting a provision due weightage will have to be given to each and every word used in the statute.' The general rule in construing an enactment containing a proviso is to construe them together without making either of them redundant or otiose (Principles of Statutory Interpretation - Justice G P Singh).

Given the aforesaid, intent of law should be derived from the terminology used in Proviso as well. If the Proviso is ignored, then it effectively means to rewrite the clause and to omit the proviso which will defeat the express intention of the Legislature.

Way forward

In the days to come, Revenue is certain to knock the doors of Apex Court. Nonetheless, the possibility of retrospective amendment by the Central Government cannot also be ruled out. Given the aforesaid, the taxpayers as well as Revenue may have to tread the path cautiously!

Going forward, as the issue is industries specific, instead of making the taxpayer and Revenue fight over the issue in the court of law, it is much better for GST Council to address the issue in a holistic manner and at the earliest.

Following in the footsteps of Brand Equity Treaties Ltd.…

(The author is a Founder of CA Pritam Mahure and Associates and the views expressed are strictly personal.)