GST: Controversy on Inverted Rate Structure to continue- Madras High Court has ruled against the ITC Claim

On refund of input tax credit on account of inverted rate structure, Madras High Court has delivered a judgment which is diagonally opposite to the judgment rendered by Gujarat High Court in the case of VKC Footsteps.

The Madras High court has delivered this judgment in the case of TVL  Transtonnelstroy Af-cons Joint venture. With this controversy is set to be ignited further till the necessary amendment is carried out by the Parliament or the issue is settled by the Supreme Court of the County.

The issue is related to section 54(3) which provides that Input Tax Credit (ITC) on input would be eligible for refund only if the GST rate on input is more than that on the outward supply of the finished goods. In short, the parliament was in favour of the refund of credit on input alone.

In VKC Footsteps India Pvt Ltd, Gujarat High Court has held that since the provisions of section 50(3) of the CGST Act, 2017 provides for the refund of input tax credit in case the rate of GST on input is more that the rate of GST on outward supply of goods, the refund cannot exclude the credit on input services by way of rule [89(5)]. With this observation, Court held that the rule cannot go beyond the provisions in the Act.

Almost similar issue was also pending before the Madras High Court in W.P No.8596 of 2019 Batch etc. wherein vide its order dated 21.09.2020, the following observation were made by the court on questions before it

Question No. 1.  Whether Section 54(3)(ii) infringes Article 14 of the Constitution?

Observation by Court:

Section 54(3)(ii) does not infringe Article 14.

Question No. 2.  Whether it is necessary to read the word “inputs” in Section 54(3)(ii) as encompassing both goods and services so as to ensure that the said provision is not struck down?

Observation by Court:

Refund is a statutory right and the extension of the benefit of refund only to the unutilized credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilized input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power

Question No. 3.  Whether the words input services may be read into the word “inputs” by resorting to the interpretive principle of reading down the statute?

Observation by Court:

Refund is a statutory right and the extension of the benefit of refund only to the unutilized credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilized input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power

Question No. 4.  Whether the words input services may be read into Section 54(3)(ii) as an exception to the general rule of casus omissus?

Observation by Court:

There is no necessity to adopt the interpretive device of reading down so as to save the constitutionality of Section 54(3)(ii).

Question No. 5.  Whether the proviso to Section 54(3) qualifies and curtails the scope of the principal clause to the limited extent of specifying the two cases in which registered persons become eligible for a refund of the unutilized input tax credit?

Observation by Court:

Section 54(3)(ii) curtails a refund claim to the unutilized credit that accumulates only on account of the rate of tax on input goods being higher than the rate of tax on output supplies. In other words, it qualifies and curtails not only the class of registered persons who are entitled to refund but also to imposes a source-based restriction on refund entitlement and, consequently, the quantum thereof.

Question No. 6.  Whether sub-clause (ii) of the proviso merely stipulates the eligibility conditions for claiming a refund of the unutilized input tax credit or whether it also curtails the entitlement to refund to unutilized input tax credit from a particular source, namely, input goods and excludes input services?

Observation by Court:

Section 54(3)(ii) curtails a refund claim to the unutilized credit that accumulates only on account of the rate of tax on input goods being higher than the rate of tax on output supplies. In other words, it qualifies and curtails not only the class of registered persons who are entitled to refund but also to imposes a source-based restriction on refund entitlement and, consequently, the quantum thereof.

Question No. 7.  Whether the rule making power under Section 164 empowers the Central Government to make Rule 89(5) as amended?

Observation by Court:

As a corollary, Rule 89(5) of the CGST Rules, as amended, is in conformity with Section 54(3)(ii). Consequently, it is not necessary to interpret Rule 89(5) and, in particular, the definition of Net ITC therein so as to include the words input services.

Question No. 8.  Whether Rule 89(5) of the CGST Rules, as amended, is ultra vires Section 54(3) of the CGST Act?

Observation by Court:

As a corollary, Rule 89(5) of the CGST Rules, as amended, is in conformity with Section 54(3)(ii). Consequently, it is not necessary to interpret Rule 89(5) and, in particular, the definition of Net ITC therein so as to include the words input services.

Question No. 9.  Whether the definition of the term Net ITC, as contained in Rule 89(5), is liable to be read as encompassing both input goods and input services?

Observation by Court:

As a corollary, Rule 89(5) of the CGST Rules, as amended, is in conformity with Section 54(3)(ii). Consequently, it is not necessary to interpret Rule 89(5) and, in particular, the definition of Net ITC therein so as to include the words input services.

Conclusions:

With all respect and regards to the judgemnet by Hon’ble Court of Madras, it logically appears that the above interpretation of Section 54(3) may not be in accordance with the spirit of the GST Law. The basic concept of refund is te underlying fact that the taxpayer are not required to pay more tax on inward supplies than the tax payable on his outward supplies as a result of lower rate of outward supplies

The GST authorities throught out the country (except Gujarat) will now follow the Madras HC ruling so as to reject the ITC refund claim. Thankfully, Businessmen at Gujrat will be at a winning edge. It will be in the interest of the country if the GST council take a final call and do the required clarification & amendment which side it may be.