Kerala High Court Strikes Down Rule 96(10) of CGST Rules as Ultra Vires and Manifestly Arbitrary

Kochi , Kerala: The High Court of Kerala, in a significant ruling, has declared Rule 96(10) of the Central Goods and Services Tax (CGST) Rules, 2017, as ultra vires Section 16 of the Integrated Goods and Services Tax (IGST) Act, 2017, and manifestly arbitrary. The judgment, delivered by Mr. Justice Gopinath P. in a batch of writ petitions led by M/S. SANCE LABORATORIES PRIVATE LIMITED vs UNION OF INDIA (WP(C) 17447/2023) , quashes actions taken under the impugned rule and provides relief to exporters whose IGST refunds were denied or questioned based on it.

Case Overview

The petitioners, all exporters, challenged the constitutional validity of Rule 96(10) of the CGST Rules. This rule imposed restrictions on claiming refunds of IGST paid on exports if the exporter had availed benefits under certain specified notifications for procuring inputs. The core legal question was whether this rule overstepped the boundaries set by the parent legislation, primarily Section 16 of the IGST Act, which governs zero-rated supplies (including exports) and the associated refund mechanisms.

The petitioners argued that Section 16 of the IGST Act grants a substantive right to exporters to claim refunds, either of unutilised input tax credit (ITC) when exporting under bond/Letter of Undertaking (LUT), or of the IGST paid on exports. Rule 96(10) was contended to unfairly curtail this right for those opting to pay IGST and claim a refund.

Arguments Presented

Petitioners' Contentions:

The petitioners, represented by several senior advocates including Sri. G. Shivadas , Sri. K. Srikumar, and Sri. Anil D. Nair, argued that:

* Ultra Vires: Rule 96(10) goes beyond the scope of Section 16 of the IGST Act, as the parent act itself does not stipulate such restrictions on IGST refunds.

* Violation of Vested Rights: The rule arbitrarily takes away the vested right of exporters to claim IGST refunds.

* Constitutional Violations: It infringes upon Articles 14 (equality), 19(1)(g) (freedom of trade), and 265 (no tax without authority of law) of the Constitution, and is "manifestly arbitrary" as per the test laid down in * Shayara Bano v. Union of India . * Anomalous Discrimination: The rule creates an unfair distinction between exporters opting for the refund of IGST paid (Rule 96) versus those opting for refund of unutilised ITC under LUT/bond (Rule 89), as the latter did not face similar sweeping restrictions. * Subordinate Legislation: Delegated legislation (Rules) cannot override or contradict the provisions of the plenary/parent legislation (Act). They cited precedents like Ispat Industries Ltd. v. Commissioner of Customs , Cellular Operators Association of India v. TRAI*, and * Union of India v. Intercontinental Consultants and Technocrats (P) Ltd. *

Revenue's Defence:

The Central Revenue, represented by Sri. P.G. Jayashankar and Sri. Mohammed Rafiq, countered that:

* Conditional Right: The right to refund under Section 16 of the IGST Act is subject to Section 54 of the CGST Act, which allows for conditions to be imposed.

* Fiscal Policy: Citing Union of India v. VKC Footsteps India Pvt. Ltd. , they argued that refund is not an absolute right and the State can impose restrictions for fiscal objectives. The term "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 IGST Act empowers the rule-making authority.

* Conformity with Act: Rule 96(10) was in conformity with Section 16 of the IGST Act.

* Exporter's Choice: Exporters have the option to choose between the two refund mechanisms (Rule 89 or Rule 96), and they should choose the one more beneficial to them.

Court's Analysis and Legal Reasoning

Mr. Justice Gopinath P. found strong merit in the petitioners' arguments. The Court's analysis highlighted several key points:

Subservience of Subordinate Legislation: The Court reiterated the established principle that "subordinate legislation must be subservient to plenary legislation." While acknowledging the State's latitude in fiscal matters as noted in VKC Footsteps , the Court distinguished it, stating, "...in VKC Footsteps (supra), the Supreme Court was dealing with a restriction imposed by plenary legislation and not with a situation like this, in the present cases where it is evident that the subordinate legislation has travelled beyond the scope of the plenary legislation..."

Interpretation of "Conditions, Safeguards and Procedure": Referencing the Gujarat High Court's decision in * Zenith Spinners v. Union of India * (affirmed by the Supreme Court), the Court held that phrases like "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 of the IGST Act cannot be interpreted to empower the government to impose a complete restriction that takes away the right provided under the Act itself.

Manifest Arbitrariness and Absurd Results: The Court undertook a comparative analysis of Rule 89 (LUT/bond route) and Rule 96 (IGST payment route), as presented by the petitioners. This comparison demonstrated how Rule 96(10) led to "hostile discrimination amongst exporters" and created "a restriction not contemplated by Section 16 of the IGST Act." The judgment cited Shayara Bano (supra) on striking down manifestly arbitrary legislation and * K.P Varghese v. Income Tax Officer * on construing statutes to avoid absurd and unjust results. The Court noted the absurdity where even a small percentage of inputs availed under specified notifications could lead to denial of the entire refund. The Court quoted: > "The above comparative table clearly indicates that the working of Rule 96(10) of the CGST Rules as presently worded creates a restriction not contemplated by Section 16 of the IGST Act, on the right to refund. Therefore, I am constrained to hold that Rule 96(10) of the CGST Rules as presently worded is ultra vires the provisions of Section 16 of the IGST Act, it is ‘manifestly arbitrary’ as the term is to be understood in the light of the law laid down in Shayara Bano (supra) and the provision as it stands today produces absurd results, not intended by the Legislature."

Impact of Subsequent Deletion of Rule: The Court acknowledged that after the judgment was dictated, Notification No.20/2024-Central Tax, dated 08-10-2024, was issued, deleting Rule 96(10) prospectively. However, since this deletion did not address past cases, the Court proceeded to declare upon its validity for the prior period.

Final Decision and Implications

The High Court allowed the writ petitions, delivering the following key directives:

Rule 96(10) Declared Ultra Vires: Rule 96(10) of the CGST Rules, as inserted by Notification No.53/2018-CT dated 09-10-2018 (effective from 23-10-2017), is declared ultra vires Section 16 of the IGST Act and unenforceable due to being manifestly arbitrary.

Quashing of Actions: Any actions initiated (show cause notices) or orders passed against the petitioners based on Rule 96(10) stand quashed.

No Recovery of Refunds: No proceedings shall be initiated to recover any IGST already refunded to the petitioners by applying Rule 96(10) for the period between 23-10-2017 and 08-10-2024.

Appeals on Other Issues: Petitioners aggrieved by orders on issues other than Rule 96(10) can file appeals within two weeks, which will be considered timely.

Replies to Notices on Other Issues: For show cause notices involving other issues, petitioners are to file replies within two weeks, and these other issues shall be adjudicated by the proper officer.

This landmark judgment provides significant relief to exporters who were adversely affected by the restrictive conditions of Rule 96(10) and clarifies the limits of rule-making power in the context of GST legislation, reinforcing the supremacy of the parent Act.