Union of India vs VKC Footsteps India Pvt Ltd.

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2021 Supreme(SC) 583

SUPREME COURT OF INDIA
Dhananjaya Y. Chandrachud, M.R. Shah, JJ.
Union of India & Ors. – Appellants
Versus
VKC Footsteps India Pvt Ltd. – Respondents
Civil Appeal No 4810, 4809, 4811, 4807, 4767, 4804, 4806, 4802, 4783, 4775-4781, 4769-4774, 4805, 4808, 4764-4765 of 2021, Writ Petition (C) 489 of 2021
Decided On : 13-09-2021

Advocates appeared:
For the Petitioner(s): Mr. N. Venkataraman, ASG Mr. Balbir Singh, ASG Mr. Mukesh Kumar Maroria, AOR Mr. Shyam Gopal, Adv. Ms. Binu Tamta, Adv. Mr. Shantanu Sharma, Adv. Ms. Chinmayee Chandra, Adv. Mr. B. Krishna Prasad, AOR Mr. B. V. Balaram Das, AOR Mr. Arvind Datar, Sr. Adv. Mr. Harish Bindhumadavan, Adv. Mr. Pawan Shree Agrawal, AOR Mr. Rahul Unnikrishnan, Adv. Mr. Ashwini Chandrashekharan, Adv. Ms. Sharyashree Thyagarajan, Adv. Mr. Manoharan Ellappan, Adv. Mr. Sujit Ghosh, Adv. Mr. Krishna Rao, Adv. Mr. Ajinka Tiwari, Adv. Mr. Nikilesh Ramachandran, AOR Mr. V. Sridharan, Sr. Adv. Mr. Sriram Sridharan, Adv. Mr. Anand Nainavati, Adv. Mr. Aditya Bhattacharya, Adv. Ms. Apeksha Mehta, Adv. Mr. Somesh Jain, Adv. Mr. Nalin Bajaj, Adv. Mr. Kunal Kapoor, Adv. Ms. Mounica Kasturi, Adv. Ms. Charanya Lakshmikumaran, AOR Mr. Ankit Yadav, AOR Ms. Veena Kamath, Adv.
For the Respondent(s): Mr. V. Sridharan, Sr. Adv. Mr. Sriram Sridharan, Adv. Mr. Anand Nainavati, Adv. Mr. Aditya Bhattacharya, Adv. Ms. Apeksha Mehta, Adv. Mr. Somesh Jain, Adv. Mr. Nalin Bajaj, Adv. Mr. Kunal Kapoor, Adv. Ms. Mounica Kasturi, Adv. Ms. Charanya Lakshmikumaran, AOR Mr. Arvind Datar, Sr. Adv. Mr. Harish Bindhumadavan, Adv. Mr. Pawan Shree Agrawal, AOR Mr. Rahul Unnikrishnan, Adv. Mr. Ashwini Chandrashekharan, Adv. Ms. Sharyashree Thyagarajan, Adv. Mr. Manoharan Ellappan, Adv. Mr. Uchit Sheth, Adv. Mr. Santosh Krishnan, AOR Mr. Mukesh Kumar Maroria, AOR Mr. Amit Anand Tiwari, AAG Dr. Joseph Aristotle S., Adv. Mr. Saaketh Kasibhatla, Adv. Ms. Preeti Singh, Adv. Mr. Joseph Pookkatt, Adv. Mr. Prashant Kumar, Adv. Mr. Nilesh Sharma, Adv. Mr. Dhawesh Pahuja, Adv. M/s. Ap & J Chambers Dr. Avinash Poddar, Adv. Mr. Anant Kumar Vatsya, Adv. Mr. Ashish Kumar Sinha, Adv. Mr. Devendra Singh, AOR Mr. Naresh Thacker, Adv. Mr. Kumar Visalaksh, Adv. Mr. Hardik Modh, Adv. Mr. Udit Jain, Adv. Mr. Amit Laddha, Adv. Mr. Abhishek Vikas, AOR
(Intervenor) : Mr. Arvind Datar, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. P.R. Renganath, Adv. Mr. Rohan Talwar, Adv. Mr. E. C. Agrawala, AOR Mr. Vinay Shraff, Adv. Mr. Ravi Bharuka, AOR Mr. Ankit Agarwal, Adv. Mr. Sandeep Goyal, Adv. Mr. Pawan Shree Agrawal, AOR Mr. G. Natarajan, Adv. Mr. Kartik Jindal, Adv. Mr. Anant Gautam Adv. Mr. Nipun Sharma, Adv Mr. Madhur Tewatia, Adv. Mr. Rajesh Kumar Gautam, AOR Mr. V. N. Raghupathy, AOR Mr. Md. Apzal Ansari, Adv. Mr. M. Yogesh Kanna, AOR

Headnote:
Constitution of India,1950 - ARTICLES 226, 14, 246A, 366(12A) , 265 , 279A(4) , 14 AND 19(1)(G) - CGST Act - Section 54(3), 54 , 54, sub-section (6) of Section 49, 39 , Sub-section (10), , 112) of section 2, 366(26A), 2(60) , 2(62) , 2(63), 2(87), 164 , 2(52), 2(102), 2(59), 2(60)., Income Tax Act 1961 - Section 80-HHC(3) - IT Act - Section 2 - Finance Act, 1994 - Claim for refund of accumulated ITC - Envisaging a refund - Central Goods and Services Tax - Parliament while enacting the Central Goods and Services Tax Act 2017,1[“CGST Act”] has incorporated a provision for refund of tax in Section 54 - petitions under Article 226 of the Constitution were instituted before the High Court of Gujarat and the High Court of Judicature at Madras. The petitioners before the High Court submitted inter alia th Section 54(3) does not restrict the entitlement of refund only to unutilised ITC which is accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies. It also allows for refund of unutilised ITC when the rate of tax on input services is higher than the rate of tax on output supplies - Section 54(3) allows for a refund of ITC originating in inputs as well as input services, Rule 89(5) is ultra vires in so far as it excludes tax on input services from the purview of the formula - Section 54(3) is interpreted as a restriction against a claim for refund of accumulated ITC by confining it only to tax on inputs, it would be unconstitutional as it would lead to discrimination between inputs and input services - Union Government to allow the claim for refund made by the petitioners before it, considering unutilised ITC on input services as part of “Net ITC” for the purpose of calculating refund in terms of Rule 89(5), in furtherance of Section 54(3) - person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed – Held, Court having examined the provisions of Section 54(3) and Rule 89(5) held that the latter was ultra vires. In its decision in VKC Footsteps India Pvt. Ltd. (supra), the Gujarat High Court held that by prescribing a formula in sub-Rule (5) of Rule 89 of the CGST Rules to execute refund of unutilized ITC accumulated on account of input services, the delegate of the legislature had acted contrary to the provisions of sub-Section (3) of Section 54 of the CGST Act which provides for a claim of refund of any unutilized ITC - High Court noted the definition of ITC in Section 2(62) and held that Rule 89(5) by restricting the refund only to input goods had acted ultra vires Section 54(3). The Division Bench of the Madras High Court on the other hand while delivering its judgment - implications do not appear to have been taken into consideration in VKC Footsteps India Pvt. Ltd. (supra) except for a brief reference. Having considered this batch of appeals, and for the reasons which have been adduced in this judgment, we affirm the view of the Madras High Court and disapprove of the view of the Gujarat High Court - against the judgment of the Madras High Court - writ petition dismissed.

Judgement Key Points

The ratio of the decision primarily centers on the interpretation of Section 54(3) of the CGST Act and the scope of the refund of unutilized input tax credit (ITC). The Court held that the statutory provision and its provisos should be understood as restrictions rather than mere conditions of eligibility, thereby limiting the refund to specific scenarios explicitly provided therein. Specifically, the Court emphasized that the refund is permissible only in cases where the credit has accumulated due to zero-rated supplies without payment of tax or due to an inverted duty structure where the rate of tax on inputs exceeds that on output supplies.

The Court rejected the broad interpretation that ITC on input services should be included in the refund calculation, affirming that the legislative intent restricts refunds to input goods only. The provisions and rules framing the refund mechanism are to be read in harmony with this legislative intent, and any delegated legislation or formula that restricts the scope of refund beyond what is explicitly provided is ultra vires.

Furthermore, the Court underscored that refund is a statutory right, not a constitutional one, and that the legislature's policy choices, including classifications and restrictions, are within its domain. The Court also clarified that the formula prescribed in rules, though imperfect, falls within the legislative and rule-making powers, and anomalies or inequities therein do not automatically invalidate the rule, provided it is not arbitrary or violative of constitutional principles.

In conclusion, the Court affirmed that the legislative scheme confines the refund of unutilized ITC to specific situations, and the legislative restrictions—such as limiting refunds to input goods only—must be upheld. The Court disapproved of extending the refund to input services in the context of inverted duty structures, as such an extension is not supported by the statutory language and would infringe upon the legislative intent and constitutional boundaries.

JUDGMENT :

Dhananjaya Y Chandrachud, J

Index

A	Introduction	4
B	Factual Backdrop	5
C	Statutory Provisions	7
D	Submissions	11
	D.1 Union of India	11
	D.1.1 Part I- Distinction between goods and services	11
	D.1.2 Part II- Interpretation of Section 54(3)	12
	D.1.3. Part III- Legal Propositions	18
	D.2 Assessees	21
	D.3 Rejoinder by Union of India	59
E	Constitutional Scheme of GST	61
F	CGST Act	69
	F.1 Definitions	69
	F.2 Section 16 & Section 49 of the CGST Act	73
	F.3 Interpretation of Section 54(3) of the CGST Act	77
	F.4 Construing the proviso	94
	F.5 Constitutional validity: The ultra vires doctrine	104
G	Rule 89(5)	113
	G.1 The validity of Rule 89(5) of CGST Rules in exercise of the rule-making power under Section 164 of the CGST Act	115
	G.2 The vires of Rule 89(5) vis-à-vis Section 54(3) of the CGST Act	117
	G.3 The validity of the formula prescribed in Rule 89(5)	122
H	Conclusion	138

A Introduction

1. Parliament while enacting the Central Goods and Services Tax Act 2017,¹[“CGST Act”] has incorporated a provision for refund of tax in Section 54. Sub-Section (3) embodies a provision for refund of unutilised input tax credit²[“ITC”] in cases involving:

(ii) credit accumulation “on account of rate of tax on inputs being higher than rate of tax on output supplies”.

2. While envisaging a refund in the latter of the above two situations, Parliament was cognizant of the fact that ITC may accumulate due to a variety of reasons. However, Parliament envisaged a specific situation where the credit has accumulated due to an inverted duty structure, that is where the accumulation of ITC is because the rate of tax on inputs is higher than the rate of tax on output supplies. Taking legislative note of this situation, a provision for refund has been provided for in Section 54(3). The Central Goods and Service Tax Rules 2017³[“CGST Rules”] have been formulated in pursuance of the rule making power conferred by Section 164 of the CGST Act. Rule 89(5) provides a formula for the refund of ITC, in “a case of refund on account of inverted duty structure”. The said formula uses the term “Net ITC”. In defining the expression “Net ITC”, Rule 89(5) speaks of “input tax credit availed on inputs”.

B Factual Backdrop

3 Writ petitions under Article 226 of the Constitution were instituted before the High Court of Gujarat and the High Court of Judicature at Madras. The petitioners before the High Court submitted inter alia that

(ii) ITC includes the credit of input tax charged on the supply of goods as well as services;

(iii) Section 54(3) does not restrict the entitlement of refund only to unutilised ITC which is accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies. It also allows for refund of unutilised ITC when the rate of tax on input services is higher than the rate of tax on output supplies;

(iv) While Section 54(3) allows for a refund of ITC originating in inputs as well as input services, Rule 89(5) is ultra vires in so far as it excludes tax on input services from the purview of the formula; and

(v) In the event that Section 54(3) is interpreted as a restriction against a claim for refund of accumulated ITC by confining it only to tax on inputs, it would be unconstitutional as it would lead to discrimination between inputs and input services.

4 By its judgment dated 24 July 2020 in VKC Footsteps India Pvt. Ltd. v. Union of India, R/ Special Civil Application No 2792 of 2019, the Division Bench of the Gujarat High Court, held that:

“Explanation (a) to Rule 89(5) which denies the refund of “unutilised inpu

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