Summary
The Court upheld Section 54(3)’s restriction of inverted-duty refunds to credit attributable to input goods and sustained the challenged Rule 89(5) formula. The proviso restricted refund entitlement, rather than merely prescribing eligibility for refund of the entire credit pool. The goods–services distinction was constitutionally permissible, and the general rule-making power supported the formula. Although recognizing anomalies, the Court declined to rewrite it and required the GST Council to consider its observations. The Union’s appeals were allowed; the assessees’ appeals and writ petition were dismissed without costs.
Issues
- Whether Section 54(3) permitted refund of unutilised input-service credit in an inverted-duty case.
- Whether the distinction between input goods and input services violated constitutional equality.
- Whether Rule 89(5) exceeded the statute or rule-making power, or required judicial alteration because of its formula’s anomalies.
Provisions considered
- Section 54(3), first proviso (ii), read with Section 2(59) and Explanation 1 to Section 54, Central Goods and Services Tax Act, 2017The proviso restricts inverted-duty refunds to accumulation attributable to input goods; inputs cannot be expanded to include input services merely because both enter the credit pool. (¶¶ 37, 49, 52, 53, 55, 62, 69, 70)
- Sections 16(1), 49(6), 2(60), 2(62) and 2(63), Central Goods and Services Tax Act, 2017Common credit and utilisation for goods and services do not remove the separate statutory limits governing refund under Section 54. (¶¶ 38, 39, 40, 43, 46, 47, 48, 69)
- Section 164, Central Goods and Services Tax Act, 2017The general rule-making power is not confined to sections expressly using the word prescribed; implementing rules must remain consistent with the Act. (¶¶ 83, 84, 85, 88)
- Rule 89(5), including Explanation (a), as challenged, Central Goods and Services Tax Rules, 2017The formula and definition of Net ITC were consistent with the statutory restriction. Identified inequities did not justify judicially prescribing a different order of credit utilisation. (¶¶ 82, 83, 92, 94, 103, 104, 105, 106, 107, 111)
- Article 14, Constitution of IndiaThe statutory distinction between input goods and input services survived the equality challenge, having regard to permissible fiscal classification and legislative latitude. (¶¶ 71, 75, 76, 78, 80, 81)
Held
- The first proviso to Section 54(3) restricts refunds to its specified situations. Inverted-duty refunds concern accumulation arising from tax on input goods exceeding tax on output supplies. The plural inputs carries the statutory meaning of input, and cannot be enlarged to include input services. (¶¶ 52, 53, 55, 62, 69, 70)
- The availability of credit on both goods and services and its subsequent assimilation into a common ledger do not confer an unrestricted refund entitlement. The circular concerning multiple input-goods tax rates could not enlarge the statutory refund provision to cover input services. (¶¶ 46, 48, 67, 68, 69)
- Fiscal neutrality and the constitutional goal of a harmonised GST structure do not authorize courts to redraw clear statutory limits. Goods and services remain distinct categories under the constitutional and statutory framework, and the refund classification did not offend Article 14. Fiscal legislation remains subject to constitutional limits despite the latitude accorded to legislative choices. (¶¶ 58, 59, 60, 61, 62, 75, 76, 81)
- Section 164 permits rules implementing the Act even where a particular section does not expressly call for prescribed rules. Rule 89(5)’s exclusion of input-service credit from Net ITC accords with Section 54(3), and striking out the limitation would expand the rule beyond the statute. (¶¶ 83, 85, 88, 89, 92, 94)
- The Court accepted the need for a formula to attribute credit after assimilation. It nevertheless recognized that deducting the entire output tax from input-goods credit alone could favour the Revenue. The proposed input-services-first utilisation assumption could conversely favour assessees. (¶¶ 101, 103, 104, 105)
- The formula was neither ambiguous nor unworkable and did not contradict the statutory policy. Its practical inequities alone did not warrant invalidation or judicial rewriting. The Court urged reconsideration and directed the GST Council to consider the observations in paragraphs 104–111 and take a considered view in accordance with law. (¶¶ 105, 106, 107, 108, 109, 110, 111, 113)
- The Gujarat High Court’s contrary judgment was set aside on the Union’s appeals. The Madras High Court’s view was affirmed, the assessees’ appeals and writ petition were dismissed, and no costs were ordered. (¶¶ 112, 113, 114)
Result
Union appeals allowed and Gujarat judgment set aside; assessees’ appeals and writ petition dismissed, with no costs. GST Council to consider the specified observations on the formula.