VKC Footsteps India Pvt. Ltd. v. Union of India & 2 Others
[Citation -2020-LL-0724-60]

Citation 2020-LL-0724-60
Appellant Name VKC Footsteps India Pvt. Ltd.
Respondent Name Union of India & 2 Others
Court HIGH COURT OF GUJARAT AT AHMEDABAD
Relevant Act CGST
Date of Order 24/07/2020
Judgment View Judgment
Keyword Tags purchase of capital goods • retrospective application • reimbursable expenditure • goods and services tax • retrospective effect • statutory provisions • period of limitation • proportionate basis • cost of production • remuneration paid • colourable device • input tax credit • job work charges • grant of refund • recovery of tax • import of goods • job work basis • existing right • total turnover • refund of tax • sale of goods • compensation • tax due


C/SCA/2792/2019 CAV JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 2792 of 2019 With R/SPECIAL CIVIL APPLICATION NO. 14980 of 2018 With R/SPECIAL CIVIL APPLICATION NO. 12483 of 2019 With R/SPECIAL CIVIL APPLICATION NO. 13120 of 2019 With R/SPECIAL CIVIL APPLICATION NO. 14148 of 2019 With R/SPECIAL CIVIL APPLICATION NO. 14155 of 2018 With R/SPECIAL CIVIL APPLICATION NO. 16269 of 2019 With CIVIL APPLICATION (FOR DIRECTION) NO. 1 of 2019 In R/SPECIAL CIVIL APPLICATION NO. 16269 of 2019 With R/SPECIAL CIVIL APPLICATION NO. 16276 of 2019 With R/SPECIAL CIVIL APPLICATION NO. 653 of 2019 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA 1 Whether Reporters of Local Papers may be allowed toYes see judgment ? 2 To be referred to Reporter or not ? Yes 3 Whether their Lordships wish to see fair copy of No judgment ? 4 Whether this case involves substantial question of lawNo as to interpretation of Constitution of India or any order made thereunder ? Page 1 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT VKC FOOTSTEPS INDIA PVT. LTD. Versus UNION OF INDIA & 2 other(s) Appearance: MR MIHIR JOSHI, SENIOR COUNSEL WITH MS. AMRITA THAKORE, MR HARDIK MODHWITHY, MR AMIT LADDHA, MR AVINASH PODDAR, MR V SRIDHARAN SENIOR ADVOCATE WITH MR ANAND NAINAWATI, MR JIGAR SHAH AND MS PRIYANKA KALWANI , WADIAGHNADHY AND CO. for Petitioner(s) No. 1 MR NIRZAR S DESAI, MR PARTH BHATT AND MR SOAHAM JOSHI FOR RESPONDENTS. CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 24/07/2020 CAV JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. Since these petitions are arising out of common issue, same were heard analogously and are being disposed of by this Common Judgment. 2. For sake of convenience, Special Civil Application No.2792 of 2019 is treated as lead matter. 3. petitioner has prayed for following reliefs: 20. Petitioners, therefore, prays that this Hon'ble Court may be pleased to: (a) hold that amended Rule 8 of CGST Rules is ultra vires Section 54(5) inasmuch as Section 54(3) provides for refund of any Page 2 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT unutilized input tax credit accumulated on account of inverted duty structure thereby covering credit of both inputs and input services ; (b) hold that amended Rule 89 of CGST Rules is violative of Article 14 of Constitution of India inasmuch as it treats dealers with accumulated credit on inputs and dealers with accumulated credit on input services differently; (c) hold that Section 164(3) is unconstitutional inasmuch as it suffers from vice of excessive delegation; (d) hold that amendment of Rule 89 cannot be given retrospective application; (e) issue Writ of Certiorari or any other appropriate Writ, Order or direction, in nature of Writ, quashing refund withholding orders dated 14.06.2018, and letter dated 11.06.2018 issued by Respondent No. 3 enclosed at Exhibit-1 and Exhibit-2 respectively; (f) direct Respondents herein, pending present petition, not to initiate any coercive action or recovery proceedings; 4. Petitioner is engaged in business of manufacture and supply of footwear which attracts Goods and Service Tax (for short GST ) at rate of 5%. Petitioner procures input services such as job work service, goods transport agency service etc. and inputs such as synthetic leather, PU Polyol, etc., on payment of applicable GST for use in course of business and avails input tax credit of GST paid thereon. Majority of inputs and input services attract GST at rate of 12% or 18%. Thus, GST rate paid by Petitioner on Page 3 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT procurement of input is higher than rate of tax payable on their outward supply of footwear. Therefore, in spite of utilization of credit for payment of GST on outward supply, there is accumulation of unutilized credit in electronic credit ledger of Petitioners. 5. fundamental feature of GST is that effective taxation of goods takes place at stage of supply to final consumer only and all taxes paid at anterior stages should be fully absorbed in tax on outward supply. Where it is not so, refund of accumulated unutilized credit can alone achieve object of effective taxation only at stage of supply to final consumer. Sub-section 3 of Section 54 of Central Goods and Service Tax Act,2017 (for short CGST Act ) is inspired by this principle as it provides for refund of unutilized input tax credit where credit is accumulated on account of tax rate on inputs being higher than tax rate on output supplies. Such situation has been referred as inverted duty structure. Section 54(3) (ii) of CGST Act lays down eligibility criteria for grant of refund on account of inverted duty structure or condition precedent. criterion being, that rate of tax on inputs being higher than rate of tax on output supplies . Thus, as per these provisions, it provides circumstance under Page 4 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT which refund of unutilized credit will be granted. Section 54(3) of CGST Act provides for refund of any unutilized input tax credit' and said provision itself specifies quantum of refund which will include credit availed on input services apart from inputs. This is so because term input tax is defined in Section 2(62) of CGST Act inter alia as tax charged on supply of goods or services or both. Input tax credit is defined in Section 2(63) of CGST Act as credit of input tax. 6. Rule 89(5) of Central Goods and Service Tax Rules,2017 (for Short CGST Rules, 2017 ) is enacted to provide formula for determining refund on account of inverted duty structure and assessee is entitled to refund of unutilized input tax credit availed during relevant period proportionate to turnover of inverted rated supply of goods vis- -vis total turnover of assessee for that period. Circular No. 79/53/2018-GST dated 31.12.2018 provides example at para 4(b) which is informative,(i) if, rate of GST on some inputs is higher than rate of GST applicable on output supply, while rate of GST on some other inputs is lower than rate of GST applicable on said output supply, then that is situation of inverted duty structure governed by Section 54(3) of CGST Act,(ii) Page 5 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT if, assessee supplies goods and none of which involve inverted duty structure, it is not entitled for any refund of unutilized input tax credit,(iii) if, assessee supplies goods involving only inverted duty structure, then entire unutilized credit is refundable to it and (iv)if, assessee is engaged in making two supplies, one involving inverted duty structure and other not involving inverted duty structure, then it is not entitled for refund for second category of supplies and eligible for refund only for first category of supplies. 7. provision of Rule 89(5) of CGST Rules, 2017 as originally introduced was substituted vide Notification No. 21 /2018-CT dated 18.4.2018 prescribing revised formula for determining refund on account of inverted duty structure which was given retrospective effect from 1.7.2017 vide Notification No. 26/2018-CT dated 13.6.2018. revised formula inter alia excluded input services from scope of net input tax credit for computation of refund amount under Rule. Thus, substituted Rule 89(5) of CGST Rules,2017 denied refund on input tax credit availed on input services and allow relief of refund of input tax credit availed on inputs alone. 8. Thus, in present case, Respondents are Page 6 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT allowing refund of accumulated input tax credit of tax paid on inputs such as synthetic leather, PU Polyol, etc. However, refund of accumulated credit of tax paid on procurement of input services such as job work service, goods transport agency service, etc. is being denied. 9. Petitioners have therefore challenged validity of amended Rule 89(5) of CGST Rule,2017 to extent it denies refund of input tax credit relatable to input services. 10. It is significant that it is not case of Respondents that credit for tax paid on input services is not available to petitioner. Respondents are only denying refund in cash of unutilized amount of input service credit. Respondents are willing to grant refund in cash of unutilized amount to extent relatable in inputs only. I. SUBMISSIONS ON BEHALF OF PETITIONERS 11. learned senior advocate Mr. Sridharan assisted by learned advocate Mr. Anand Nainawati for petitioner in SCA No.2792 of 2019 submitted as under : 11.1 It was submitted that fundamental principle of GST laws worldwide is that it is multi-stage tax. Each point in supply chain is potentially taxed. However, suppliers are Page 7 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT entitled to avail credit of taxes paid at anterior stage. This feature of GST leads to its description as being tax on value addition, with final consumer alone ultimately bearing tax. GST law as enacted in India is also based on this principle. 11.2. It was submitted that First discussion paper published on 10.11.2019 by Empowered Committee of State Finance Ministers explained that introduction of GST would achieve continuous chain of set-off from original manufacturer to last retailer in supply chain and eliminate burden of all cascading effects. relevant excerpts from discussion paper have been reproduced hereunder: 1.14 In GST, both cascading effects of CENVAT and service tax are removed with set-off, and continuous chain of set-off from original producer s point and service provider's point upto retailer's level is established which reduces burden of all cascading effects. This is essence of GST, and this is why GST is not simply VAT plus service tax but improvement over previous system of VAT and disjointed service tax. 1.15 GST at Central and at State level will thus give more relief to industry, trade, agriculture and consumers through more comprehensive and wider coverage of input tax set-off and service tax Page 8 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT setoff, subsuming of several taxes in GST and phasing out of CST. ...... emphasis supplied 11.3. It was submitted that Statement of Objects and Reasons appended to Bill introducing CGST Act also stated that GST will be levied at each stage of supply chain and taxes paid at earlier stage will be available as input tax credit. relevant extract of same is as under: 3. In view of aforesaid difficulties, all above mentioned taxes are proposed to be subsumed in single tax called goods and services tax which will be levied on sac o! of goods or services or both at each stage of supply chain starting from manufacture or import till last retail level. 4. proposed legislation will simplify and harmonise indirect tax regime in country. It is expected to reduce cost of production and inflation in economy, thereby making Indian trade and industry more competitive, domestically as well as internationally. Due to seamless transfer of input tax credit from one stage to another in chain of value addition there is in-built mechanism in design of goods and services tax that would incentivise tax compliance by taxpayers. ...... emphasis supplied Page 9 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT 11.4. It was submitted that Frequently Asked Questions (FAQs ) on GST issued by Central Board of Excise and Customs on 21.6.2016 updated from time to time, explains GST as under: Q 1. What is Goods and Services Tax (GST)? Ans. It is destination based tax on consumption of goods and services. It is proposed to be levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff. In nutshell, only value addition will be taxed and burden of tax is to be borne by final consumer. 11.5. It was submitted that Government issued GST flyers to create awareness amongst trade and industry regarding various provisions of GST also emphasized that uninterrupted and seamless flow of input tax credit is one of key features of GST. Flyer No. 19 dated 1.1.2018 issued by CBEC explaining input tax credit mechanism in GST reads thus: Uninterrupted and seamless chain of input tax credit hereinafter referred to as ITC is one of key features of Goods and Services Tax. ITC is mechanism to avoid cascading of taxes. Cascading of taxes, in simple language, is tax on tax . Under present system of taxation, credit of taxes being levied by Central Government is Page 10 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT not available as set-off for payment of taxes levied by State Governments, and vice versa. One of most important features of GST system is that entire supply chain would be subject to GST to be levied by Central and State Government concurrently. As tax charged by Central or State Governments would be part of same tax regime, credit of tax paid at every stage would be available as set-off for payment of tax at every subsequent stage. 11.6. It was submitted that thus, GST is consumption tax where tax burden is borne by final consumer and business does not bear burden of tax since business are allowed to take credit of tax paid on anterior supplies received by them. 11.7. It was submitted that Organisation of Economic Co-operation and Development (OECD) has issued international VAT/GST Guidelines which elucidate that VAT/GST are consumption tax and are borne ultimately by final consumers and relevant portion relied on is as under: INTERNATIONAL VAT/GST GUIDELINES PREFACE 4. In addition it should be borne in mind that value added tax systems are designed to tax final consumption and as such, in most cases it is only consumers who should actually bear tax burden. Indeed, tax is levied, ultimately, Page 11 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT on consumption and not on intermediate transactions between firms as tax charged on these purchases is, in principle, fully deductible. This feature gives tax its main characteristic of neutrality in value chain and towards international trade. CHAPTER I BASIC PRINCIPLES I.A. INTRODUCTION 1. There are many differences in way value added taxes are implemented around world and across OECD countries. Nevertheless, there are some common core features that can be described as follows: Value added taxes are taxes on consumption, paid, ultimately, by final consumers. tax is levied on broad base (as opposed to e.g., excise duties that cover specific products); In principle, business should not bear burden of tax itself since there are mechanisms in place that allow for refund of tax levied on intermediate transactions between firms. system is based on tax collection in staged process, with successive tax payers entitled to deduct input tax on purchases and account for output tax on sales. Each business in supply chain takes part in process of controlling and collecting tax, remitting proportion of tax corresponding to its margin i.e. on difference between VAT paid out to suppliers and VAT charged to customers. in general, OECD countries Page 12 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT with value added taxes impose tax at all stages and normally allow immediate deduction of taxes on purchases by all but final consumer. 2. These features give value added takes their main economic characteristic, that of neutrality. full right to deduction of input tax through supply chain, with exception of final consumer, ensures neutrality of tax, whatever nature of product, structure of distribution chain and technical means used for its delivery (stores, physical delivery, Internet). 11.8. It was submitted that though India is not signatory to OECD model, it adopts same model of destination-based consumption tax rule as is clear from discussion paper, statement of objects and reasons of bill introducing CGST Act and FAQ. 11.9. It was further submitted that tax on each stage but effectively only on value addition also ensures that there is free flow of goods and services within country and also across borders of countries. It was submitted that for instance, as if rate of GST on article, say fan is 10%. Then fan will suffer same tax of 10% whether it is imported from outside India or procured domestically. However, if tax regime is not based on value addition, imported fan will suffer tax at rate of 10% on its value, Page 13 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT while same article procured domestically will, in addition to tax payable at rate of 10% on value of fan will also suffer tax paid on inputs like motor etc. which will form part of cost of fan which will seriously prejudice domestic suppliers of fan. It was also submitted that governments want to encourage exports, by reliving domestic taxes levied on goods which can be easily achieved under value added tax regime by simply refunding output tax of 10% on fan exported or by simply giving refund of total input tax credit to exporter of fan. This will ensure that taxes paid at any stage of supply chain do not get exported with export of goods. In tax regime which is not based on value added taxation, ensuring refund of taxes paid at various stage of manufacture of fan will be cumbersome and complicated. Thus, to find out tax paid on steel, motor etc. used in manufacture of fan will be extremely complicated. Thus, along with goods, taxes will also get exported. It was submitted that keeping in mind above economic necessities and realities, GST law is enacted by various countries world over including India to achieve principle of value added destination based consumption tax. 11.10. It was submitted that if, Steel supplied by is used to manufacture body of vehicle by B which is in turn used to manufacture car by Page 14 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT C . GST rate applicable on steel is 18%, vehicle body is 28%,and car is 28%. Supplies steel at Rs.150 (basic value of steel) + Rs.27 (amount of GST at 18% on Rs.150) to B, manufacturer of vehicle body. will remit Rs. 27 as GST to government. B manufacturers vehicle body and supplies vehicle body at Rs.200 (value of supply) + Rs.56 (amount of GST at 28% on Rs.200) to C . B collects GST of Rs.56 from C , subtracts GST paid on steel of Rs.27 and deposits net amount of Rs.29 to Government in cash. C supplies car at Rs.300 (value of supply) + Rs. 84 (amount of GST at 28% on Rs.300) to ultimate consumer. C collects from customer Rs.84, subtracts GST paid on vehicle body at Rs.56 and deposits net amount of Rs.28 to Government in cash. In this case, output tax payable is higher than input tax credit at all stages. It was submitted that thus, ordinarily, each Page 15 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT assessee pays certain amount of tax in cash to government at each stage due to value addition even after utilising input tax credit. 11.11 It was submitted that instead of above example of car, if example of tractor is considered and if, tractor attracts GST rate of 12%. D , supplier of tractors will supply tractor at Rs.300 (value of supply) + Rs.36 (amount of GST at 12% on Rs.300) to ultimate consumer, D , supplier of tractor would have availed input tax credit of Rs.56 (tax paid to B , supplier of vehicle body). This input tax credit would be used to pay GST on tractors of Rs.36. It was submitted that in such case, there will be accumulation of input tax credit of Rs.20 (Rs.56 -36) to C. as rate of GST on inward supplies i.e. tractor body is higher (being 28%) then rate of GST on outward supplies of tractors (being 12%). It was submitted that direct consequence in such situation would be cascading effect of taxes in form of unabsorbed excess tax on inputs with consequent increase in cost of product which is against very tenet of GST being consumption tax (namely, only tax in entire chain is tax charged to end customer and in entire supply chain there should not be any sticking or unabsorbed input tax credit). It was therefore, submitted that in such odd situations Page 16 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT where rate of tax at final stage is less than rate of tax on anterior stages is common feature when Government in public interest impose lower rate of tax on products like fertiliser, tractors, low-priced footwear, etc. 11.12. It was submitted that in order to mitigate this anomaly, mature GST law provides for refund of accumulated unutilised excess input tax credit. Such refund would ensure that anomalies in tax rate which do not lead to distortions to fundamental features of GST and GST remains true consumption tax. It was submitted that First Discussion Paper on GST in India by Empowered Committee of State Finance Ministry published on 10.11.2009 had acknowledged problem of accumulation of input tax credit on account of rate of input tax being higher than output tax and suggested that refund be provided of accumulated input tax credit. relevant portion of paper which was relied upon, is reproduced as under: (vi) Ideally, problem related to credit accumulation on account of refund of GST should be avoided by both Centre and States except in cases such as exports, purchase of capital goods Input tax at higher rate than output tax etc where, again refund/adjustment should be completed in time bound manner." Page 17 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT 11.13 It was submitted that accordingly legislature was alive to reality/ this aberration / anomaly (namely inverted duty structure) and hence provided for refund of unutilised input tax credit, by enacting Section 54(3)(ii) of CGST Act, 2017. It was submitted that Proviso (ii) to Section 54(3) enacts condition precedent to be fulfilled for grant of refund, namely inverted duty structure. Thus, it sets out only circumstance when refund can be granted. It was submitted that main Section 54(3) itself stipulates what would be refunded. Main Section 54(3) refers any unutilised input tax credit . It was submitted that expression input tax credit as defined under Section 2(63) means credit of input tax. expression input tax' as specifically defined under Section 2(62) means tax charged on any supply of goods or services or both" made to registered person. It was submitted that it is well settled that when expression employed in body of Act is defined in Act, that definition will apply whenever expression is employed in body of Act, therefore, expression input tax credit appearing in main Section 54(3) would include both i.e., credit on inputs and input services as well. It was submitted that there is no reference/or provision in entire Section 54(3) enabling Central Government/ Executive to Page 18 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT frame / enact Rule in this regard. It was submitted that this is unlike numerous other sections in CGST Act, which expressly employ word "prescribed . For example, Section 9 provides that manner in which tax is to be collected may be prescribed, Section 16(1) provides that conditions and restrictions for availing input tax credit may be prescribed, Section 31(2) provides that time within which person supplying taxable service shall issue invoice may be prescribed. It was submitted that in other words, in context of Section 54(3), any exercise of any power by Rule making authority to frame Rule in this regard is entirely unnecessary and unwarranted. Hence, Rule 89(5) of CGST Rules,2017 and Explanation (a) thereto, is ultra vires to that extent. 11.14 It was submitted that policy of Government that goods are to be exported and not taxes. Consequently, no output tax is charged on goods exported (or if levied, same is refunded). It was submitted that non-levy of output taxes on goods exported alone does not relieve of full burden of local taxation on goods exported. Therefore, apart from not levying taxes on goods exported, refund of taxes paid on input supplies used in export goods is also to be granted as per provision of section 54(3)of Page 19 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT CGST Act. 11.15 It was submitted that therefore, if entire supplies made by assessee are by way of export, entire input tax credit would be refunded to it but, ordinarily, assessee making domestic supplies is not eligible refund of input tax credit. However, if, assessee is engaged in exporting goods as well making domestic supplies in such cases, assessee would be eligible for claiming refund of input tax credit attributable to exports while simultaneously, not being entitled for cash refund of input tax credit relatable to domestic supplies. In such cases, where assessee makes both domestic supplies as well as export, one has to estimate input tax credit relatable to exports so that, such credit alone is refunded to assessee. It was therefore, submitted that broadly speaking, Rule 89(4) provides for computation of amount refundable as (export turnover divided by total turnover) multiplied by total input tax credit and hence purpose of formula in Rule 89(4) is only to estimate input tax credit relatable to export on proportionate basis, where assessee effects both export sales and domestic sales, while in law refund is due only for export. 11.16 It was therefore submitted that similarly need for providing formula in Rule 89(5) is that Page 20 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT if assessee has output supplies having inverted duty structure and also has output supplies not having inverted duty structure, refund is to be given only for former supplies and refund is not to be given for latter supplies and proportionate formula is provided to confine refund to inverted duty structure Supplies only with no refund for other (i.e. non-inverted duty) outward supplies. It was submitted that if, GST paid on inward supplies is higher than GST payable on output supplies i.e., supplies falling under inverted duty structure, then in principle, government decided to grant refund in such case by enacting Section 54(3) read with proviso (ii) thereto. 11.17 It was submitted that if assessee is exclusively effecting outward supplies involving inverted duty structure, then entire unutilised input tax credit will be eligible as refund to assessee as ordinarily, in law, assessee is not eligible for input tax refund relatable to supplies not involving inverted duty structure. It was submitted that on lines of rationale of Rule 89(4), Rule 89(5) estimates refund attributable / relatable to inverted duty structure supplies by adopting proportionate turn over basis which is sole and only purpose of formula for enabling Rule 89(5). Page 21 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT 11.18 It was therefore, submitted that need and rational for formula contained in Rule 89(5) in considering turnover of inverted duty structure goods vis-a-vis total turnover is understandable and reasonable, however, Rule 89(5) in garb of fixing formula for determining pro-rata amount of credit relatable to inverted duty structure turnover vis-a-vis total turnover, has restricted refund to input tax credit on inputs and by denying input tax credit on input services by defining Net ITC to mean input tax credit availed on inputs only which consequently ignores/overlooks input tax credit relatable to input services. relevant extract of amended Rule 89(5) reads thus: (5) In case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per following formula : Maximum Refund Amount = {(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. Explanation : For purposes of this sub-rule, expressions- (a) Net ITC shall mean input tax credit availed on inputs during relevant period other than input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; Page 22 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT It was submitted that excluding refund on input services in formula prescribed in Rule 89(5) is plainly contrary to main Section 54(3) and proviso (ii) thereto and therefore to this extent Rule 89(5) is ultra vires. It was submitted that main Section 54(3) categorically provides that person may claim refund of any unutilised input tax credit and there are no words either in main section 54(3) or under proviso (ii) to Section 54(3) whatsoever that refund in question would only be limited to credit of tax paid on inputs only. It was submitted that moreover, Explanation (a) to Section 54 defines refund to include refund of unutilised input tax as provided under sub- section (3) and as per Section 2(63) input tax credit" means credit of input tax, where as term input tax" is defined under Section 2(62) as under (relevant portion only): input tax in relation to registered person, means central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes- XXXX It was therefore, submitted that Explanation (a) to Rule 89(5) has narrowed down Section 54(3) by employing expression input tax credit availed on inputs in Rule 89(5),thus, Rule 89(5) Page 23 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT has effect of granting refund only on inputs and not on input services, hence, Explanation (a)to Rule 89(5) to extent it confines refund of input tax credit only to 'inputs' & ignoring input services , is ultra vires Section 54(3). 11.19 It was submitted that it is well settled law that Rule made by executive cannot curtail or whittle down provisions of Act. It was therefore, submitted that explanation (a) to Rule 89(5) which confines refund to input credit to exclusion of input service credit also whittles down effect of word any" in phrase any unutilised input tax credit' employed in Section 54(3) as word any in phrase 'any unutilised input tax credit employed in Section 54(3) would obviously mean "all" input tax credit including input services. 11.20 Reliance was placed on following decisions of Hon'ble Supreme Court in support of above submissions: (i) Shri Balaganesan Metals v. M.N. Shanmugham Chetty reported in (1987) 2 SCC 707 where in Para 18 & 19 word any in statute is explained as under: 18. In construing Section 10(3) (c) it is pertinent to note that words used are "any tenant" and not "a tenant" who can be called upon to vacate portion Page 24 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT in his occupation. word "any" has following meaning:- "Some; one out of many; indefinite number. One indiscriminately of whatever kind or quantity." Word "any" has diversity of meaning and may be employed to indicate "all" or "every" as well as "some" or "one" and its meaning in given statute depends upon context and subject matter of statute. It is often synonymous with "either", "every" or "all". Its generality may be restricted by context; (Black's Law Dictionary; Fifth Edition). 19. Unless legislature had intended that both classes of tenants can be asked to vacate by Rent Controller for providing landlord additional accommodation be it for residential or non-residential purposes it would not have used word "any" instead of using letter "a" to denote tenant. (ii) Lucknow Development Authority v. M.K. Gupta (1994) 1 SCC 243. Para 4 of this judgment explains meaning of service as under: 4. What is meaning of word 'service'? Does it extend to deficiency in building of house or flat? Can complaint be filed under Act against statutory authority or builder or contractor for any deficiency in respect of such property. answer to all this shall depend on understanding of word 'service". term has variety of meanings. It may Page 25 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT mean any benefit or any act resulting in promoting interest or happiness. It may be contractual, professional, public, domestic, legal, statutory etc. concept of service thus is very wide. How it should be understood and what it means depends on context in which it has been used in enactment. Clause (o) of definition section defines it as under: " service' means service of any description which is made available to potential users and includes provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or lodging or both, housing construction, entertainment, amusement or purveying of news or other information, but does not include rendering of any service free of charge or under contract of personal service;" It is in three parts. main part is followed by inclusive clause and ends by exclusionary clause. main clause itself is very wide. It applies to any service made available to potential users. words 'any' and 'potential' are significant. Both are of wide amplitude. word 'any' dictionarily means 'one or some or all'. In Black's Law Dictionary it is explained thus, "word ,any' has diversity of meaning and may be employed to indicate 'all' or ,every' as well as 'some' or 'one' and its meaning in given statute depends upon context and subject- matter of statute". use of word 1 any' in context it has been used in clause (o) indicates that it has been used in wider sense extending from one Page 26 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT to all. other word 'potential' is again very wide. In Oxford Dictionary it is defined as 'capable of coming into being, possibility'. In Black's Law Dictionary it is defined as "existing in possibility but not in act. Naturally and probably expected to come into existence at some future time, though not now existing; for example, future product of grain or trees already planted, or successive future instalments or payments on contract or engagement already made." In other words service which is not only extended to actual users but those who are capable of using it are covered in definition. clause is thus very wide and extends to any or all actual or potential users. But legislature did not stop there. It expanded meaning of word further in modem sense by extending it to even such facilities as are available to consumer in connection with banking, financing etc. Each of these is wide-ranging activities in day to day life. They are discharged both by statutory and private bodies. In absence of any indication, express or implied there is no reason to hold that authorities created by statute are beyond purview of Act. When banks advance loan or accept deposit or provide facility of locker they undoubtedly render service. State Bank or nationalised bank renders as much service as private bank. No distinction can be drawn in private and public transport or insurance companies. Even supply of electricity or gas which throughout country is being made, mainly, by statutory authorities is included in it. legislative intention is thus clear to protect consumer against services rendered even Page 27 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT by statutory bodies. test, therefore, is not if person against whom complaint is made is statutory body but whether nature of duty and function performed by it is service or even facility. It was submitted that thus, what is to be refunded is unutilised input tax credit and is so stated in main Section 54(3) itself. Therefore, Rule 89(5) is ultra vires to that extent. 11.21 It was submitted that Section 164(1) of CGST Act confers general rule making power on Government as under: 164. (1) Government may, on recommendation of Council, by notification, make rules for carrying out provisions of this Act. It was submitted that thus, government can make rules only for purpose of carrying out provisions of Act whereas Rule 89(5) provides proportionate formula for determining pro-rata amount of credit relatable to inverted duty structure vis-a-vis total turnover which is needed in case where assessee is making supplies involving inverted duty structure as well as supplies not involving inverted duty structure as Section 54(3) provides for refund only in case of inverted duty structure and Page 28 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT hence, to this extent, Rule 89(5) can be said to be rule made for carrying cut provisions of Act in terms of Section 164(1), however, Rule 89(5) further restricts refund to input tax credit on inputs alone and denies in respect of input services, therefore, such rule is not for purpose of carrying out provisions of Act but for purpose of restricting provision of Act namely Section 54(3) which provides credit of any unutilised input tax credit and as such explanation (a) to Rule 89(5) cannot be sustained even under general rule making power conferred by Section 164(1). 11.22 It was submitted that it is well settled that if provision is ultra vires, court in appropriate case can strike down offending portion keeping intact valid portions of provision. Reliance was placed on para 10 in case of Lohara Steel Industries Ltd. v. State of AP. Reported in (1997) 2 SCC 37. 11.23 It was summarised that in present case challenge to vires of Rule 89(5) is only because of definition of Net ITC as per Explanation (a) to said rule which defines Net ITC mean input tax credit availed on inputs during relevant period other than input tax credit availed for which refund is claimed Page 29 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT under sub-rules (4A) or (4B) or both where as Section 54(3) allows refund of any input tax credit and not credit on inputs only. Therefore if above expression on inputs employed in Explanation (a) to Rule 8(5) is struck down, Explanation defining Net ITC will read as under: Net ITC shall mean input tax credit availed during two relevant period other than input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both It was submitted that Explanation (a) to Rule 89(5) will then be entirely in line with main provision viz. Section 54(3). Hence, offending words in Explanation i.e. on inputs are easily severable and liable to be stuck down to bring Explanation (a) in accordance with main section 54(3) read with proviso (ii) thereto. It was submitted that granting refund of input tax credit on inputs and denying refund in respect of input service is also violative of Article 14 of Constitution of India and hence bad in law. 12. Learned Senior advocate Mr. Mihir Joshi assisted by learned advocate Ms. Amrita M. Thakore appearing for petitioner in SCA No.14155 of 2018 submitted as under: 12.1. It was submitted that GST was introduced with intention of removing cascading Page 30 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT effect of taxes by providing for input tax credit on all inputs and input services, which can be used for payment of output tax. [See Statement of Objects and Reasons of Constitution (122nd Amendment) Act and Statement of Objects and Reasons of CGST Act. 12.2 It was submitted that scheme of CGST Act makes this object very clear since Sections 16 and 49 clearly provide for input tax credit on any supply of goods or services used or intended to be used in course of furtherance of business which can be used for payment of tax. Section 49(6) provides for refund of balance in electronic credit ledger after payment of tax, interest, penalty, fees, etc in accordance with Section 54 which pertains to refund of tax and Sub-section (3) of Section 54 stipulates that registered person can claim refund of ANY unutilised input tax credit at end of any tax period. Reference was made to Notes on Clauses of Section 54 to point out that it does not restrict refund of tax paid on inputs nor does it create distinction between zero rated supplies and inverted tax structure for purposes of refund of unutilised input tax credit as input tax credit as defined in Section 2(63) means credit of input tax and input tax as defined in Section 2(62) includes tax charged on any supply of goods or services or both. It was submitted Page 31 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT that proviso to sub-section (3) of Section 54 provides threshold eligibility criteria for claiming refund of unutilised input tax credit and Clause (ii) thereof allows claiming of refund of unutilised input tax credit where credit has accumulated on account of rate of tax on inputs being higher than rate of tax on output supplies which was explained as under: (i) If rate of tax on inputs is higher than rate of tax on output supplies, registered person would meet eligibility for claiming refund and is therefore entitled to all/ ANY unutilised input tax credit lying in electronic credit ledger. (ii) Department seeks to rely upon definition of input as contained in Section 2(59) which excludes input services" separately defined in Section 2(60) to contend that proviso to Section 54(3) excludes refund of tax paid on input services. It was submitted that this interpretation is not correct as: (a) words used in Clause (ii) of proviso are tax on inputs and tax on output supplies ,considering that intention of legislature as evident from object and scheme of Act is to prevent cascading effect of tax and Act specifically provides for availment of credit on inputs as well as input services, words tax on inputs cannot be interpreted to mean tax on inputs" as defined in Section 2(59) but have to be read as input tax as Page 32 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT defined in Section 2(62) which includes input services within its purview. This interpretation is fortified by use of phrase tax on output supplies also in same clause (ii) when considered in context of fact that Act does not define output but defines output tax in Section 2(82) to include tax on both gods and services and defines outward supply in Section 2(83) to include supply of goods as well as services and supply in Section 7 to include supply of both goods and services. (b) Section 2 of Act begins with words In this Act unless context otherwise requires , considering object and scheme of Act and intention of legislature, context does require aforementioned interpretation. (iii) It was submitted that assuming that interpretation of department is applicable, then also once rate of tax on inputs is higher than rate of tax on output supplies, registered person would meet threshold eligibility for claiming refund and would thereafter be entitled to all/ANY unutilised input tax credit lying in electronic credit ledger. No restriction can thereafter be placed by way of rules on refund of any part of unutilised input tax credit lying in electronic credit ledger. 12.3 It was submitted that amended Rule 89(5) results in perpetual retention / appropriation of unutilised input tax credit on services by Page 33 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Government contrary to intention of legislature as evidenced from object and scheme of Act which would therefore amount to indirect levy of tax without authority of law under Article 265 of Constitution of India. 12.4 It was submitted that amended Rule 89(5) violates Article 14 of Constitution of India as it is manifestly arbitrary and irrational because; (i) It denies crystallised and vested right created by statute by virtue of statutory entitlement to credit which keeps accumulating but cannot be used. (ii) retrospective operation of amended Rule 89(5) deprives petitioner even of crystalised and vested right of refund. (iii) There is absolutely no rationale for allowing credit of tax paid on input services used or intended to be used in course of furtherance of business which can be used for payment of tax but not allowing refund thereof if such credit cannot be utilised on account of inverted duty structure imposed by Government itself. (iv) There is absolutely no rationale for allowing refund of unutilised input tax credit in respect of tax paid on inputs but not unutilised input tax credit in respect of tax paid on input services. Page 34 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT 12.5 It was submitted that amended Rule 89(5) is also discriminatory since: (i) Refund of unutilised input tax credit in respect of tax paid on input services is permitted in case of zero rated supplies (exports or supplies to SEZs). No intelligible differentia which has rational nexus to object sought to achieved is perceptible. (ii) It is Government which fixes rates of tax to be paid on different goods and services from time to time. It is only on account of prevalent rates that some industries would face inverted duty structure while others do not. That may change if rates are changed. Those industries which face inverted duty structure and whose input services are taxed at higher rate than tax on their outward supplies, are not entitled to refund of unutilised input tax credit (which remains unutilised not on account of any action or inaction of industry but on account of rate structure set by Government)while those industries which do not face inverted duty structure are not faced with losing any part of their input tax credit. No intelligible differentia which has rational nexus to object sought to achieved is perceptible. (iii) Those industries which are engaged in making outward supplies wholly using inputs would get full refund of unutilised input tax credit while putting at disadvantage those industries which substantially use input services for making outward supplies. Page 35 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT (iv) If manufacturer gets any part of his manufacturing done on job work basis, tax paid on job work charges would be treated tax on input services which would not be refunded while other manufacturers of identical goods which do not use job work services would get refund of entire unutilised input tax credit. 12.6 It was further submitted that statement of object and reasons of CGST Bill 2017 are required to be considered for purpose of analysis as to whether Rule 89(5) of CGST rules is ultra vires or not. Statements of objects and reasons of Act reads thus: STATEMENT OF OBJECTS AND REASONS Presently, Central Government levies tax on, manufacture of certain goods in form of Central Excise duty, provision of certain services in form of service tax, inter-State sale of goods in form of Central Sales tax. Similarly, State Governments levy tax on and on retail sales in form of value added tax, entry of goods in State in form of entry tax, luxury tax and purchase tax, etc. Accordingly, there is multiplicity of taxes which are being levied on same supply chain. 2. present tax system on goods and services is facing certain difficulties as under (i) there is cascading of taxes as taxes levied by Central Government are not available as set off against Page 36 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT taxes being levied by State Governments; (ii) certain taxes levied by State Governments are not allowed as set off for payment of other taxes being levied by them; (iii) variety of Value Added Tax Laws in country with disparate tax rates and dissimilar tax practices divides country into separate economic spheres; and (iv) creation of tariff and non- tariff barriers such as octroi, entry tax, check posts, etc., hinder free flow of trade throughout country. Besides that, large number of taxes create high compliance cost for taxpayers in form of number of returns, payments, etc. 3. In view of aforesaid difficulties, all above mentioned taxes are proposed to be subsumed in single tax called goods and services tax which will be levied on supply of goods or services or both at each stage of supply chain starting from manufacture or import and till last retail level. So, any tax that is presently being levied by Central Government or State Governments on supply of goods or services is going to be converged in goods and services tax which is proposed to be dual levy where Central Government will levy and collect tax in form of central goods and services tax and State Government will levy and collect tax in form of state goods and services tax on intra-State supply of goods or services or both. 4. In view of above, it has become necessary to have Central legislation, namely Central Goods and Services Page 37 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Tax Bill, 2017. proposed legislation will confer power upon Central Government for levying goods and services tax on supply of goods or services or both which takes place within State. proposed legislation will simplify and harmonise indirect tax regime in country. It is expected to reduce cost of production and inflation in economy, thereby making Indian trade and industry more competitive, domestically as well as internationally. Due to seamless transfer of input tax credit from one stage to another in chain of value addition, there is in-built mechanism in design of goods and services tax that would incentivise tax compliance by taxpayers. proposed goods and services tax will broaden tax base, and result in better tax compliance due to robust information technology infrastructure. 5. Central Goods and Services Tax Bill, 2017, inter alia, provides for following, namely: (a) to levy tax on all intra-State supplies of goods or services or both except supply of alcoholic liquor for human consumption at rate to be notified, not exceeding twenty per cent. as recommended by Goods and Services Tax Council (the Council); (b) to broad base input tax credit by making it available in respect of taxes paid on any supply of goods or services or both used or intended to be used in course or furtherance of business; (c) to impose obligation on electronic commerce operators to collect tax at Page 38 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT source, at such rate not exceeding one per cent. of net value of taxable supplies, out of payments to suppliers supplying goods or services through their portals; (d) to provide for self-assessment of taxes payable by registered person; (e) to provide for conduct of audit of registered persons in order to verify compliance with provisions of Act; (f) to provide for recovery of arrears of tax using various modes including detaining and sale of goods, movable and immovable property of defaulting taxable person; (g) to provide for powers of inspection, search, seizure and arrest to officers; (h) to establish Goods and Services Tax Appellate Tribunal by Central Government for hearing appeals against orders passed by Appellate Authority or Revisional Authority; (i) to make provision for penalties for contravention of provisions of proposed Legislation; (j) to provide for anti-profiteering clause in order to ensure that business passes on benefit of reduced tax incidence on goods or services or both to consumers; and (k) to provide for elaborate transitional provisions for smooth transition of existing taxpayers to Page 39 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT goods and services tax regime. 6. Notes on clauses explain in detail various provisions contained in Central Goods and Services Tax Bill, 2017. 7. Bill seeks to achieve above objectives . Referring to above, it was submitted that basic object of GST Act is to streamline indirect tax structure earlier prevailing in India so as to levy tax on intra-state supply of goods and interstate supply of goods and other objective stated herein above. It was therefore, submitted that Rule 89(5) prescribing formula for calculation of refund on account of inverted duty structure is contrary to sub-section 3 of Section 54 of GST Act rendering in contradictory to basic scheme and object of GST Act. Reliance was placed on decision of Supreme Court in case of Printers (Mysore) Ltd. and another vs. Assistant Commercial Tax Officer and Others reported in [1994] 2 SCC 434, to submit that object of GST Act is not to create burden, which was not there but to remove burden, if any already existing in prevailing tax structure. Supreme Court has observed in said decision as under : 17. Reference must be made in this connection to judgment in Indian Page 40 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Express Newspapers v. Union of India wherein not only importance of freedom of press was emphasised, it was also held that newspaper cannot survive and sell itself at price within reach of common man unless it is allowed to take in advertisements. (See para 84). This decision is significant for reason that it seeks to place freedom of press on higher footing than other enterprises. E.S. Venkataramiah, J., as he then was, speaking for Bench, said: (SCC p. 686, para 69) "In view of intimate connection of newsprint with freedom of press, tests for determining vires of statute taxing newsprint have, therefore, to be different from tests usually adopted for testing vires of other taxing statutes. In case of ordinary taxing statutes, 8 (1 962) 3 SCR 842: AIR 1962 SC 305 9 (1972) 2 SCC 788 10 (1985) 1 SCC 641 :1985 SCC (Tax) 121 laws may be questioned only if they are either openly confiscatory or colourable device to confiscate. On other hand, in case of tax on newsprint, it may be sufficient to show distinct and noticeable burdensomeness, clearly and directly attributable to tax." 18. Now coming back to amendment of definition of "goods" in Section 2(d) of Central Sales Tax Act, said amendment, brought in with view to bring said definition in accord with amendments brought in by Constitution Sixth (Amendment) Act (referred to hereinbefore) was actuated Page 41 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT by very same concern, viz., to exempt sale of newspapers from levy of Central Sales Tax. amendment was not intended to create burden which was not there but to remove burden, if any already existing on newspapers policy evidenced by enactment of Taxes on Newspapers (Sales and Advertisements) Repeal Act, 1951. This concern must have to be borne in mind while understanding and interpreting expression "goods" occurring in second half of Section 8(3)(b). Now, expression "goods" occurs on four occasions in Section 8(3) (b). On first three occasions, there is no doubt, it has to be understood in sense it is defined in clause (d) of Section 2. Indeed, when Section 8(1) (b) speaks of goods, it is really referring to goods referred to in first half of Section 8(3)(b), i.e., on first three occasions. It is only when Section 8(3)(b) uses expression "goods" in second half of clause, i.e., on fourth occasion that it does not and cannot be understood in sense it is defined in Section 2(d). In other words, "goods" referred in first half of clause (b) in Section 8(3) refers to what may generally be referred to as raw material (in cases where they were purchased by dealer for use in manufacture of goods for sale) while said word "goods" occurring for fourth time (i.e., in latter half) cannot obviously refer to raw material. It refers to manufactured "goods", i.e., goods manufactured by such purchasing dealer in this case, newspapers. If we attach defined meaning to "goods" in second half of Section 8(3)(b), it would place newspapers in more Page 42 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT unfavourable position than they were prior to amendment of definition in Section 2(d). It should also be remembered that Section 2 which defines certain expressions occurring in Act opens with words: "In this Act, unless context otherwise requires". This shows that wherever word "goods" occurs in enactment, it is not mandatory that one should mechanically attribute to said expression meaning assigned to it in clause (d). Ordinarily, that is so. But where context does not permit or where context requires otherwise, meaning assigned to it in said definition need not be applied. If we keep above consideration in mind, it would be evident that expression "goods" occurring in second half of Section 8(3)(b) cannot be taken to exclude newspapers from its purview. context does not permit it. It could never have been included by Parliament. Before said amendment, position was State could not levy tax on intra-State sale of newspapers; Parliament could but it did not and Entry 92-A of List I bars Parliament from imposing tax on inter-State sale of newspapers; as result of above provisions, while newspapers were not paying any tax on their sale, they were enjoying benefit of Section 8(3)(b) read with Section 8(1)(b) and paying tax only @ 4% on non- declared goods which they required for printing and publishing newspapers. Their position could not be worse after amendment which would be case if we accept contention of Revenue. If contention of Revenue is accepted, newspapers would now become liable to pay tax Co) 10% on non- Page 43 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT declared goods as prescribed in Section 8(2). This would be necessary consequence of acceptance of Revenue's submission inasmuch as newspapers would be deprived of benefit of Section 8(3)(b) read with Section 8(1)(b). We do not think that such was intention behind amendment of definition of expression "goods" by 1958 (Amendment) Act. Even apart from opening words in Section 2 referred to above, it is well settled that where context does not permit or where it would lead to absurd or unintended result, definition of expression need not be mechanically applied. [Vide T.M. Kanniyan v. ITO' Pushpa Devi v. Milkhi Ram 12 (para 14) and CIT v. J. H. Gotla.] 13. Mr. Uchit Sheth, learned advocate for petitioners appearing in Special Civil Application Nos.12483 of 2019, 16269 of 2019 and 16276 of 2019 referred to Section 2(60) of GST Act which defines input service means any service used or intended to be used by supplier in course or furtherance of business. Thereafter, reference was made to definition of input tax as per section 2(62) of GST Act, to submit that input tax in relation to registered person, means central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him. 13.1 Learned advocate thereafter, referred to Page 44 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT provisions of Section 17 of GST Act, which provides for Apportionment of credit and blocked credits and submitted that Section 17(1) provides that where goods or services or both are used by registered person partly for purpose of any business and partly for other purposes, amount of credit shall be restricted to so much of input tax as is attributable to purposes of his business. Section 18 of GST Act was also referred to point out Availability of credit in special circumstances in relation to inputs and Section 20 was referred to point out Manner of distribution of credit by Input Service Distributer . 13.2 It was pointed out that Section 140(3) of GST Act provides for Transitional arrangements for input tax credit available in hands of assessee on coming into force of GST with effect from 1st July 2017. It was submitted that aforesaid provisions of GST Act clearly provides that assessee is entitled to refund as per provision of Section 54(3) of Act to claim refund of any unutilised input tax credit at end of tax period. In such circumstances, it was submitted that Rule 89(5) prescribing formula to calculate refund on account of inverted duty structure is therefore, contrary to provision Page 45 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT of Section 54 (3) of CGST Act, 2017. II. SUBMISSIONS ON BEHALF OF REVENUE 14. On other hand, Mr. Nirzar S. Desai, learned standing counsel for respondent submitted that petitions are not maintainable as Rule 89(5) of CGST Rules only provides mode of calculation of refund available to assessee on account of inverted duty structure and same is not contrary to provisions of Sub-section 3 of Section 54 of CGST Act in any manner because Sub-section 3 of Section 54 only provides that subject to provisions of sub-section (10), registered person may claim refund of any unutilised input tax credit at end of any tax period and Proviso to Sub-section 3 of Section 54 of CGST Act makes embargo on claim of refund of unutilised input tax credit as it shall be allowed in cases other than- zero-rated supplies made without payment of tax and where credit has accumulated on account of rate of tax on inputs being higher than rate of tax on output supplies, except supplies of goods or services or both as may be notified by Government on recommendations of GST Council. 14.1 It was submitted that Section 164 of GST empowered Central Government to make rules on recommendations of Council, by Page 46 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT notification, for carrying out provisions of this Act. It was submitted that this Rule making power is conferred upon Government in widest possible manner to make rules for carrying out provisions of GST Act. 14.2 It was further pointed out that Sub- section 2 of Section 164 also empowers Government without prejudice to generality of provision of sub-section (1) to make rules for all or any of matters which by CGST Act,2017 are required to be, or may be, prescribed or in respect of which provisions are to be or may be made by Rules and sub-Section 3 of Section 164 empowers Government to have retrospective effect of such rules. It was therefore, submitted that Government has framed CGST Rules, 2017 in exercise of this rule making power conferred under Section 164 of CGST Act. In such circumstances, it was submitted that Rule 89(5) cannot be held to be ultra vires as it only provides method of calculating refund on account of inverted duty structure. 14.3 Learned advocate for respondent relied upon decision of this Court in case of Willowwood Chemicals Pvt. Ltd. vs. Union of India in SCA No.4252 of 2018 rendered on 12th / 19th September 2018 and more particularly on Page 47 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT following observations of Court made in paragraph Nos.22, 23, 25, 30, 31 and 32 as under : 22. We can however not be oblivious to Section 164 of CGST Act, which is rule making power and reads as under : 164. Power of Government to make rules : (1) Government may, on recommendations of Council, by notification, make rules for carrying out provisions of this Act. (2) Without prejudice to generality of provisions of subsection (1), Government may make rules for all or any of matters which by this Act are required to be, or may be, prescribed or in respect of which provisions are to be or may be made by rules. (3) power to make rules conferred by this section shall include power to give retrospective effect to rules or any of them from date not earlier than date on which provisions of this Act comes into force. (4) Any rules made under sub- section (1) of subsection (2) may provide that contravention Page 48 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT thereof shall be liable to penalty not exceeding ten thousand rupees. 23. Under subsection [1] of Section 164 of CGST Act, thus, Government on recommendations of Council, by notification, could make rules for carrying out provisions of Act . This rule making power is thus couched in widest possible manner empowering Government to make rules for carrying out provisions of Act. Subsection [2] to Section 164 is equally widely worded, when it provides that, without prejudice to generality of provisions of subsection (1), Government may make rules for all or any of matters which by this Act are required to be, or may be, prescribed or in respect of which provisions are to be, or may be made by rules. Sub- section [3] of Section 164, to which we are not directly concerned, nevertheless provides that power to make rules conferred in said section would include power to give retrospective effect to such rules. 25. Section 140 of Act envisages certain benefits to be carried forward during regime change. As is well settled, reduced rate of duty or concession in payment of duty are in nature of exemption and is always open for legislature to grant as well as to withdraw such exemption. As noted in case of Jayam & Company [Supra], Supreme Court had observed that input tax credit is form of concession provided by legislature and can be made available subject to conditions. Likewise, in case of Page 49 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Reliance Industries Limited [Supra], it was held and observed that how much tax credit has to be given and under what circumstances is domain of legislature. In case of Godrej & Boyce Mfg. Co. Pvt. Limited [Supra], Supreme Court had upheld rule which restricts availment of MODVAT credit to six months from date of issuance of documents specified in proviso. contention that such amendment would take away existing right was rejected. 30. Both these judgments of Supreme Court in case of Kanhaiya Lal Mukundlal Saraf [Supra] and Tilokchand Motichand v. H.B Munshi, CST [Supra] came up for consideration before 9Judge Bench in case of Mafatlal Industries Limited & Ors., [Supra]. Mr. Justice B.P Jeevan Reddy speaking for majority, summarized conclusions in para 108 of judgment. Portions relevant for our purpose, read as under: 108. [i] Where refund of tax/duty is claimed on ground that it has been collected from petitioner/plaintiff whether before commencement of Central Excise and Customs Laws [Amendment] Act, 1991 or thereafter by misinterpreting or misapplying provisions of Central Excises and Salt Act, 1944 read with Central Excise Tariff Act, 1985 or Customs Act, 1962 read with Customs Tariff Act or by Page 50 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT misinterpreting or misapplying any of rules, regulations or notifications issued under said enactments, such claim has necessarily to be preferred under and in accordance with provisions of respective enactments before authorities specified there under and within period of limitation prescribed therein. No suit is maintainable in that behalf. While jurisdiction of High Courts under Article 226 and of this Court under Article 32 cannot be circumscribed by provisions of said enactments, they will certainly have due regard to legislative intent evidenced by provisions of said Acts and would exercise their jurisdiction consistent with provisions of Act. writ petition will be considered and disposed of Act. writ petition will be considered and disposed of in light of and in accordance with provisions of Section 11B. This is for reason that power under Article 226 has to be exercised to effectuate rule of law and not for abrogating it. said enactments including Section 11B of Central Excises and Salt Act and Section 27 of Customs Act do constitute law within meaning of Article 265 of Page 51 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Constitution of India and hence, any tax collected, retained or not refunded in accordance with said provisions must be held to be collected, retained or not refunded, as case may be, under authority of law. Both enactments are self- contained enactments providing for levy, assessment, recovery and refund of duties imposed there under. Section 11B of Central Excises and Salt Act and Section 27 of Customs Act, both before and after 1991 [Amendment] Act are constitutionally valid and have to be followed and given effect to. Section 72 of Contract Act has no application to such claim of refund and cannot form basis for maintaining suit or writ petition. All refund claims except those mentioned under Proposition (ii) below have to be and must be filed and adjudicated under provisions of Central Excise and Sale Act or Customs Act, as case may be. It is necessary to emphasize in this behalf that Act provides complete mechanism for correcting any errors whether or fact or law and that not only appeal is provided to Tribunal which is not departmental organ but to this Court, which is civil court. [ii]Where, however, refund is claimed on ground that Page 52 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT provisions of Act under which it was levied is or has been held to be unconstitutional, such claim, being claim outside purview of enactment, can be made either by way of suit or by way of writ petition. This principle is, however, subject to exception. Where person approaches High Court or Supreme Court challenging constitutional validity of provision but fails, he cannot take advantage of declaration of unconstitutionality obtained by another person on another ground; this is for reason that so far as he is concerned, decision has become final and cannot be reopened on basis of decision on another person s case; this is ratio of opinion of Hidayatullah, CJ., in Trilokchand Motichand [Supra] and we respectfully agree with it. Such claim is maintainable both by virtue of declaration contained in Article 265 of Constitution of India and also by virtue of Section 72 of Contract Act. In such cases, period of limitation would naturally be calculated taking into account principle underlying clause (c) of subsection [1] of Section 17 of Limitation Act, 1963. refund claim in such situation Page 53 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT cannot be governed by provisions of Central Excises and Salt Act or Customs Act, as case may be, since enactments do not contemplate any of their provisions being struck down and refund claim arising on that account. In other words, claim of this nature is not contemplated by said enactments and is outside their purview. [iii] xx xx xx [iv] It is not open to any person to make refund claim on basis of decision of court or tribunal rendered in case of another person. He cannot also claim that decision of Court/Tribunal in another person s case has led him to discover mistake of law under which he has paid tax nor can he claim that he is entitled to prefer writ petition or to institute suit within three years of such alleged discovery of mistake of law. person, whether manufacturer or importer, must fight his own battle and must succeed or fail in such proceedings. Once assessment or levy has become final in his case, he cannot seek to reopen it nor can he claim refund without reopening such assessment/order on ground of decision in another Page 54 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT person s case. Any proposition to contrary not only results in substantial prejudice to public interest but is offensive to several well established principles of law. It also leads to grave public mischief. Section 72 of Contract Act, or for that matter Section 17 [1](c) of Limitation Act, 1963, has no application to such claim for refund. [v] Article 265 of Constitution has to be construed in light of goal and ideals set out in Preamble to Constitution and in Articles 38 and 39 thereof. concept of economic justice demands that in case of indirect taxes like Central Excises duties and Customs duties, tax collected without authority of law shall not be refunded to petitioner plaintiff unless he alleges and establishes that he has not passed on burden of duty to third party and that he has himself borne burden of said duty. [vi] xx xx xx xx [vii] While examining claims for refund, financial chaos which would result in administration of State by allowing such claims is not irrelevant consideration. Where Page 55 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT petitioner-plaintiff has suffered no real loss or prejudice, having passed on burden of tax or duty to another person, it would be unjust to allow or decree his claim since it is bound to prejudicially affect public exchequer. In case of larger claims, it may well result in financial chaos in administration of affairs of State. [viii] decision of this Court in STO v. Kanhaiya Lal Mukundlal Saraf [Supra] must be held to have been wrongly decided in so far as it lays down or is understood to have laid down proportions contrary to propositions enunciated in (i) and (vii) above. It must equally be held that subsequent decisions of this Court following and applying said propositions in Kanhaiya Lal [Supra] have also been wrongly decided to above extent. This declaration or law laid down in Propositions (i) to (vii) above shall not however entitle State to recover taxes/duties already refunded and in respect whereof no proceedings are pending before any authority or Tribunal or Court as on this date. All pending matters shall, however, be governed by law declared herein notwithstanding that tax or duty has been refunded pending those proceedings, Page 56 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT whether under orders of authority, Tribunal or Court or otherwise. 31. As per this decision, thus, time limit provisions contained in Central Excise and Customs laws for seeking refund of excess duty were held to be sacrosanct and were seen as constituting law within meaning of Article 265 of Constitution. Consequently, tax collected, retained or not refunded in accordance with such provisions would be seen as collected, retained and not refunded under authority of law. view expressed by Supreme Court in Trilokchand Motichand [Supra] was affirmed. It was emphatically stated that it was not open to any person to make refund claim on basis of decision of Court or Tribunal rendered in case of another person. Such person cannot claim that decision of Court or Tribunal in another person s case has led him to discover mistake of law under which he had paid tax. In this context, it was observed that any proposition to contrary not only results in substantial prejudice to public interest, but is offensive to several well established principles of law. It also leads to grave public mischief. In this context, it was also observed that while examining claims for refund, financial chaos which would result in administration of State by allowing such claims would not be irrelevant consideration. In case of large claims, same may result in financial chaos in administration of affairs of State. decision Page 57 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT in case of STO vs. Kanhaiya Lal Mukundlal Saraf [Supra] to extent it lays down or is understood to have laid down proposition contrary to these propositions was held to have been wrongly decided. 32. Thus, in economic matters of such vast scale, wider considerations of State exchequer, while interpreting statutory provisions cannot be kept out of purview. Quite apart from independently finding that time limit provisions contained in sub-rule (1) of Rule 117 of CGST Rules is not ultra vires Act or powers of rule making authority, interpreting such powers as merely directory would give rise to unending claims of transfer of credit of tax on inputs and such other claims from old to new regime. Under new GST laws, existing tax structure was being replaced by new set of statutes, through exercise which was unprecedented in Indian context. claims of carry forward of existing duties and credits during period of migration, therefore, had to be within prescribed time. Doing away with time limit for making declarations could give rise to multiple large scale claims trickling in for years together, after new tax structure is put in place. This would besides making task of matching of credits impractical if not impossible, also impact revenue collection estimates. It is in this context that Supreme Court in case of Mafatlal Industries Limited (Supra), after rejecting contention that person can move proceedings for recovery of tax paid upon success of Page 58 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT some other person before Tribunal or Court in getting such tax collection declared illegal, was further influenced by fact that any such situation could lead to utter chaos, if claims are large. Under circumstances, we do not find any substance in petitioners challenge to rule 117 (1) of CGST Rules as well as GGST Rules. III. ANALYSIS 15. Having heard learned advocates for respective parties and having gone through materials on record in order to decide controversy as to whether Rule 89(5) of CGST Rules, 2017 is ultra vires or not, it would be relevant to refer to following provisions of CGST Act, IGST Act and CGST Rules, 2017 : (i) Sections 2(62), 2(63), 54 and 164 of CGST, Act 2017 read as under: 2. Definitions. In this Act, unless context otherwise requires, (62) input tax in relation to registered person, means central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes (a) integrated goods and services tax charged on import of goods; (b) tax payable under provisions of sub-sections (3) and (4) of section 9; (c) tax payable under provisions of sub-sections (3) and (4) of section 5 of Integrated Goods and Services Tax Act; (d) tax Page 59 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT payable under provisions of sub- sections (3) and (4) of section 9 of respective State Goods and Services Tax Act; or (e) tax payable under provisions of sub-sections (3) and (4) of section 7 of Union Territory Goods and Services Tax Act, but does not include tax paid under composition levy; (63) input tax credit means credit of input tax; SECTION 54. Refund of tax. (1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make application before expiry of two years from relevant date in such form and manner as may be prescribed: Provided that registered person, claiming refund of any balance in electronic cash ledger in accordance with provisions of sub-section (6) of section 49, may claim such refund in return furnished under section 39 in such manner as may be prescribed. (2) xxxxx (3) Subject to provisions of sub- section (10), registered person may claim refund of any unutilised input tax credit at 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 credit has accumulated on account of rate of tax on Page 60 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT inputs being higher than 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 Government on recommendations of Council: Provided further that no refund of unutilised input tax credit shall be allowed in cases where goods exported out of India are subjected to export duty: Provided also that no refund of input tax credit shall be allowed, if supplier of goods or services or both avails of drawback in respect of central tax or claims refund of integrated tax paid on such supplies. (4) application shall be accompanied by (a) such documentary evidence as may be prescribed to establish that refund is due to applicant; and (b) such documentary or other evidence (including documents referred to in section 33) as applicant may furnish to establish that amount of tax and interest, if any, paid on such tax or any other amount paid in relation to which such refund is claimed was collected from, or paid by, him and incidence of such tax and interest had not been passed on to any other person: Provided that where amount claimed as refund is less than two lakh rupees, it shall not be necessary for applicant to furnish any documentary and other evidences but he may file declaration, based on documentary or other evidences available with him, Page 61 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT certifying that incidence of such tax and interest had not been passed on to any other person. SECTION 164. Power of Government to make rules. (1) Government may, on recommendations of Council, by notification, make rules for carrying out provisions of this Act. (2) Without prejudice to generality of provisions of sub- section (1), Government may make rules for all or any of matters which by this Act are required to be, or may be, prescribed or in respect of which provisions are to be or may be made by rules. (3) power to make rules conferred by this section shall include power to give retrospective effect to rules or any of them from date not earlier than date on which provisions of this Act come into force. (4) Any rules made under sub-section (1) or sub-section (2) may provide that contravention thereof shall be liable to penalty not exceeding ten thousand rupees. (ii) Section 16 of Integrated Goods and Services Tax Act, 2017 reads as under: SECTION 16. Zero rated supply.- (1) zero rated supply means any of following supplies of goods or services or both, namely: (a) export of goods or services or both; or (b) supply of goods or services or both Page 62 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT to Special Economic Zone developer or Special Economic Zone unit. (2) Subject to provisions of sub- section (5) of section 17 of Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be exempt supply. (3) registered person making zero rated supply shall be eligible to claim refund under either of following options, namely: (a) he may supply goods or services or both 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) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with provisions of section 54 of Central Goods and Services Tax Act or rules made there under. (iii) Rule 89 of CGST Rules, 2017 reads as under: CHAPTER X REFUND 89. Application for refund of tax, interest, penalty, fees or any other amount.- (1) Any person, except persons covered under notification issued under section 55,claiming refund of any tax, interest, penalty, fees or any other Page 63 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT amount paid by him, other than refund of integrated tax paid on goods exported out of India, may file application electronically in FORM GST RFD-01through common portal, either directly or through Facilitation Centre notified by Commissioner: Provided that any claim for refund relating to balance in electronic cash ledger in accordance with provisions of sub-section (6) of section 49 may be made through return furnished for relevant tax period in FORM GSTR-3 or FORM GSTR-4 or FORM GSTR- 7, as case may be: Provided further that in respect of supplies to Special Economic Zone unit or Special Economic Zone developer, application for refund shall be filed by (a) supplier of goods after such goods have been admitted in full in Special Economic Zone for authorised operations, as endorsed by specified officer of Zone; (b) supplier of services along with such evidence regarding receipt of services for authorised operations as endorsed by specified officer of Zone: Provided also that in respect of supplies regarded as deemed exports, application may be filed by, - (a) recipient of deemed export supplies; or (b) supplier of deemed export supplies in cases where recipient does not avail of input tax credit on such supplies and furnishes undertaking to effect that supplier may claim refund Provided also that refund of any amount, after adjusting tax payable Page 64 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT by applicant out of advance tax deposited by him under section 27 at time of registration, shall be claimed in last return required to be furnished by him. (2) XXX (3) XXX (4) In case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking in accordance with provisions of sub-section (3) of section 16 of Integrated Goods and Services Tax Act, 2017 (13 of 2017), refund of input tax credit shall be granted as per following formula Refund Amount = (Turnover of zero- rated supply of goods + Turnover of zero rated supply of services) x Net ITC Adjusted Total Turnover Where, - (A) "Refund amount" means maximum refund that is admissible; (B) "Net ITC" means input tax credit availed on inputs and input services during relevant period other than input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; (C) "Turnover of zero-rated supply of goods" means value of zero-rated supply of goods made during relevant period without payment of tax under bond or letter of undertaking, other than turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both; (D) "Turnover of zero-rated supply of services" means value of zero- rated supply of services made without payment of tax under bond or letter of undertaking, calculated in following manner, namely:- Page 65 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Zero-rated supply of services is aggregate of payments received during relevant period for zero- rated supply of services and zero-rated supply of services where supply has been completed for which payment had been received in advance in any period prior to relevant period reduced by advances received for zero-rated supply of services for which supply of services has not been completed during relevant period; (E) Adjusted Total Turnover means sum total of value of- (a) turnover in State or Union territory, as defined under clause (112) of section 2, excluding turnover of services; and (b) turnover of zero- rated supply of services determined in terms of clause (D) above and non-zero- rated supply of services, excluding- (i) value of exempt supplies other than zero-rated supplies; and (ii) turnover of supplies in respect of which refund is claimed under sub-rule (4A) or sub-rule (4B) or both, if any, during relevant period. (F) Relevant period means period for which claim has been filed. (4A) XXXX (4B) XXXX (5) In case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per following formula:- Maximum Refund Amount = {(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. Page 66 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Explanation:- For purposes of this sub-rule, expressions (a) Net ITC shall mean input tax credit availed on inputs during relevant period other than input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and [ Adjusted Total turnover and relevant period shall have same meaning as assigned to them in sub-rule (4).] (iv) Notification No.21/2018-CT dated 18.04.2018 read as under: Central Goods and Services Tax Rules, 2017- Fourth Amendment of 2018 2. In Central Goods and Services Tax Rules, 2017, - (i) in rule 89, for sub-rule (5), following shall be substituted, namely:- (5). In case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per following formula:- Maximum Refund Amount = {(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. Explanation:- For purposes of this sub-rule, expressions (a) Net ITC shall mean input tax credit availed on inputs during relevant period other than input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and Page 67 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT (b) Adjusted Total turnover shall have same meaning as assigned to it in sub-rule (4). ; (v) Notification No.26/2018-C.T. dated 13.06.2018 read as under: Central Goods and Services Tax Rules, 2017-Fifth Amendment of 2018 2. In Central Goods and Services Tax Rules, 2017, - (i) in rule 37, in sub-rule (1), after proviso, following proviso shall be inserted, namely:- Provided further that value of supplies on account of any amount added in accordance with provisions of clause (b) of sub- section (2) of section 15 shall be deemed to have been paid for purposes of second proviso to sub- section (2) of section 16. ; (ii) in rule 83, in sub-rule (3), in second proviso, for words one year , words eighteen months shall be substituted; (iii) with effect from 01st July, 2017, in rule 89, for sub-rule (5), following shall be substituted, namely:- (5) In case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per following formula:- Maximum Refund Amount = {(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. Explanation:- For purposes of this Page 68 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT sub-rule, expressions (a) Net ITC shall mean input tax credit availed on inputs during relevant period other than input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and (b) Adjusted Total turnover shall have same meaning as assigned to it in sub-rule (4). 16. It would also be fruitful to refer to relevant part of First Discussion Paper On Goods and Services Tax In India by Empowered Committee of State Finance Minister dated 10th November 2009, wherein it is observed for justification of GST as under: Justification of GST 1.13 Despite this success with VAT, there are still certain shortcomings in structure of VAT both at Central and at State level. shortcoming in CENVAT of Government of India lies in non-inclusion of several Central taxes in overall framework of CENVAT, such as additional customs duty, surcharges, etc., and thus keeping benefits of comprehensive input tax and service tax set-off out of reach for manufacturers/ dealers. Moreover, no step has yet been taken to capture value-added chain in distribution trade below manufacturing level in existing scheme of CENVAT. introduction of GST at Central level will not only include comprehensively more indirect Central taxes and integrate goods and service taxes for purpose of set-off relief, but may Page 69 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT also lead to revenue gain for Centre through widening of dealer base by capturing value addition in distributive trade and increased compliance. Salient features of GST model 3.2 Keeping in view report of Joint Working Group on Goods and Services Tax, views received from States and Government of India, dual GST structure with defined functions and responsibilities of Centre and States is recommended. appropriate mechanism that will be binding on both Centre and States would be worked out whereby harmonious rate structure along with need for further modification could be upheld, if necessary with collectively agreed Constitutional Amendment. Salient features of proposed model are as follows: (i) GST shall have two components: one levied by Centre (hereinafter referred to as Central GST), and other levied by States (hereinafter referred to as State GST). Rates for Central GST and State GST would be prescribed appropriately, reflecting revenue considerations and acceptability. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable. (ii) Central GST and State GST would be applicable to all transactions of goods and services made for Page 70 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT consideration except exempted goods and services, goods which are outside purview of GST and transactions which are below prescribed threshold limits. (iii) Central GST and State GST are to be paid to accounts of Centre and States separately. It would have to be ensured that account-heads for all services and goods would have indication whether it relates to Central GST or State GST (with identification of State to whom tax is to be credited). (iv) Since Central GST and State GST are to be treated separately, taxes paid against Central GST shall be allowed to be taken as input tax credit (ITC) for Central GST and could be utilized only against payment of Central GST. same principle will be applicable for State GST. taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of credit. Further, rules for taking and utilization of credit for Central GST and State GST would be aligned. (v) Cross utilization of ITC between Central GST and State GST would not be allowed except in case of inter- State supply of goods and services under IGST model which is explained later. vi) Ideally, problem related to credit accumulation on account of refund of GST should be avoided by both Centre and States except in cases such as exports, purchase of capital goods, input tax at higher rate than output tax etc. where, again refund/adjustment should be completed in time bound manner. (vii) To extent feasible, uniform procedure for collection of both Central Page 71 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT GST and State GST would be prescribed in respective legislation for Central GST and State GST. (viii) administration of Central GST to Centre and for State GST to States would be given. This would imply that Centre and States would have concurrent jurisdiction for entire value chain and for all taxpayers on basis of thresholds for goods and services prescribed for States and Centre. (ix) present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. uniform State GST threshold across States is desirable and, therefore, it is considered that threshold of gross annual turnover of Rs.10 lakh both for goods and services for all States and Union Territories may be adopted with adequate compensation for States (particularly, States in North- Eastern Region and Special Category States) where lower threshold had prevailed in VAT regime. Keeping in view interest of small traders and small scale industries and to avoid dual control, States also considered that threshold for Central GST for goods may be kept at Rs.1.5 crore and threshold for Central GST for services may also be appropriately high. It may be mentioned that even now there is separate threshold of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in Service Tax and CENVAT. 17. Reference is also required to be made to International VAT/GST Guidelines, published on February 2006, which read as under: Page 72 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT INTERNATIONAL VAT/GST GUIDELINES PREFACE 1. spread of Value Added Tax (also called Goods and Services Tax GST) has been most important development in taxation over last half-century. Limited to less than ten countries in late 1960s it has now been implemented by about 136 countries; and in these countries (including OECD member countries) it typically accounts for one-fifth of total tax revenue. recognised capacity of VAT to raise revenue in neutral and transparent manner drew all OECD member countries (except United States) to adopt this broad based consumption tax. Its neutrality of principle towards international trade also made it preferred alternative to customs duties in context of trade liberalisation. 2. At same time as VAT was spreading across world, international trade in goods and services was expanding rapidly as part of globalisation developments, spurred on by deregulation, privatisation and communications technology revolution. As result, interaction between value added tax systems operated by individual countries has come under greater scrutiny as potential for double taxation and unintentional non-taxation has increased. 3. When international trade was characterised largely by trade in goods, collection of taxes was generally undertaken by customs authorities, and when services were primarily traded within domestic markets, there was little need for global attention to be Page 73 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT paid to interaction between national consumption tax rules. That situation has changed dramatically in recent years and absence of internationally agreed approaches, which can be traced back to that lack of need, is now leading to significant difficulties for both business and governments, particularly for international trade in services and intangibles, and increasingly for trade in goods. 4. Even though question remains difficult and sometimes controversial- for interstate trade within federations or within economically integrated areas, destination principle (i.e. taxation in jurisdiction of consumption by zero rating of exports and taxation of imports) is international norm. issues therefore arise primarily from practical difficulty of determining, for each transaction (i.e. sale of good, right or service), jurisdiction where consumption is deemed to take place and therefore where it should be taxed. In addition, it should be borne in mind that value added tax systems are designed to tax final consumption and as such, in most cases it is only consumers who should actually bear tax burden. Indeed, tax is levied, ultimately, on consumption and not on intermediate transactions between firms as tax charged on these purchases is, in principle, fully deductible. This feature gives tax its main characteristic of neutrality in value chain and towards international trade. 5. Nevertheless, although most countries have adopted similar principles for operation of their value added tax Page 74 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT system, there remain many differences in way it is implemented, including between OECD member countries. These differences result not only from continued existence of exemptions and special arrangements to meet specific policy objectives, but also from differences of approaches in definition of jurisdiction of consumption and therefore of taxation. In addition, there are number of variations in application of value added taxes, and other consumption taxes, including different interpretation of same or similar concepts; different approaches to time of supply and its interaction with place of supply; different definitions of services and intangibles and inconsistent treatment of mixed supplies. 6. Since late 1990s, work led by OECD s Committee on Fiscal Affairs (CFA) in cooperation with business, revealed that current international consumption taxes environment, especially with respect to trade in services and intangibles, is creating obstacles to business activity, hindering economic growth and distorting competition. CFA recognised that these problems, particularly those of double taxation and unintentional non- taxation, were sufficiently significant to require remedies. This situation creates increasing issues for both businesses and tax administrations themselves since local rules cannot be viewed in isolation but must be addressed internationally. 7. Businesses are increasingly confronted by distortions of competition that sometimes favour imports over local Page 75 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT production or prevent them outsourcing activities as means of improving their competitiveness. Multi-national businesses are confronted with laws and administrative requirements that may be contradictory from country to country. This generates undue burdens and uncertainties, in particular when they specialise or group certain functions in one particular jurisdiction, such as shared service centres, centralised sales and procurement functions, call centres, data processing and information technology support. Businesses can incur double taxation when two different jurisdictions both tax same supply, first one because it is jurisdiction where supplier is established and second one because it is jurisdiction where recipient is established. In case of leasing of goods, for example, third jurisdiction, i.e. jurisdiction where goods are located, may also claim tax. Uncertainties also arise in situations where, for example, headquarters of company established in one country provides supplies to customers in another country where it has branch (force of attraction). Even if some countries implemented refund schemes of tax incurred by foreign business or registration procedures to achieve same effect, which are intended in part to address some of consequences of these different approaches, such schemes are, when they exist, often burdensome, especially for SMEs. 8. Tax administrations are often confronted with unintentional non- taxation that mirror double taxation situations referred to above. Page 76 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Consumption taxes are normally predicated on basis that businesses are responsible for proper collection and remittance of revenue. Complex, unclear or inconsistent rules across jurisdictions are difficult to manage for tax administrations and create uncertainties and high administrative burdens for business, which can lead to reduced compliance levels. In addition, such environment may also favour tax fraud and evasion. 9. OECD has long held lead position in dealing with international aspects of direct taxes. Organisation has developed internationally recognised instruments such as Model Tax Convention on Income and on Capital and Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Until now, no such instrument was available in field of consumption taxes. Only Ottawa Framework Conditions (1998), Guidelines on Consumption Taxation of Cross-Border Services and Intangible Property in Context of E-commerce (2001) and Consumption Tax Guidance Series (2003) have been published. Committee on Fiscal Affairs therefore began work on set of framework principles on application of consumption taxes to trade in international services and intangibles. These principles form first part of OECD VAT/GST Guidelines. These principles will be developed in order that countries (both OECD and non-OECD) can implement them in legislation. table of contents will evolve in light of experience and will be amended and completed over Page 77 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT time. basic principles as described in Chapter I of International VAT/GST guidelines in aforesaid report are as under: BASIC PRINCIPLES I.A. INTRODUCTION 1. There are many differences in way value added taxes are implemented around world and across OECD countries. Nevertheless, there are some common core features that can be described as follows: Value added taxes are taxes on consumption, paid, ultimately, by final consumers. tax is levied on broad base (as opposed to e.g., excise duties that cover specific products); In principle, business should not bear burden of tax itself since there are mechanisms in place that allow for refund of tax levied on intermediate transactions between firms. system is based on tax collection in staged process, with successive taxpayers entitled to deduct input tax on purchases and account for output tax on sales. Each business in supply chain takes part in process of controlling and collecting tax, remitting proportion of tax corresponding to its margin i.e. on difference between VAT paid out to suppliers and VAT charged to customers. In general, OECD countries with value-added taxes impose tax at all stages and normally allow immediate deduction of taxes on purchases by all Page 78 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT but final consumer. 2. These features give value added taxes their main economic characteristic, that of neutrality. full right to deduction of input tax through supply chain, with exception of final consumer, ensures neutrality of tax, whatever nature of product, structure of distribution chain and technical means used for its delivery (stores, physical delivery, Internet). 3. Value added taxes are also neutral towards international trade according to international norms since they are destination based (even if rule might be different for transactions made within federations or economically integrated areas). This means that exports are zero rated and imports are taxed on same basis and with same rate as local production. Most of rules currently in place aim therefore at taxing consumption of goods and services within jurisdiction where consumption takes place. Practical means implemented to this end are nevertheless diverse across countries, which can, in some instances, lead to double or involuntary non-taxation, and uncertainties for both business and tax administrations. 1 Germany expressed its reservation on these principles. Luxembourg expressed its reservation on first principle referred in paragraph 14 ( For consumption tax purposes internationally traded services and intangibles should be taxed according to rules of jurisdiction of consumption ). 4. Sales tax systems, although they work differently in practice, also set Page 79 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT out to tax consumption of goods, and to some extent services, within jurisdiction of consumption. To this end, their implementation also aims at keeping it neutral towards international trade. However, in most sales tax systems, businesses do incur irrecoverable sales tax and, if they subsequently export goods, there will be element of sales tax embedded in price. Chapter Nineteen of explanations given for Input Tax Credit Mechanism in GST as under: Chapter Nineteen Input Tax Credit Mechanism in GST Uninterrupted and seamless chain of input tax credit (hereinafter referred to as, ITC ) is one of key features of Goods and Services Tax. ITC is mechanism to avoid cascading of taxes. Cascading of taxes, in simple language, is tax on tax . Under present system of taxation, credit of taxes being levied by Central Government is not available as set-off for payment of taxes levied by State Governments, and vice versa. One of most important features of GST system is that entire supply chain would be subject to GST to be levied by Central and State Government concurrently. As tax charged by Central or State Governments would be part of same tax regime, credit of tax paid at every stage would be available as set-off for payment of tax at every subsequent stage. Let us understand how cascading of taxes takes place in present regime. Page 80 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Central excise duty charged on inputs used for manufacture of final product can be availed as credit for payment of Central Excise Duty on final product. For example, to manufacture pen, manufacturer requires, plastic granules, refill tube, metal clip, etc. All Electronic Way Bill in GST 150 GST FLYERS these inputs are chargeable to central excise duty. Once pen is manufactured by using these inputs, pen is also chargeable to central excise duty. Let us assume that cost of all above mentioned inputs is say, Rs.10/- on which central excise duty @10% is paid, means Re.1. cost of manufactured pen is say Rs.20/-, central excise duty payable on pen @10% will be Rs.2/- . Now manufacturer of pen can use duty paid on inputs, i.e. Re.1/- for payment of duty on pen. So he will use Re.1 paid on inputs and he will pay Re.1/- through cash (1+1=2), price of pen becomes Rs. 22/-. In effect he actually pays duty on value added over and above cost of inputs. This mechanism eliminates cascading of taxes. However, when pen is sold by manufacturer to trader he is required to levy VAT on such sale. But under present system, manufacturer cannot use credit of central excise duty paid on pen for payment of VAT, as two levies are being levied by Central and State government respectively with no statutory linkage between two. Hence he is required to pay VAT on entire value of pen, i.e. Rs.22/-, which actually includes central excise duty to tune of Rs.2/-. This is cascading of taxes or tax on tax as now VAT is not only paid on value of pen Page 81 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT i.e. Rs.20/- but also on tax i.e. Rs.2/. Goods and Services Tax (GST) would mitigate such cascading of taxes. Under this new system most of indirect taxes levied by Central and State Governments on supply of goods or services or both would be combined together under single levy. major taxes/levies which are going to be clubbed together or subsumed in GST 18. Central Board of Excise & Customs, New Delhi issued frequently asked questions on Goods and Services Tax Act (GST)in 2nd Edition No. 31.03.2017 is as under: 1. Overview of Goods and Services Tax (GST) Q 1. What is Goods and Services Tax (GST)? Ans. It is destination based tax on consumption of goods and services. It is proposed to be levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff. In nutshell, only value addition will be taxed and burden of tax is to be borne by final consumer. Q 2. What exactly is concept of destination based tax on consumption? Ans. tax would accrue to taxing authority which has jurisdiction over place of consumption which is also termed as place of supply. Q 3. Which of existing taxes are proposed to be subsumed under GST? Ans. GST would replace following taxes: (i) taxes currently levied and collected by Centre: a. Central Excise duty b. Duties of Excise (Medicinal and Page 82 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Toilet Preparations) c. Additional Duties of Excise (Goods of Special Importance) d. Additional Duties of Excise (Textiles and Textile Products) e. Additional Duties of Customs (commonly known as CVD) 19. Circular no.79/53/2018-GST dated 31.12.2018 prescribes calculation of refund amount for claims of refund of accumulated Input Tax Credit (ITC) on account of inverted duty structure as under: Calculation of refund amount for claims of refund of accumulated Input Tax Credit (ITC) on account of inverted duty structure: 4. Representations have been received stating that while processing refund of unutilized ITC on account of inverted tax structure, departmental officers are denying refund of ITC of GST paid on those inputs which are procured at equal or lower rate of GST than rate of GST on outward supply, by not including amount of such ITC while calculating maximum refund amount as specified in rule 89(5) of CGST Rules. matter has been examined and following issues are clarified: a) Refund of unutilized ITC in case of inverted tax structure, as provided in section 54(3) of CGST Act, is available where ITC remains unutilized even after setting off of available ITC for payment of output tax liability. Where there are multiple inputs attracting different rates of tax, in formula provided in rule 89(5) of CGST Rules, term Net ITC covers ITC availed on all inputs in Page 83 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT relevant period, irrespective of their rate of tax. b) calculation of refund of accumulated ITC on account of inverted tax structure, in cases where several inputs are used in supplying final product/output, can be clearly understood with help of following example: i. Suppose manufacturing process involves use of input (attracting 5 per cent GST) and input B (attracting 18 per cent GST) to manufacture output Y (attracting 12 per cent GST). ii. refund of accumulated ITC in situation at (i) above, will be available under section 54(3) of CGST Act read with rule 89(5) of CGST Rules, which prescribes formula for maximum refund amount permissible in such situations. iii. Further assume that claimant supplies output Y having value of Rs. 3,000/- during relevant period for which refund is being claimed. Therefore, turnover of inverted rated supply of goods and services will be Rs. 3,000/-. Since claimant has no other outward supplies, his adjusted total turnover will also be Rs. 3,000/-. iv. If we assume that Input A, having value of Rs. 500/- and Input B, having value of Rs. 2,000/-, have been purchased in relevant period for manufacture of Y, then Net ITC shall be equal to Rs. 385/- (Rs. 25/- and Rs. 360/- on Input and Input B respectively). v. Therefore, multiplying Net ITC by ratio of turnover of inverted rated supply of goods and services to adjusted total turnover will give figure of Rs. 385/-. Page 84 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT vi. From this, if we deduct tax payable on such inverted rated supply of goods or services, which is Rs. 360/-, we get maximum refund amount, as per rule 89(5) of CGST Rules which is Rs. 25/-. above Circular also provides for following explanation with regard to misinterpretation of meaning of term inputs with regard to refund of accumulated ITC of input services and capital goods arising on account of inverted duty structure as under: Misinterpretation of meaning of term inputs : 12. It has been represented that on certain occasions, departmental officers do not consider ITC on stores and spares, packing materials, materials purchased for machinery repairs, printing and stationery items, as part of Net ITC on grounds that these are not directly consumed in manufacturing process and therefore, do not qualify as input. There are also instances where stores and spares charged to revenue are considered as capital goods and therefore ITC availed on them is not included in Net ITC, even though value of these goods has not been capitalized in his books of account by claimant. 13. In relation to above, it is clarified that input tax credit of GST paid on inputs shall be available to registered person as long as he/she uses or intends to use such inputs for purposes of his/her business and there is no specific restriction on availment of such ITC anywhere else in GST Act. GST Page 85 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT paid on inward supplies of stores and spares, packing materials etc. shall be available as ITC as long as these inputs are used for purpose of business and/or for effecting taxable supplies, including zero-rated supplies, and ITC for such inputs is not restricted under section 17(5) of CGST Act. Further, capital goods have been clearly defined in section 2(19) of CGST Act as goods whose value has been capitalized in books of account and which are used or intended to be used in course or furtherance of business. Stores and spares, expenditure on which has been charged as revenue expense in books of account, cannot be held to be capital goods. Refund of accumulated ITC of input services and capital goods arising on account of inverted duty structure: 14. Section 54(3) of CGST Act provides that refund of any unutilized ITC may be claimed where credit has accumulated on account of rate of tax on inputs being higher than rate of tax on output supplies (other than nil rated or fully exempt supplies). Further, section 2(59) of CGST Act defines inputs as any goods other than capital goods used or intended to be used by supplier in course or furtherance of business. Thus, inputs do not include services or capital goods. Therefore, clearly, intent of law is not to allow refund of tax paid on input services or capital goods as part of refund of unutilized input tax credit. Accordingly, in order to align CGST Rules with CGST Act, notification No. 26/2018-Central Tax dated 13.06.2018 was issued wherein it was stated that term Net ITC, as used in formula for calculating maximum refund Page 86 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT amount under rule 89(5) of CGST Rules, shall mean input tax credit availed on inputs during relevant period other than input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both. In view of above, it is clarified that both law and related rules clearly prevent refund of tax paid on input services and capital goods as part of refund of input tax credit accumulated on account of inverted duty structure. 20. On perusal of aforesaid provisions of Act, Rules and various notifications, it appears that Rule 89(5) and more particularly explanation (a) thereof, provides that Net Input Tax Credit shall mean input tax credit availed on inputs during relevant period other than input tax credit availed for which refund is claimed under sub-rule (4A) or (4B) or both. Therefore, grievance of petitioner is that only inputs is referred to in explanation (a) to sub-rule 5 of Rule 89 of CGST Rules 2017 and therefore, input tax credit on input services are not eligible for calculation of amount of refund by applying Rule 89(5). Thus, it results into violation of provision of sub-section 3 of Section 54 of CGST Act, 2017, which entitles any registered person to claim refund of any unutilised input tax credit. Sub-clause (ii) of proviso to sub-section 3 of Section 54 negates claim of refund of unutilized input Page 87 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT tax credit other than where credit has accumulated on account of rate of tax on inputs being higher than rate of tax on output supplies, except supplies of goods or services or both as may be notified by Government on recommendations of GST Council. Therefore, it would be germane to refer to and analyse what is meaning of supply as per Section 7 of CGST Act,2017 which defines scope of supply and reads as under : Scope of supply 7 (1) For purposes of this Act, expression supply includes-- a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for consideration by person in course or furtherance of business; (b) import of services for consideration whether or not in course or furtherance of business;1[and]; (c) activities specified in Schedule I, made or agreed to be made without consideration. 2 *** (d) * * ** * [(1A) Where certain activities or transactions constitute supply in accordance with provisions of sub- section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.] (d) activities to be treated as supply of goods or supply of services as referred to in Schedule II. Page 88 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT above provision of section 7 provides that scope of supply includes all forms of supply of goods or services. Therefore, for purpose of calculation of refund of accumulated input tax credit of input services and capital goods arising on account of inverted duty structure is not included into inputs which is explained by Circular No. 79/53/2018-GST dated 31.12.2018, wherein it is stated that intent of law is not to allow refund of tax paid on input services as part of unutilised input tax credit . Therefore, it is required to consider whether refund of unutilised input tax credit arising due to inverted duty structure can be denied or not. 21. Delhi High Court in case of Intercontinental Consultants & Technocrats Pvt. Ltd. Vs. Union Bank of India reported in 2013 (29) S.T.R. (Del.) has held that Rule which goes beyond statute is ultra vires and thus liable to be struck down by referring to various decisions of Supreme Court as under: 12. There is ample authority for proposition that rules cannot override or overreach provisions of main enactment. In Central Bank of India v. Their Workmen, AIR 1960 SC 12, Constitution Bench of Supreme Court was concerned with Banking Companies Act, 1949. Section 10 of Page 89 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Act prohibit grant of industrial bonus to bank employees in as much as such bonus is remuneration which takes form of share in profits of banking company. Rule 5 of Banking Companies Rules, 1949, which were statutory rules, required banking company to send periodically to principle office of Reserve Bank statement in Form-I showing remuneration paid during previous calendar year to officers of company. In footnote to Form, it was stated that remuneration includes salary, house allowance, dearness allowance, bonus, fees and allowances to Directors, etc. contention was that Rule 5 enlarged meaning and content of Section 10. contention was repelled but not on ground that rule can validly enlarge content of Section, but on ground that Section itself used word "remuneration" in widest sense. It was however acknowledged by Court that Rule cannot go beyond statute. relevant observations are: - "We do not say that statutory rule can enlarge meaning of S.10; if rule goes beyond what Section contemplates, rule must yield to statute. We have, however, pointed out earlier that S.10 itself uses word "remuneration" in widest sense, and R.5 and Form-I are to that extent in consonance with Section." It has not been suggested in present case that words "consideration in money" or "the gross amount charged" themselves have been used in section 67 in widest sense of including Page 90 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT amounts collected by service provider for his travel, hotel stay, transportation and other out of pocket expenses. These words have been defined in Explanation below section and it is significant that out of pocket expenses such as travel, hotel stay, transportation etc. have not been included in those expressions. 13. In Babaji Kondaji Garad v. Nasik Merchants Co-operative Bank Ltd., (1984) 2 SCC 50, Supreme Court (Three-Judge Bench) observed as under: - "Now if there is any conflict between statute and subordinate legislation, it does not require elaborate reasoning to firmly state that statute prevails over subordinate legislation and bye- law, if not in conformity with statute in order to give effect to statutory provision Rule or bye- law has to be ignored. statutory provision has precedence and must be complied with." 14. learned single Judge of this Court in Devi Datt v. Union of India, AIR 1985 Delhi 195 held that though language of Rule 102 of Displaced Persons (Compensation and Rehabilitation) Rules, 1955 was wider in its ambit and covered properties comprised in compensation bill and entrusted to managing officer for management, "but obviously said rule has to be construed in light of parent Section and it cannot be construed as enlarging scope of Section 19 itself. It is well settled canon of construction that Rules made under statute must be treated exactly as if Page 91 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT they were in Act and are of same effect as if contained in Act. There is another principle equally fundamental to rules of construction, namely, that Rules shall be consistent with provisions of Act. Hence, Rule 102 has to be construed in conformity with scope and ambit of Section 19 and it must be ignored to extent it appears to be inconsistent with provisions of Section 19". In making these observations, learned single Judge referred to and followed judgment of Supreme Court in State of Uttar Pradesh v. Babu Ram Upadhyay, AIR 1961 SC 751. 15. In tax jurisprudence position is no different and it has been held in CIT v. S.Chenniappa Mudaliar, (1969) 74 ITR 41 that if rule clearly comes into conflict with main enactment or if there is any repugnancy between substantive provisions of Act and Rules made therein, it is rule which must give way to provisions of Act. In Bimal Chandra Banerjee v. State of M.P. and Ors., (1971) 81 ITR 105, Hegde J. was examining provisions of M.P. Excise Act, 1915. legislature levied excise duty only on those articles which came within scope of Section 25 of that Act. rule-making authority, which was State Government, purported to levy duty on articles which did not fall within scope of Section. Holding this act of State Government to be ultra vires Section, it was observed as under: - "No tax can be imposed by any bye- law or rule or regulation unless statute under which subordinate legislation is made specially Page 92 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT authorises imposition even if it is assumed that power to tax can be delegated to executive. basis of statutory power conferred by statute cannot be transgressed by rule making authority. rule making authority has no plenary power. It has to act within limits of power granted to it. 16. In CIT, Andhra Pradesh v. Taj Mahal Hotel, (1971) 82 ITR 44 it was held by Supreme Court that "the Rules were meant only for purpose of carrying out provisions of Act and they could not take away what was conferred by Act or whittle down its effect." 17. In Commissioners of Customs and Excise v. Cure and Deeley Ltd., (1961) 3 WLR 788 (QB) facts were these. Section 33(1) of Finance Act, 1940 of United Kingdom enacted that Commissioners might make regulations providing for any method for which provision appeared to them to be necessary for purpose of giving effect to provisions of Act and of enabling them to discharge functions. Commissioners framed Regulation 12 of Purchase Tax Regulations, 1945. It stated that if any person failed to furnish return as required by regulation or furnished incomplete return, then Commissioners could determine amount of tax appearing to them to be due from such person, and demand payment thereof. Such amount determined by Commissioners was to be deemed to be proper tax due from such person and tax had to be paid within 7 days of Page 93 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT demand. regulations did not provide for any appeal or for taking up decision of Commissioners to any Court of law. validity of regulation came up for consideration before Court. Sachs J., observed as follows: - "To my mind Court is bound before reaching decision on question whether regulation is intra vires to examine nature, objects, and scheme of piece of legislation as whole, and in light of that examination to consider exactly what is area over which powers are given by section under which competent authority is purporting to act." It was ultimately held by Court that Regulation 12 was ultra vires on three grounds. One of grounds, which is relevant for our purpose, was that regulation rendered subject liable to pay such tax as Commissioner believed to be due whereas charging Section imposed liability to pay such tax as in law was due. 18. Section 66 levies service tax at particular rate on value of taxable services. Section 67 (1) makes provisions of section subject to provisions of Chapter V, which includes Section 66. This is clear mandate that value of taxable services for charging service tax has to be in consonance with Section 66 which levies tax only on taxable service and nothing else. There is thus in built mechanism to ensure that only taxable service shall be evaluated under provisions of 67. Clause (i) of sub- section (1) of Section 67 provides that Page 94 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT value of taxable service shall be gross amount charged by service provider "for such service". Reading Section 66 and Section 67 (1) (i) together and harmoniously, it seems clear to us that in valuation of taxable service, nothing more and nothing less than consideration paid as quid pro quo for service can be brought to charge. Sub-section (4) of Section 67 which enables determination of value of taxable service "in such manner as may be prescribed" is expressly made subject to provisions of sub-section (1). thread which runs through Sections 66, 67 and Section 94, which empowers Central Government to make rules for carrying out provisions of Chapter V of Act is manifest, in sense that only service actually provided by service provider can be valued and assessed to service tax. We are, therefore, undoubtedly of opinion that Rule 5 (1) of Rules runs counter and is repugnant to Sections 66 and 67 of Act and to that extent it is ultra vires. It purports to tax not what is due from service provider under charging Section, but it seeks to extract something more from him by including in valuation of taxable service other expenditure and costs which are incurred by service provider "in course of providing taxable service". What is brought to charge under relevant Sections is only consideration for taxable service. By including expenditure and costs, Rule 5(1) goes far beyond charging provisions and cannot be upheld. It is no answer to say that under sub-section (4) of Section 94 of Act, every rule framed by Page 95 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT Central Government shall be laid before each House of Parliament and that House has power to modify rule. As pointed out by Supreme Court in Hukam Chand v. Union of India, AIR 1972 SC 2427: - "The fact that rules framed under Act have to be laid before each House of Parliament would not confer validity on rule if it is made not in conformity with Section 40 of Act." Thus Section 94 (4) does not add any greater force to Rules than what they ordinarily have as species of subordinate legislation. 19. For above reasons we quash impugned show-cause notice and allow writ petition with no order as to costs. above decision is also affirmed by Supreme Court vide 2018(10)GSTL 401 (SC), which read as under : 24) In this hue, expression such occurring in Section 67 of Act assumes importance. In other words, valuation of taxable services for charging service tax, authorities are to find what gross amount is charged for providing such taxable services. As fortiori, any other amount which is calculated not for providing such taxable service cannot part of that valuation as that amount is not calculated for providing such taxable service . That according to us is plain meaning which is to be attached to Section 67 (unamended i.e., prior to May 01, 2006) or after its amendment, with effect from, May 01, Page 96 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of Rules went much beyond mandate of Section 67. We, therefore, find that High Court was right in interpreting Sections 66 and 67 to say that in valuation of taxable service, value of taxable service shall be gross amount charged by service provider for such service and valuation of tax service cannot be anything more or less than consideration paid as quid pro qua for rendering such service. 25) This position did not change even in amended Section 67 which was inserted on May 01, 2006. Sub-section (4) of Section 67 empowers rule making authority to lay down manner in which value of taxable service is to be determined. However, Section 67(4) is expressly made subject to provisions of sub-section (1). Mandate of sub- section (1) of Section 67 is manifest, as noted above, viz., service tax is to be paid only on services actually provided by service provider. 26) It is trite that rules cannot go beyond statute. In Babaji Kondaji Garad, this rule was enunciated in following manner: Now if there is any conflict between statute and subordinate legislation, it does not require elaborate reasoning to firmly state that statute prevails over subordinate legislation and bye-law, if not in conformity with statute in order to give effect to statutory provision Rule or bye- law has to be ignored. statutory Page 97 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT provision ahs precedence and must be complied with. 27) aforesaid principle is reiterated in Chenniappa Mudaliar holding that rule which comes in conflict with main enactment has to give way to provisions of Act. 28) It is also well established principle that Rules are framed for achieving purpose behind provisions of Act, as held in Taj Mahal Hotel: Rules were meant only for purpose of carrying out provisions of Act and they could not take away what was conferred by Act or whittle down its effect. 29) In present case, aforesaid view gets strengthened from manner in which Legislature itself acted. Realising that Section 67, dealing with valuation of taxable services, does not include reimbursable expenses for providing such service, Legislature amended by Finance Act, 2015 with effect from May 14, 2015, whereby Clause (a) which deals with consideration is suitably amended to include reimbursable expenditure or cost incurred by service provider and charged, in course of providing or agreeing to provide taxable service. Thus, only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost would also form part of valuation of taxable services for charging service tax. Though, it was not argued by learned counsel for Department that Section 67 is declaratory provision, nor could it be argued so, as we find that this is Page 98 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT substantive change brought about with amendment to Section 67 and, therefore, has to be prospective in nature. On this aspect of matter, we may usefully refer to Constitution Bench judgment in case of Commissioner of Income Tax (Central)- I, New Delhi v. Vatika Township Private Limited8 wherein it was observed as under: 27. legislation, be it statutory Act or statutory rule or statutory notification, may physically consists of words printed on papers. However, conceptually it is great deal more than ordinary prose. There is special peculiarity in mode of verbal communication by legislation. legislation is not just series of statements, such as one finds in work of fiction/non-fiction or even in judgment of court of law. There is technique required to draft legislation as well as to understand legislation. Former technique is known as legislative drafting and latter one is to be found in various principles of interpretation of statutes . Vis- - vis ordinary prose, legislation differs in its provenance, layout and features as also in implication as to its meaning that arise by presumptions as to intent of maker thereof. 28. Of various rules guiding how legislation has to be interpreted, one established rule is that unless contrary intention appears, legislation is presumed not to be intended to have retrospective operation. idea behind rule Page 99 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT is that current law should govern current activities. Law passed today cannot apply to events of past. If we do something today, we do it keeping in view law of today and in force and not tomorrow's backward adjustment of it. Our belief in nature of law is founded on bedrock that every human being is entitled to arrange his affairs by relying on existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not backward. As was observed in Phillips v. Eyre [(1870) LR 6 QB 1] , retrospective legislation is contrary to general principle that legislation by which conduct of mankind is to be regulated when introduced for first time to deal with future acts ought not to change character of past transactions carried on upon faith of then existing law. 29. obvious basis of principle against retrospectivity is principle of fairness , which must be basis of every legal rule as was observed in L'Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co. Ltd. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach new disability have to be treated as prospective unless legislative intent is clearly to give enactment retrospective effect; unless Page 100 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT legislation is for purpose of supplying obvious omission in former legislation or to explain former legislation. We need not note cornucopia of case law available on subject because aforesaid legal position clearly emerges from various decisions and this legal position was conceded by counsel for parties. In any case, we shall refer to few judgments containing this dicta, little later. 22. Further, in case of Lohara Steel Industries Ltd. v. State of A.P. reported in (1997) 2 SCC 37,the Supreme Court has held that offending portion which is severable can be struck down. Para 10 of said order read as under : 10. It was, however, contended before us by department that exemption notification must be read as whole and, therefore, if we find exemption notification to be violative of Article 304(a) entire exemption notification will have to be struck down and not just portion of it which is discriminatory as contended by appellants. This question in relation to taking statute has been considered by this Court as far back as in 1953 in case of State of Bombay and Anr. v. United Motors (India) Ltd. and Ors. ([1953] SCR 1069 at 1097). If taxing statute imposes tax on subjects which are divisible in their nature and if covered subjects which are exempted by Constitution are wrongly taxed, entire taxing statute need not be declared as ultra Page 101 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT vires because it is feasible to separate taxes levied on authorised subjects from those levied on exempt subjects and to exclude latter in assessment to tax. In such cases this Court has said statute itself should be allowed to stand. taxing authority can be prevented by injunction from imposing tax on subject exempted by Constitution. In present case exemption notification as it originally stood exempted all re-rolled finished products sold in State of Andhra Pradesh from tax provided tax had been paid in State of Andhra Pradesh on raw material. This exemption is still available to rerolled products which are manufactured within State. No exception can be taken to this part of notification. Only portion of exemption notification which discriminates against goods manufactured outside State violates provisions of Article 304(a). In fact words denying this exemption to goods manufactured outside State were expressly and specifically added to original http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 4 exemption notification by amending G.O.Ms.No.1373 of 28.8.1981. It is this amendment alone, which is clearly severable, that offends Article 304(a). It can, therefore, be struck down. subsequent notification of 20.3.1984 proceeds on same basis. There is no need, therefore. to strike down entire tax exemption which is granted to all re-rolled steel products sold in there State of Andhra Pradesh and manufactured out of tax paid raw material purchased in state of Andhra Pradesh. discriminatory provision is clearly severably and can Page 102 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT be struck down. 23. From conjoint reading of provisions of Act and Rules, it appears that by prescribing formula in Sub-rule 5 of Rule 89 of CGGST Rules,2017 to exclude refund of tax paid on input service as part of refund of unutilised input tax credit is contrary to provisions of Sub-section 3 of Section 54 of CGST Act,2017 which provides for claim of refund of any unutilised input tax credit . word Input tax credit is defined in Section 2(63) means credit of input tax. word input tax is defined in Section 2(62), whereas word input is defined in Section 2(59) means any goods other than capital goods and input service as per Section 2(60) means any service used or intended to be used by supplier. Whereas input tax as defined in section 2(62) means 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 input tax and input tax credit . Therefore, as per provision of sub-section 3 of Section 54 of CGST Act,2017, legislature has provided that registered person may claim refund of any unutilised input tax , therefore, by way of Rule 89(5)of CGST Rules,2017, such claim of refund cannot be restricted only to input excluding input services from Page 103 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT purview of Input tax credit . Moreover, clause (ii) of proviso to Sub-section 3 of Section 54 also refers to both supply of goods or services and not only supply of goods as per amended Rule 89(5) of CGST, Rules 2017. 24. In view of above analysis of provisions of Act and Rules keeping in mind scheme and object of CGST Act, intent of Government by framing Rule restricting statutory provision cannot be intent of law as interpreted in Circular No.79/53/2018- GST dated 31.12.2018 to deny registered person refund of tax paid on input services as part of refund of unutilised input tax credit. 25. We are of opinion that Explanation (a) to Rule 89(5) which denies 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 provision of Section 54(3) of CGST Act, 2017. 26. In view of above, Explanation (a) to Rule 89(5) is read down to extent that Explanation (a) which defines Net Input Tax Credit means input tax credit only. said explanation (a)of Rule 89(5) of CGST Rules is held to be contrary to provisions of Section Page 104 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 C/SCA/2792/2019 CAV JUDGMENT 54(3) of CGST Act. In fact Net ITC should mean input tax credit availed on inputs and input services as defined under Act. 27. respondents are therefore, directed to allow claim of refund made by petitioners considering unutilised input tax credit of input services as part of net input tax credit (Net ITC) for purpose of calculation of refund of claim as per Rule 89(5) of CGST Rules,2017 for claiming refund under Sub-section 3 of Section 54 CGST Act,2017. 28. In result, for forgoing reasons, petitions are accordingly allowed. Rule is made absolute to aforesaid extent. No order as to costs. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) FURTHER ORDER : After judgment is pronounced, Mr. Nirzar Desai learned Standing Counsel for respondent made request to stay operation, implementation and execution of judgment. Having regard to what has been stated in judgment and more, particularly, when Explanation(a) to Rule 89(5) of CGST Rules, 2017 is held to be ultra vires provisions of sub section(3) of section 54 of CGST Act, 2017, request of learned advocate is rejected. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) ALOK Page 105 of 105 Downloaded on : Tue Apr 27 09:48:54 IST 2021 VKC Footsteps India Pvt. Ltd. v. Union of India & 2 Other
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