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Stepping back to move forward

AUGUST 10 , 2020

By K Srinivasan


The Petitioner VKC Footsteps India Private Limited - 2020-TIOL-1273-HC-AHM-GST is in the business of manufacture and supply of footwear which attracts 5% GST.

The Petitioner procures various inputs and input services on payment of applicable GST for use in the course of business and avails ITC of the GST paid.

The majority of the inputs and input services attract GST, 12% & 18%. Thus, the GST rate paid by the Petitioner on procurement of input/input services is higher than the rate of tax payable on their outward supply of footwear which is 5% GST.

Therefore, in spite of the utilization of credit for payment of GST on outward supply, there is an accumulation of unutilized credit in the electronic credit ledger of the Petitioners all the time.

From a conjoint reading of the provisions of Act and Rules and the Notification No. 26/2018-CT dated 13/6/2018 read with the Circular No. 79/53/2018-GST dated 31/12/2018, the formula prescribed under Sub-rule 5 of Rule 89 of the CGGST Rules, 2017 is understood to exclude clearly beyond all doubt, any refund of tax paid on input service and capital goods credit as part of the refund of the unutilized Input tax credit.

This is in consonance with the provisions of Sub-section 3 of Section 54 of the CGST Act, 2017 which provides for a claim of refund of unutilized input tax credit on Inputs.

The word Input tax credit is defined in Section 2(63) means the credit of input tax.

The word input tax is defined in Section 2(62) whereas the word input is defined in Section 2(59) means any goods other than capital goods.

Input service as per Section 2(60) means any service used or intended to be used by a supplier.

Whereas input tax as defined in section 2(62) means the tax charged on any supply of goods or services or both made to any registered person.

Thus input and input service are both part of the input tax and input tax credit.

However, as per provision of sub-section 3 of Section 54 of the CGST Act, 2017, the legislature has provided that registered person may claim a refund of unutilized input tax, only in respect of Inputs and not Input services.

Therefore, by way of Rule 89(5) of the CGST Rules, 2017 read with the formula prescribed thereunder, such claim of the refund is sought to be restricted only to inputs excluding the input services, not at all to mention capital goods credit, from the purview of Input tax credit for the purpose of the said refund, which is the prerogative of the legislature to curtail.

A reference in Clause (ii) of the proviso to Sub-section 3 of Section 54 to both supply of goods or services is to be taken careful note of here, as only relating to output/outward supplies and not to be mixed up with Input/inward supplies, as also clearly mentioned in the amended Rule 89(5) of the CGST, Rules 2017 vide Notification No. 26/2018-CT dated 13/06/2018.


The maximum refund amount is equal to {(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.

The net ITC in this formula is defined as input tax credit availed on inputs during the relevant tax period. It does not see a mention of input services.

But on observing the rest of the components of the above formula, one would find turnover and output-tax referring to services as well, on the numerator and the denominator respectively of the said formula to produce a matching effect.

But, in view of the above analysis of the provisions of the Act and Rules keeping in mind the scheme and object of the GST Act, the intent of the Government by framing Rules inter se the Act to translate the restriction in the statutory provision, is legitimate and a customary intent of law, would be the argument of the Government.


The CBIC vide Circular No. 79/53/2018-GST dated 31.12.2018 has further clarified that the registered person can claim refund of tax paid on input only and not input services and capital goods as part of a refund of any unutilized input tax credit, whose mischief, though wide enough to embrace all three forms of the Input tax credit Scheme.

Therefore, it would appear that Explanation (a) to Rule 89(5) which refers to the refund of unutilized input tax paid, refers only to Inputs as part of input tax credit to be claimed as refund, and not the other two forms namely input services and capital goods, accumulated on account of inverted duty which is within the four corners of the provision of Section 54(3) of the CGST Act, 2017.


Even though the rule does not technically cover input services in Net ITC of the formula, the provision of the Act is said to override the Rule to cover services and hence the High Court maintained that input services should also be eligible for ITC refund due to the inverted tax structure, is the counter argument.

Accordingly, the Gujarat Court as per its recent judgment (supra) had directed the Department to allow the claim of the refund made by the petitioners considering the unutilized input tax credit of input services as well, as part of the net input tax credit (Net ITC) for the purpose of calculation of the refund claim under Rule 89(5) of the CGST Rules, 2017 for claiming such refund under Sub-section 3 of Section 54 of CGST Act, 2017

Having regard to what has been stated above in the judgment, Explanation (a) to Rule 89(5) of the CGST Rules, 2017 was held  ultra vires  the provisions of sub­-section (3) of section 54 of the CGST Act, 2017. In effect the Court struck down the said Explanation (a) to Rule 89(5) under the Central GST Act.


The above statutory exercise clearly enjoys the mandate of Sec 164 of the Act to make such rules as found necessary including carrying out retrospective amendments in the Rules in terms of sub-section (3) of the said provision above, is another argument of the Government in support of its retrospective action.

The government brought in the rule in 2018 by amending retrospectively the one that allowed all kinds of credits, whether the taxes are paid on goods or services.

Despite all the above arguments of the Government, it is the considered view of the Court that there is contradiction in the new rule and the Act.

The court said that the intent of the government by framing a rule restricting input tax credit is not the real intent as seem to be reflected in the law.


The judgment is likely to set a precedent for similarly placed petitioners being heard by courts and tribunals. For instance, the Authority for Advance Rulings in Maharashtra had held that Daewoo-TPL JV -2019-TIOL-233-AAR-GST, engaged in execution of construction of large projects, were ineligible for refund of ITC on input services with respect to transactions covered under inverted duty structure.

Experts said the ruling of Gujarat High Court might help many companies, particularly e-commerce players. E-commerce and other companies who were suffering on account of blocked input service credits would be keen to analyze the ruling in detail and evaluate if the benefit of this ruling can be availed in their case.

The Gujarat court's ruling confirms the view that the inverted duty structure refunds will also include refunds on account of input services, bringing a substantial cash flow benefit to  companies  in a situation where input service credits been accumulated and there is no immediate utilization window open.

It is further important to notice here that the decision can take a retrospective effect since it is a question of law. Further, the judgment can be held as a valid one not only to the Petitioner but also to other taxpayers in and outside the jurisdiction of Gujarat until a contrary verdict emerges from the jurisdictional High Court of the taxpayer. 

In applying the judgment retrospectively, many taxpayers would have already added the ITC on input services to the cost or capitalized it. It is, therefore, expected to severely impact the working capital of such companies in a big way.


Let's also examine here the relevance of a Proviso in any enactment and thereby evaluate how restrictive is its nature and relevance in the subject context of the refund.

A proviso is  intended to limit  the enacted provision  so as to except something which would have otherwise formed part of the main scope of the provision and thus in some degree alters its course.

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

Therefore, to the extent of proviso and its terms are an exception, within whose restricted scope, the refund needs to be allowed. In other words, only if the given case falls within the terms of such exception, the refund can be granted. Accordingly, one needs to appreciate that the subject refund needs to be restricted or rather given only to the extent provided in the Proviso rather than section 54(3) of the Act.

There is also another plausible defense advanced by some experts that the term Inputs used in Sec 54(3) proviso (ii) in its plural form goes to show very clearly that Inputs includes not only Input but Input services under it and hence the use of the plural form in the section providing for refund of unutilized credit of input and input services.

Is it true? No, the Author does not think so for the following semantic reasons -

Collective nouns refer to a group of more than one. They are singular subjects, although they represent a group. The following words are examples of common collective nouns: audience, committee, congregation, family, flock, group, staff, team, pack, swarm, the Philippines (countries, cities, etc. are always singular even if ending in 's' because each country is one collective of several people), etc.

- Remember to pay special attention to the nouns ending with 's', and always check whether they are really plural.

- Always check subject verb agreement when you notice a collective noun in the question, e.g. family. A group is always singular (unless put into its plural form of course)

Therefore, Inputs is always singular even if ending in 's' because it is collective of several goods, raw materials, etc.


Proviso (ii) to Section 54(3) states that where  the credit has accumulated, on account of  rate of tax on inputs being higher than the rate of tax on output supplies…

Accordingly, it may not be possible to equate the term 'the credit' to the term 'input tax credit' occurring in the said Sub-Section.

Thus, refund may relate to the specified credit and not all the input tax credit accumulated on account of tax on all types of inputs being higher than the rate of tax on output supplies. 

The Legislature has deliberately used the expression 'on account of' and has thereby made known its intention to grant refund only on goods (inputs) and not services (input services).

Therefore, in case of 'refund' of inverted duty structure, it is crucial to trace the credit to the specified source of inputs, and not to the generic source of input tax credit, comprising both goods (inputs and capital goods) and services.

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, the entitlement for refund should be sourced from the Proviso itself rather than the enabling provision. Accordingly, it may be stated that Sl. No. (ii) not only provides  when  refund will be available but also how much   of refund is to be allowed.


In a taxing statute, one has to look merely at what is said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing should be read in to it and nothing to be implied. One is allowed to look fairly at the language used. Kasturi And Sons Ltd   - 2002-TIOL-2734-SC-IT refers)


The Gujarat HC seems to have been more guided by the basic principles and the generalities of GST as envisaged by the Government in its policy statement, rather than remaining more on track with the legal provisions of the GST Law that was litigated before it.

The core issue that was required to be addressed is whether clause (ii) to the proviso to Section 54(3), is limited to accumulation arising out of inputs being higher than GST rate on output supplies, or, whether the said clause (ii) would operate as a whole to cover ITC accumulation on account of inputs and input services as well, which once settled, would entitle the Petitioner to refund of entire unutilized ITC, irrespective of its composition.

This core question, it appears, has been sidelined in its findings by the High Court. Moreover, on this aspect, the High Court seems to have mistakenly relied on the definition of 'supply', to conclude that both goods and services are covered within the ambit of the said clause (ii).

A plain reading of the said clause (ii) indicates that the use of the term supply therein is only in the context of output supplies, as per which the corresponding inputs are inverted in rate of tax and not the inward supplies. To this extent, the judgment appears to be per incuriam.

However, while reading down Explanation (a) to Rule 89(5), the High Court has not limited the applicability of such refund to inputs alone but has enlarged it to input services as well.

Even as it fails to dwell upon the core issue, a peek into the mind of the Court has also proved very difficult as it has not given away anything else in the process of making its decision and hence it will be apt not to consider it as a ratio decidendi of the Gujarat High Court.

In fact even Rule 89(4)(C) was amended prospectively by Notification No.  16/2020-Central Tax  dated 23/3/2020.

The object of the amendment was to link the refund claim of ITC to 1.5 times of the domestic value of export goods through the pre-existing formula, which allowed it at the actual value of export goods itself in a tax period when there was no value of domestic clearances available.

It certainly needs a reading down in contrast to Rule 89(5) since the former is intended to save the exporters from a double whammy effect, by keeping lesser of the two, namely 1.5 times of the value of the domestic equivalent on the numerator while keeping the higher of the two, namely the actual export value of goods in the denominator, which is incorrect.

Whereas in the latter case, formula prescribed under Rule 89(5), the Net ITC is a specific independent factor of Input Tax credit accumulated from Inputs which has an inverted tax rate with reference to its corresponding inverted rated supply of goods and services partaking equally on both the numerator and the denominator of such output supplies.

The reasoning for the above folly in the formula under 89(5) is that it is unfair enough to have left the Adjusted Turnover, unadjusted, i.e. without aligning it with the value of export goods as in the numerator of the formula to the extent it remains changed in the denominator.

Therefore, formula under Rule 89(5) does not suffer from any such infirmity as formula under 89(4)(C) suffers from, as delineated above.

In fact, there is even a similarity noticeable between the two sub-rules and the formulae, in that, they adopt the same meaning and import of the term Adjusted Total Turnover, as defined under the said Rule.


Continuing with the judgment the substantive part of it is not based on reasoned interpretation of Section 54(3) and fails to carry forward the interpretation that clause (ii) only provides the circumstance under which the refund of unutilized credit will be granted while the proviso under is enabled fully to restrict it, in the manner specified therein.

Also it fails to make out a case against Rule 89(5) that it is at variance with proviso (ii) to Sub-clause (3) to Sec 54 but instead concludes it as ultra vires the whole Section 54(3) without harmoniously reading it with the Proviso thereto, to discover that the general circumstance to claim the refund as put out by the main section makes no sense without the Proviso which alone tells when and how much refund is eligible under it.

It is however hoped that, in similar petitions filed in other jurisdictions, the Courts would have ample time and reason to arrive at a more reasoned order, which would stand the test of time, as this is certainly going to be another long haul on the same lines of Brand Equity Treaties Ltd case - 2020-TIOL-900-HC-DEL-GST [stayed by Supreme Court - 2020-TIOL-115-SC-GST-LB.

[The Author is a former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer, GST and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.]

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