SN

Issue

SC's observation

1

Inverted duty structure

The SC noted that distortion of unutilized ITC due to higher rated inputs and lower rated output was noticed much before the advent of GST. In the Gujarat VAT law, a provision was embodied for refund of unadjusted ITC. While discussing the GST regime, the Empowered Committee of State Finance Ministers acknowledged this issue and suggested that a refund may be provided of accumulated ITC. Therefore, while enacting the law, the Parliament took special cognizance of this and enacted Section 54(3)

2

Interpreting the provisos to Section 54(3)

There are essentially three provisos to Section 54(3). The first proviso begins with "No refund of unutilized ITC shall be allowed in cases other than…". The language indicates that the two clauses of the first proviso are not conditions of eligibility, but are restrictive in nature. Further, the clauses are distinct to the extent that refund of zero-rated supplies is allowed without any distinction between inputs and input services; however, for the other clause i.e. in case of inverted duty structure, there is a limitation in respect of rate of tax on inputs being higher than the rate of tax on outputs.

The Court also held that they cannot restrict the ambit of the proviso basis a circular issued by the department in 2018 especially when its effect would be expanding the area of refund contemplated by the legislature.

With the clear language used by the legislature, the court cannot accept the submissions of the counsels as it would involve a judicial re-writing of provision which is impermissible.

3

Interpreting the Explanation 1 to Section 54

Explanation 1 to Section 54 defines 'refund' as - " refund includes refund of tax paid on zero-rated supplies of goods or services or both or on inputs or input services used in making such zero-rated supplies, or refund of tax on the supply of goods regarded as deemed exports, or refund of unutilised input tax credit as provided under sub-section (3)". This indicates that w.r.t. exports, the legislature has indicated the ITC on inputs and input services both. However, for unutilised credit in respect of inverted duty structure, it is only input goods, where refund can be allowed.

4

On doctrine of equivalence

The Court noted that the petitioners had submitted that a doctrine of equivalence should prevail in as far as refund of inputs and input services are concerned. However, the SC decided that while interpreting the provisions of Section 54(3), effect must be given to its plain terms. The Court cannot redraw legislative boundaries on the basis of an ideal which the law was intended to pursue.

5

On the ideal GST framework

Fiscal legislations around the world, with India being no exception, complex balances are established which are based on socio-economic complexities and diversities which permeate. The GST regime in unitary state differs from a dual model GST like that of India's which operates in a federal structure. Article 279A(6) of the Constitution lays down an ideal GST framework, which can only be realized progressively. The arguments of petitioners do furnish the rationale of enactment of law (like removal of cascading effects etc.), however, they do not make a case for judicial review of legislation or holding an enacted law as invalid.

6

On the differentia that is created by Section 54(3)

While replying to the petitioners' arguments that Section 54(3) creates a class of persons and each of such person are entitled to claim refund of unutilized ITC whether its origin lies in inputs or input services, the SC noted that accumulated ITC may result due to variety of circumstances and not all circumstances would warrant a refund under section 54(3). Once this fact is recognized, the legislature should be allowed the autonomy to distinguish between credits of inputs and input services. To draw the balance for granting refund, the legislature can create a differentia.

7

Definition of input u/s 2(59)

The CGST Act, 2017 defines input as goods other than capital goods. However, the plural expression 'inputs' has not been defined as such. The SC noted that there is no reason why the usual principle of construing the plural in the same plane as singular should not be adopted. Nonetheless, construing 'inputs' to include both input goods and input services would do violence to the provisions of Section 54(3) and would also run contrary to Explanation 1 as noted above.

8

On Constitutional rights

No Constitutional right is being asserted in claiming a refund. Refund is a statutory prescription and Parliament is within its legislative authority to determine whether refunds should be allowed of both input goods and input services.

9

On Constitutional validity

Commenting on the submissions of the counsels of assessee wherein it has been submitted that Article 14 would be attracted and section 54(3) suffers from the vice of arbitrariness, the SC noted that a cause of invalidity arises where equals are treated as unequally and unequal are treated as equals. However, under the Constitution and the CGST Act, 2017, goods and services and inputs and input services are not treated as one and they are distinct species. Parliament is entitled to make policy choices and adopt appropriate classification. A refund claim is governed by statue; it is not a constitutional entitlement.

10

Vires of Rule 89(5)

The SC accepted the justification of the formula given in Rule 89(5) by the ASG (to create a legal bifurcation). However, the SC also accepted that the formulas is not perfect. The formula presumes that output tax is entirely paid from the ITC of Input goods and ITC of input services is not utilized. A comparison of this formula with Rule 89(4) also reveals that it considers both - input goods and input services. The SC opined that there are certain anomalies with the formula, however, it cannot render the rule as invalid. The Court also urged the GST Council to reconsider the said formula and take appropriate policy decision.