NOVEMBER 11, 2024

By Rishab J & Achyutha R Bharadwaj

A single sub-rule which was amended five (5) times has been struck down by applying the time-tested doctrine, 'Subordinate legislation must be subservient to the plenary legislation', by the Kerala High Court in a recent judgment, which puts an end to the plethora of tribulations arising out of Rule 96(10) of the Central Goods and Services Tax Rules, 2017 ("CGST Rules") by declaring it to be ultra vires the provisions of Section 16 of the Integrated Goods and Services Tax Act, 2017 ("IGST Act") and Section 54 of the Central Goods and Services Tax Act, 2017 ("CGST Act").

Substantial Provisions for export under GST

In terms of Section 16 of the IGST Act, export of goods or services from India is a 'zero-rated supply' and the person undertaking such supply has the following options:

(a) Export goods under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or

(b) Export goods, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied.

Introduction of the Rule

After extending the exemption from payment to IGST for goods, including capital goods imported under, Export Oriented Unit (EOU), Advance Authorisation (AA), Export Promotion Capital Goods (EPCG) Schemes, the Central Government introduced Rule 96(9) into the CGST Rules vide Notification No.75/2017-Central Tax dated 29.12.2017 which was later renumbered as Rule 96(10). The genesis of the said Rule was discussed in the 28th and 30th GST Council Meetings held on 21.07.2018 and 28.09.2018 respectively, wherein it stated that the exporters were allowed to claim refund of IGST on export of permitted goods with no conditions attached to the Rule, which has led to dual benefit as the tax was paid on inputs by claiming exemption under the Notification and claiming refund of the tax paid on the exports made.

Pursuant to the recommendations from various States presented during the GST Council Meetings, the Central Government implemented Rule 96(10) of the CGST Rules through Notification No. 53/2018-CT and Notification No. 54/2018-CT, both dated 09.10.2018. However, these Notifications appear to fall short of accomplishing the proposed objectives in the GST Council Meetings.

A summary of the substance produced in the said Notifications in outlined in the table below:

Subsequently, an amendment was made to Rule 96(10) of the CGST Rules, in which an explanation was inserted by way of Notification No. 16/2020 - CT dated 23.03.2020, wherein it was indicated that the benefit of the notifications mentioned in the Rule would not be considered to have been availed if the assessee has paid the applicable IGST on inputs and has availed restricted exemption only to the extent of Basic Customs Duty (BCD).

Benefit of refund available on exports under Section 16 of the IGST Act

Section 54 of the CGST Act states the manner in which the refund of Tax can be claimed by the eligible assessee. Section 54(1) of the CGST Act provides that a person claiming refund of any tax, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed. In terms of Explanation 2(c) to the said Section, for the services exported out of India, where the supply had been completed prior to the receipt of such payment, the period of two years shall be computed from the receipt of payment in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India.

Arguments advanced by the Assessees while challenging the Rule

The restriction in Rule 96(10) of the CGST Rules is qua 'person', i.e., if an assessee themselves avail benefit of the specified Notifications, or receive supplies from suppliers who have availed benefit of the specified Notifications, even if the said benefit constituted a very small fraction of the total inputs, refund of IGST paid on exports is not allowed; such an absolute denial of benefit is illegal, as for these assessees, the statutory provisions of Section 16(3)(b) of the IGST Rules become redundant. Further, with 'person' being defined at entity level, in all of the following illustrations, refund of IGST paid on exports shall be arbitrarily denied to the exporter:

(a) In case a unit of a company, say in Karnataka, avails benefit of the specified Notifications, another unit of the same company, be it in the same state or any different state, will not be able to claim refund of the IGST paid on their exports.

(b) In a case where a registered person avails benefit of the specified Notifications in December 2019, refund of IGST paid on exports, cannot be claimed for both, the past period and the period going forward.

(c) In a case where a supplier has availed benefit of the specified Notifications, the assessee receiving supplies from such a supplier, be it one consignment out of a hundred, will not be able to claim refund of the IGST paid on exports.

It was, hence, submitted that Rule 96(10) is liable to be quashed as the Central Government has traversed beyond its rule-making power under Section 164 of the CGST Act, to restrict what is otherwise granted under the provisions of Section 16 of the IGST Act and Section 54 of the CGST Act. In essence, Rule 96(10) being discriminatory, arbitrary, unreasonable and irrational, is liable to be struck down, i.e.:

(i) Discriminatory because, person claiming benefit of these very notifications have been allowed to claim refund of unutilized ITC under Rule 89 of the CGST Rules, for the same "zero-rated supply";

(ii) Arbitrary and unreasonable because even if one input is procured by claiming the benefit under the said notification or even if another unit located in another state has claimed the benefit of the notification, the entity as a whole, would be barred from claiming refund of the IGST paid under Rule 96; and

(iii) Irrational because even if an assessee undertakes 100 export consignment without availing the benefit of the notifications and claims refund of the IGST paid on the export and thereafter for the 101st consignment procures certain inputs by claiming benefit under the Notification because of business considerations and exports such consignment under LUT, Rule 96(10) renders the refund granted for the 100 consignments as irregular and open for recovery. In other words, the refund conditions the business operations, whereas refund in reality is a consequence of the business activities;

While the provisions of Rule 89 of the CGST Rules do not create an absolute restriction against the right of an exporter to claim a refund even if certain inputs have been procured availing the benefit of the specified Notifications, Rule 96(10) seeks to deny the benefit of refund completely if certain inputs have been procured after availing such benefits. This leads an inconsistent situation where an exporter who is otherwise on the same footing will get the benefit of refund of taxes paid, in the form of unutilized ITC, if he opts for the route under Rule 89, i.e., export without payment of taxes under a bond/letter of undertaking, but will not get such refund when he opts to pay the IGST and seek a refund of the IGST on account of the restrictions placed by the provisions of Rule 96(10).

Thus, Rule 96(10) has been challenged for being discriminatory to the extent that persons availing benefit of the specified Notifications, except the EPCG Scheme, are denied the right of refund, arbitrary in orchestrating an absolute denial of benefit available to such assessees, and ultra vires the provisions of Section 16 of the IGST Act, Section 54 of the CGST Act read with Article 14 and 19(1)(g) of the Constitution of India.

Department's defence

Rule 96(10) of the CGST Rules was inserted to prevent the exporters from availing double benefit by way of:

(a) procurement of goods without payment of GST or on payment of concessional rate of GST, and further exporting them on payment of IGST utilizing ITC availed on goods procured that were not intended for export; and

(b) encashing such ITC attributable to supplies other than export by claiming refund.

The right of refund under Section 16 of the IGST Act is not a constitutional or vested right available to the assessee, rather the same has always been subjected to the provisions of Section 54 of the CGST Act and sub-section (3) of Section 54 permits the imposition of conditions in claiming refund. Further, it is a settled position in law that Article 14 forbids class legislation but does not forbid classification and when classification is founded on an intelligible differentia, as is in Rule 96(10), it leads to rational relation to the object sought to be achieved by the statute.

Analysis of the judgment

Rules are subservient to the Main statute

Rules framed must be to further the provisions of the Act in terms of Section 164 of the CGST Act. The Central Government does not have the authority to exercise its delegated legislation in excess of what was delegated to it by the Parliament, i.e., the rules framed cannot travel beyond the provisions of the Statute.

Rule 96(10) seeks to impose an arbitrary restriction on assessees such as the Petitioner, who have availed benefit of the specified Notifications or received supplies from suppliers who have availed the benefit of the specified Notifications, by creating an absolute embargo in respect of the option available under Section 16(3)(b) of the IGST Act, i.e., refund of IGST paid on export of goods. The Central Government has abused the power granted to it under Section 164 of the CGST Act, which is to make rules for carrying out the provisions of the main statute and that absolute denial of benefit provided under the provisions of Section of the IGST Act, is prima facie illegal.

It is a settled principle of law, as has been laid down by the Hon'ble Supreme Court in various judgments, that the subordinate legislation to frame rules must ensure that two conditions are fulfilled, viz., (1) it must conform to the provisions of the statute under which it is framed; and (2) it must also come within the scope and purview of the rule making power of the authority framing the rule. If either of these two conditions is not fulfilled, the rule so framed would be void. The following decisions of the Supreme Court have concurred to the rule of law that where provisions of a plenary legislation produce a manifestly absurd/arbitrary and unjust result, they should be struck down for being contrary to the provisions of the main statute:

- Shayara Bano and Ors. v. Union of India and Ors., (2017) 9 SCC 1

- Ispat Industries v. Commissioner of Customs, Mumbai,- 2006-TIOL-127-SC-CUS

- Cellular Operators Association of India and Ors. v. TRAI and Ors.- 2016-TIOL-425-HC-DEL-MISC

- K.P. Varghese v. Income Tax Officer,- 2002-TIOL-128-SC-IT

- Union of India v. Intercontinental Consultants and Technocrats (P) Ltd; - 2018-TIOL-76-SC-ST

The phrase 'conditions, safeguards and procedures' indicated in Section 16(3)(b) would only relate to the aspect of supply, as such transactions are also regulated by the regulations made under the Foreign Trade Policy and by Reserve Bank of India, in addition to the GST Laws. The Court placed reliance on the case of Zenith Spinners v. Union of India- 2005-TIOL-273-HC-AHM-CX confirmed by the Supreme Court in Union of India v. Zenith Spinners, - 2015-TIOL-337-SC-CX, where the Court held that the Board cannot go beyond the powers granted under the statute, i.e., if the Central Government has provided for granting rebate upon fulfilment of certain conditions and subject to certain procedural safeguards, the Board cannot be permitted to render the notification issued by the Central Government redundant by issuing a notification. Notwithstanding the above, on perusal of Section 16 of the IGST Act, the power to prescribe conditions, safeguards and procedures is with reference to 'supply goods or services' and not for claiming refund of tax paid.

Restriction cannot be imposed on "person"

The restriction under Rule 96(10) of the CGST Rules is on 'person', which indicates that irrespective of the quantum of procurements made by availing the benefit, the exporter is barred from claiming refund of the entire tax paid on exports under Section 16(3)(b) of the IGST Act.

The amendment to Section 16, made vide Finance Act, 2021 by introduction of Section 16(4) and the Notifications issued thereunder in 2023, empowers the Government to identify the class of exporters and class of goods, which shall not be eligible for refund of IGST paid on export supplies. Further, the introduction of Section 54(11) introduced vide Finance Act (No.2), 2024 creates a category of exports which shall not be entitled for refund either unutilized ITC or output tax paid.

Therefore, it can be observed that the Central Government has created an absolute restriction in claiming refund of IGST paid indirectly through its rule-making power, as against obtaining the approval of the Parliament in amending the provisions of Section 16 of the IGST Act or Section 54 of the CGST Act, being a colourable exercise of power, which is absolutely unjust and against the principles of law.

The Court, therefore, declared Rule 96(10) of the CGST Rules to be ultra vires the provisions of Section 16 of the IGST Act and unenforceable on account of being manifestly arbitrary for the period 23.10.2017 to 08.10.2024. Further, the Court accentuated that, any action that has been initiated by the issuance of a show cause notice or otherwise or has culminated in an order against the Petitioners in the WPs on the basis of the provisions contained in Rule 96(10) of the CGST Rules, will stand quashed.

The prospective repealing of Rule

In the light of the Recommendations made during 54th meeting of the GST Council on 09.09.2024, the GST Council had proposed to prospectively omit the impugned rule, Rule 96(10) along with Rule 89(4A) and Rule 89(4B) from the CGST Rules, to simplify and expedite the procedure for refunds in respect of such exports.

Pursuant to the above, the Central Government vide Notification No. 20/2024-CT dated 08.10.2024 deleted Rule 96(10) of the CGST Rules from the book, along with references to said Rule 96(10) elsewhere in the CGST Rules with effect from the date of the Notification. Thus, the position going forward stands settled.

Conclusion

The judgment of the Kerala High Court on Rule 96(10) of the CGST Rules is a significant intervention that upholds the principle of reasonableness in delegated legislation. By striking down Rule 96(10) for being ultra vires to Section 16 of the IGST Act and Section 54 of the CGST Act, the Court underscored the necessity for subordinate legislation to conform to the spirit of the plenary legislation. The Court further recognized that Rule 96(10) imposes arbitrary and sweeping restrictions on exporters, blocking their access to legitimate refunds if even a small portion of their inputs were procured availing the benefit of the specified Notifications. Such conditions were deemed not only excessive but also contrary to the objective of facilitating exports through zero-rated supplies, thereby violating the requirement of non-discrimination under Article 14 of the Constitution of India.

(Views expressed are strictly personal. The Authors are Associate Partner and Associate at Shivadass and Shivadass Law Chambers)