UNION OF INDIA & ORS. versus VKC FOOTSTEPS INDIA PVT LTD. on 13 September 2021

1. Sub-Section (3) of Section 54 begins, in its main part,Dwith the stipulation that a registered person may claim refund ofany ‘unutilised ITC at the end of any tax period’. Whether weconstrue the first proviso as an exception or in the nature of afresh enactment, the clear intent of Parliament was to confinethe grant of refund to the two categories spelt out in clauses (i)Eand (ii) of the first proviso. That clauses (i) and (ii) are the onlytwo situations in which a refund can be granted is evident fromthe opening words of the first proviso which stipulates that “norefund of unutilised input tax credit shall be allowed in cases otherthan”. What follows is clauses (i) and (ii). The intent of Parliamentis evident by the use of a double – negative format by employingFthe expression “no refund” as well as the expression “in casesother than”. In other words, a refund is contemplated in thesituations provided in clauses (i) and (ii) and no other. To put itdifferently, the first proviso can be recast, without altering itsmeaning to read that a refund of unutilised ITC shall be allowedGonly in the cases governed by clauses (i) and (ii). Clause (i) dealswith zero rated supplies without payment of tax. Explanation-1 toSection 54 clarifies that the expression ‘refund’ includes refundof tax paid on zero rated supplies on goods or services or both,or on inputs or input services used in making such zero-ratedsupplies. On the other hand, in the case of deemed exports,HExplanation-1 refers to a refund of tax on the supply of goods.

Likewise in regard to domestic supplies, governed by clause (ii)of the first proviso, the expression ‘refund’ means refund ofunutilised ITC as provided under sub-Section (3). With the clearlanguage which has been adopted by Parliament while enactingthe provisions of Section 54(3), the acceptance of the submissionwhich has been urged on behalf of the assessee would involve ajudicial re-writing of the provision which is impermissible in law.Clause (ii) of the proviso, when it refers to “on account of” clearlyintends the meaning which can ordinarily be said to imply ‘becauseof or due to’. When proviso (ii) refers to “rate of tax”, it indicatesa clear intent that a refund would be allowed where and only if theinverted duty structure has arisen due to the rate of tax on inputbeing higher than the rate of tax on output supplies. Reading theexpression ‘input’ to cover input goods and input services wouldlead to recognising an entitlement to refund, beyond what wascontemplated by Parliament. [Para 69][253-G-H; 254-A-F]

2. This Court must be cognizant of the fact that noconstitutional right is being asserted to claim a refund, as therecannot be. Refund is a matter of a statutory prescription.Parliament was within its legislative authority in determiningwhether refunds should be allowed of unutilised ITC tracing itsorigin both to input goods and input services or, as it haslegislated, input goods alone. By its clear stipulation that a refundwould be admissible only where the unutilised ITC hasaccumulated on account of the rate of tax on inputs being higherthan the rate of tax on output supplies, Parliament has confinedthe refund in the manner which we have described above. Whilerecognising an entitlement to refund, it is open to the legislatureto define the circumstances in which a refund can be claimed.The proviso to Section 54(3) is not a condition of eligibility (asthe assessees’ Counsel submitted) but a restriction which mustgovern the grant of refund under Section 54(3). [Para 70][254-G-H; 255-A-B]

Constitutional Validity of s.54(3)

2. Parliament while enacting the provisions of Section 54(3),legislated within the fold of the GST regime to prescribe a refund.While doing so, it has confined the grant of refund in terms of the AB

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Afirst proviso to Section 54(3) to the two categories which aregoverned by clauses (i) and (ii). A claim to refund is governed bystatute. There is no constitutional entitlement to seek a refund.Parliament has in clause (i) of the first proviso allowed a refundof the unutilized ITC in the case of zero-rated supplies madewithout payment of tax. Under clause (ii) of the first proviso,BParliament has envisaged a refund of unutilized ITC, where thecredit has accumulated on account of the rate of tax on inputsbeing higher than the rate of tax on output supplies. When thereis neither a constitutional guarantee nor a statutory entitlementto refund, the submission that goods and services mustCnecessarily be treated at par on a matter of a refund of unutilizedITC cannot be accepted. Such an interpretation, if carried to itslogical conclusion would involve unforeseen consequences,circumscribing the legislative discretion of Parliament to fashionthe rate of tax, concessions and exemptions. If the judiciary wereto do so, it would run the risk of encroaching upon legislativeDchoices, and on policy decisions which are the prerogative of theexecutive. Many of the considerations which underlie thesechoices are based on complex balances drawn between political,economic and social needs and aspirations and are a result ofcareful analysis of the data and information regarding the levy ofEtaxes and their collection. That is precisely the reason why courtsare averse to entering the area of policy matters on fiscal issues.This Court is therefore unable to accept the challenge to theconstitutional validity of Section 54(3). [Para 81][261-E-H; 262-A-B]

FValidity of Rule 89(5) of CGST Rules in exercise of therule making power u/s.164 of the CGST Act

3. Under Section 164(1), confers an express power on theCentral Government to make rules for carrying out the provisionsof the CGST Act on the recommendations of the GST Council. ItGmay be true that in certain specific statutory provisions, the Actrecognizes, by using the expression ‘prescribes’, that rules maybe framed for that purpose. But the converse cannot be assumedinferentially, by presuming that in other areas, recourse to therule making power cannot be taken. By its very nature, a statutoryprovision may not visualize every eventuality which may arise inH

implementing the provisions of the Act. Hence it is open to therule making authority to frame rules, so long as they are consistentwith the provisions of the parent enactment. The rules mayinterstitially fill-up gaps which are unattended in the mainlegislation or introduce provisions for implementing thelegislation. So long as the authority which frames the rules hasnot transgressed a provision of the statute, it cannot be deprivedof its authority to exercise the rule making power. The widepowers given under Section 164 of the CGST Act are only limitedby the provisions of the Act itself, in furtherance of which a rulemaybe framed. It is for this reason that the powers under Section164 are not restricted to only those sections which grant specificauthority to frame rules. If such a construction, as assessee hashypothesised, were to be acceptable, it would render theprovisions of Section 164 otiose. Thus, this Court finds that theabsence of the words “as may be prescribed” in Section 54(3)does not deprive the rule making authority to make rules forcarrying out the provisions of the Act. [Para 85][263-F-H; 264-A-C]

The Vires of Rule 89(5) vis-à-vis Section 54(3) of the CGSTAct

The Vires of Rule 89(5) vis-à-vis Section 54(3) of the CGSTAct

4. The grievance however is that Rule 89(5) goes beyondthe “provisions of the Act” when in the garb of fixing a formula, itrestricts the refund of ITC to input goods by denying ITC ofinput services. This is done by defining ‘Net ITC’ to mean ITCavailed of inputs. The gravamen of the challenge is that thisconsequently ignores ITC relatable to input services. In otherwords, the submission is that Rule 89(5) cannot be construed tobe a rule for carrying out the “provisions of the Act”. [Para90][266-B-C]

5. The second limb of the line of challenge is that eventhough the rules are required to be recommended by the GSTCouncil this will not elevate them to the status of a law enactedby the legislature. The submission which has been urged byassessee proceeds on an underlying assumption which is thatRule 89(5) by restricting the definition of Net ITC to mean ITCavailed on input goods is an affront to Section 54(3). It is on thisfoundation, that it has been urged that a rule which is contrary to AB

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Athe statute cannot be saved merely on the ground that either (i)the rule has been laid before Parliament and is subject to its powerof modification annulment or amendment; or (ii) the rule was madeon the recommendations of the GST Council. The application ofthe second layer of the argument does not arise in the presentcase for the simple reason that Rule 89(5) in defining Net ITC toBmean “input tax credit availed on inputs” does not transgressthe statutory restriction which is contained in proviso (ii) of Section54(3). The challenge to Rule 89(5) as a piece of delegatedlegislation on the ground that it is ultra vires Clause (ii) of thefirst proviso to Section 54(3) is therefore lacking in substance.CAs reasoned in the earlier part of this judgment, Clause (ii) ofthe first proviso is not merely a condition of eligibility for availingof a refund but a substantive restriction under which a refund ofunutilized ITC can be availed of only when the accumulation isrelatable to an inverted duty structure, namely the tax on inputgoods being higher than the rate of tax on output supplies. ThereDis therefore no disharmony between Rule 89(5) on the one handand Section 54(3) particularly Clause (ii) of its first proviso onthe other hand. [Para 92][266-F-G; 267-A-B]

The Validity of the Formula prescribed in Rule 89(5)

E6. In view of this Court, the justification of the formula underRule 89(5) given by the ASG to create a legal bifurcation is valid.In this context, it would be material to advert to the provisions ofRule 42. Rule 42(1) provides that the ITC in respect of inputgoods or input services which attract the provisions of sub-Section(1) or sub-Section (2) of Section 17 being partly used for theFpurpose of business and partly for other purposes or partly usedfor affecting taxable supplies including zero rated supplies andpartly for effecting exempts supplies shall be attributed for thepurposes of business or for effecting taxable supplies in themanner which is indicated in the Rule. Sub-Section (1) of SectionG17 provides that where the goods and services or both are usedby a registered person partly for the purposes of any businessand partly for any other purpose, the amount of credit shall berestricted to so much of the input tax as is attributable to thepurpose of its business. Sub-Section (2) of Section 17 providesthat where the goods or services or both are used by a registeredH

person partly for effecting taxable supplies including zero ratedsupplies under the CGST Act or under the IGST Act and partlyfor effecting exempt supplies the amount of credit shall berestricted to so much of the input tax as is attributable to thetaxable supplies including zero rated supplies. Rule 42, in otherwords, provides for the manner in which the attributions of ITCin respect of the input or input services under sub-Sections (1)or (2) of Section 17 shall be carried out. Rule 43 similarly providesthe manner in which ITC in respect of capital goods attractingthe provisions of sub-Section (1) of Section 17, used partly forbusiness and partly for other purposes or partly for effectingtaxable supplies including zero rated supplies and partly foreffecting exempt supplies would be attracted to the purpose ofbusiness or for effecting taxable supplies. Both Rules 42 and 43provide for a formula for attribution. Rule 86 provides for themaintenance of an electronic credit ledger. Rule 89(5) providesfor a refund. In both sets of rule clusters, Rules 42 and 43 on theone hand and Rule 89(5) on the other hand, a formula is used forthe purpose of attribution in a post assimilated scenario. The useof such formulae is a familiar terrain in fiscal legislation includingdelegated legislation under parent norms and is neither untowardnor ultra vires. [Para 103][271-G; 272-A-F]

7. The aberrations which have been pointed out, certainlyindicate that the formula is not perfect. The formula makes apresumption that the output tax payable on supplies has beenentirely discharged from the ITC accumulated on account of inputgoods and there has been no utilisation of the ITC on inputservices. While a similar formula is provided in Rule 89(4) withregard to zero rated supplies, in that case, the ‘Net ITC’ includesinput goods and input services and thus, there is no imbalancebetween the different components of the formula. The formulaprescribed in Rule 89(5) however, seeks to deduct the total outputtax from only one component of the ITC, namely ITC on inputgoods. This in our view is at odds with reality, where the ITC onboth input goods and input services is accumulated in theelectronic ledger and is then utilised for the payment of outputtax. In making such an assumption, the formula tilts the balancein favour of the Revenue by reducing the refund granted. We areequally cognizant of the fact that the proposed solution, that is ABC

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Aprescribing an order of utilisation of the ITC accumulated on inputservices and input goods, may tilt the balance entirely in favourof the assessee as that would make a contrary assumption thatthe output tax is discharged by the ITC accumulated on accountof input services entirely. Another possible solution could be thatthe Rule itself provides for a statutory assumption or a deemingBfiction of utilisation of a certain percentage of ITC on inputservices towards the payment of output tax for the purpose ofcalculation of refund. [Para 105][273-A-E]

8. The above judicial precedents indicate that in the fieldof taxation, this Court has only intervened to read down orCinterpret a formula if the formula leads to absurd results or isunworkable. In the present case however, the formula is notambiguous in nature or unworkable, nor is it opposed to the intentof the legislature in granting limited refund on accumulation ofunutilised ITC. It is merely the case that the practical effect of Dthe formula might result in certain inequities. The reading downof the formula as proposed by prescribing an order of utilisationwould take this Court down the path of recrafting the formulaand walk into the shoes of the executive or the legislature, whichis impermissible. Accordingly, we shall refrain from replacing thewisdom of the legislature or its delegate with our own in such aEcase. However, given the anomalies pointed out by the assessees,we strongly urge the GST Council to reconsider the formula andtake a policy decision regarding the same. [Para 111][280-D-F]

VKC Footsteps India Pvt. Ltd. v. Union of IndiaR/Special Civil Application No 2792 of 2019 –Fdisapproved.

Tvl. Transtonnelstroy Afcons Joint Venture v. Union ofIndia Writ Petition Nos 8596, 8597, 8602, 8603, 8605and 8608 of 2019 – affirmed.

GAssistant Commissioner of Urban Land Tax v.Buckingham and Carnatic Co. Ltd. (1969) 2 SCC 55 :[1970] 1 SCR 268; Federation of Hotel & RestaurantAssociation of India v. Union of India (1989) 3 SCC

634 : [1989] 2 SCR 918; RK Garg v. Union of India(1981) 4 SCC 675 : [1982] 1 SCR 947 – followed.

S Sundaram Pillai v. V R Pattabiraman (1958) 1 SCC591; Hiralal Rattanlal v. State of UP (1973) 1 SCC 216: [1973] 2 SCR 502; Union of India v. NITDIP TextileProcessors Private Limited (2012) 1 SCC 226 : [2011]13 SCR 26; Elel Hotels and Investments Limited andOthers v. Union of India (1989) 3 SCC 698 : [1989] 2SCR 880; Spences Hotel Pvt Ltd. v. State of West Bengal(1991) 2 SCC 154 : [1991] 1 SCR 429; Commissionerof Income Tax v. HCL Technologies Limited (2018) 16SCC 709 : [2018] 7 SCR 1079; Arun Kumar and Othersv. Union of India (2007) 1 SCC 732 : [2006] 6 Suppl.SCR 290 – relied on.

Mafatlal Industries Limited v. Union of India (1997) 5SCC 536 : [1996] 10 Suppl. SCR 585; All IndiaFederation of Tax Practitioners v. Union of India (2007)7 SCC 527 : [2007] 9 SCR 147; Association of Leasingand Financial Service Companies v. Union of India(2011) 2 SCC 352 : [2010] 13 SCR 381; CIT v.Bipinchandra Maganlal AIR 1961 SC 1040 : [1961]SCR 493; State of Rajasthan v. Leela Jain AIR 1965SC 1296 : [1965] SCR 276; Bihar CooperativeDevelopment Cane Marketing Union Ltd. v. Bank ofBihar AIR 1967 SC 389 : [1967] SCR 848; State ofJammu & Kashmir v. Triloki Nath Khosa (1974) 1 SCC19 : [1974] 1 SCR 771; Re The Special Courts Bill 1978(1979) 1 SCC 380 : [1979] 2 SCR 476; AssistantCommissioner of Commercial Tax (Asst.) v. DharmendraTrading Company (1988) 3 SCC 570 : [1988] 3 SCR946; Kerala State Electricity Board v. Indian AlluviumCo. Ltd. (1976) 1 SCC 466 : [1976] 1 SCR 552; BharatHari Singhania v. Commissioner of Wealth Tax (Central)(1994) 3 Suppl. SCC 46 : [1994] 1 SCR 1033;Commissioner of Income Tax, Coimbatore v. LakshmiMachine Works (2007) 11 SCC 126 : [2007] 5 SCR622 – referred to.

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GCIVIL APPELLATE JURISDICTION: Civil Appeal No. 4810of 2021.

From the Judgment and Order dated 24.07.2020 of the High Courtof Gujarat at Ahmedabad in S.C.A. No.2792 of 2019.

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Civil Appeal Nos. 4809, 4811, 4807, 4767, 4804, 4806, 4802, 4783,4775-4781, 4769-4744, 4805, 4808, 4764-4765 of 2021 and Writ Petition(C) No. 489 of 2021.

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N. Venkataraman, Balbir Singh, ASGs, Amit Anand Tiwari, AAG,Arvind Datar, V. Sridharan, Sr. Advs., Mukesh Kumar Maroria, ShyamGopal, Ms. Binu Tamta, M. Yogesh Kanna, Joseph Pookkatt, PrashantKumar, Nilesh Sharma, Dhawesh Pahuja, M/s Ap & J Chambers,Dr. Avinash Poddar, Anant Kumar Vatsaya, Devendra Singh, NareshThacker, Kumar Visalaksh, Hardik Modh, Udit Jain, Amit Laddha,Abhishek Vikas, Harish Bindhumadavan, Pawanshree Agrawal, RahulUnnikrishnan, Ashwini Chandrashekharan, Sharyashree Thyagarajan,Manoharan Ellappan, G. Natarajan, Kartik Jindal, Anant Gautam, NipunSharma, Madhur Tewatia, Rajesh Kumar Gautam, Mahesh Agarwal, P.R. Renganath, Rohan Talwar, Shantanu Sharma, Chinmayee Chandra,B. Krishna Prasad, B. V. Balaram Das, Sujit Gosh, Krishna Rao, AjinkaTiwari, Nikilesh Ramachandran, Ms. Charanya Lakshmikumaran, AnkitYadav, Ms. Veena Kamath, Ratnesh Sharma, Uchit Sheth, SantoshKrishnan, Anand Nainavati, Aditya Bhattacharya, Ms. Apeksha Mehta,Sriram Sridharan, Somesh Jain, Nalin Bajaj, E. C. Agrawala, Vinay Shraff,Ravi Bharuka, Ankit Agarwal, Sandeep Goyal, Dr. Joseph Aristotle S.,Saaketh Kasibhatla, Ms. Preeti Singh, Advs. for the appearing parties.

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The Judgment of the Court was delivered by E

DR DHANANJAYA Y CHANDRACHUD, J.

Index*

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*Ed. Note : The pagination in the Index is as per the original judgment.

[2021] 15 S.C.R.

AD.3 Rejoinder by Union of India ................................. 58

EConstitutional Scheme of GST....................................... 60

FCGST Act ...................................................................... 68

F.1 Definitions .............................................................. 68

BF.2 Section 16 & Section 49 of the CGST Act ............ 71

F.3 Interpretation of Section 54(3) of the CGST Act... 75

F.4 Construing the proviso............................................ 93

F.5 Constitutional validity: The ultra vires doctrine ... 102CGRule 89(5) ..................................................................... 111

G.1 The validity of Rule 89(5) of CGST Rules in exerciseof the rule-making power under Section 164 of theCGST Act .............................................................112

DG.2 The vires of Rule 89(5) vis-à-vis Section 54(3) of theCGST Act .............................................................114

G.3 The validity of the formula prescribed in Rule 89(5)118

HConclusion ................................................................... 134

A IntroductionE

1. Parliament while enacting the Central Goods and Services TaxAct 2017,[1] has incorporated a provision for refund of tax in Section 54.Sub-Section (3) embodies a provision for refund of unutilised input taxcredit[2] in cases involving:

F(i)zero rated supplies made without payment of tax; and

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

2. While envisaging a refund in the latter of the above twosituations, Parliament was cognizant of the fact that ITC may accumulateGdue to a variety of reasons. However, Parliament envisaged a specificsituation where the credit has accumulated due to an inverted dutystructure, that is where the accumulation of ITC is because the rate oftax on inputs is higher than the rate of tax on output supplies. Taking 1 “CGST Act”H2 “ITC”

legislative note of this situation, a provision for refund has been providedfor in Section 54(3). The Central Goods and Service Tax Rules 2017[3]have been formulated in pursuance of the rule making power conferredby Section 164 of the CGST Act. Rule 89(5) provides a formula for therefund 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 wereinstituted before the High Court of Gujarat and the High Court ofJudicature at Madras. The petitioners before the High Court submittedinter alia that

(i) Section 54(3) allows for a refund of ITC where theaccumulation is due to an inverted duty structure;

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

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

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

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

4. By its judgment dated 24 July 2020 in VKC Footsteps IndiaPvt. Ltd. v. Union of India[4], the Division Bench of the Gujarat HighCourt, held that:

3 “CGST Rules”

4 R/ Special Civil Application No 2792 of 2019

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A“Explanation (a) to Rule 89(5) which denies the refund of“unutilised input tax” paid on “input services” as part of “input taxcredit” accumulated on account of inverted duty structure is ultravires the provision of Section 54(3) of the CGST Act, 2017.”

The High Court therefore directed the Union Government to allowBthe claim for refund made by the petitioners before it, considering unutilisedITC on input services as part of “Net ITC” for the purpose of calculatingrefund in terms of Rule 89(5), in furtherance of Section 54(3).

5. By its judgment dated 21 September 2020, in Tvl.Transtonnelstroy Afcons Joint Venture v. Union of India[5]andCconnected cases the Division Bench of the Madras High Court came toa contrary conclusion, after having noticed the view of the Gujarat HighCourt, which it has declined to follow. The Madras High Court hasconcluded that “63…

D(1) Section 54(3)(ii) does not infringe Article 14.

(2) Refund is a statutory right and the extension of the benefit ofrefund only to the unutilised credit that accumulates on account ofthe rate of tax on input goods being higher than the rate of tax onoutput supplies by excluding unutilised input tax credit thatEaccumulated on account of input services is a valid classificationand a valid exercise of legislative power.”

6. The writ petitions challenging the validity of Rule 89(5) on theground that it is ultra vires Section 54(3)(ii) were dismissed. Thedivergence between the views of the Gujarat High Court on the onehand, and the Madras High Court on the other, forms the subject matterFof this batch of appeals.

C Statutory Provisions

7. Section 54 of the CGST Act provides for a refund of ax. Undersub-Section (1) of Section 54, a person claiming a refund of “tax andGinterest, if any, paid on such tax or any other amount paid” has to makean application within two years of the relevant date. Section 54(3)provides for a claim of refund of unutilised ITC. Sub-sections (1) and(3) of Section 54 provide as follows:

H5 Writ Petition Nos 8596, 8597, 8602, 8603, 8605 and 8608 of 2019

“Section 54. Refund of tax

(1) Any person claiming refund of any tax and interest, if any, paidon such tax or any other amount paid by him, may make anapplication before the expiry of two years from the relevant datein such form and manner as may be prescribed:

Provided that a registered person, claiming refund of any balancein the electronic cash ledger in accordance with the provisions ofsub-section (6) of Section 49, may claim such refund in the returnfurnished under section 39 in such manner as may be prescribed.

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(3) Subject to the provisions of sub-section (10), a registered personmay claim refund of any unutilised input tax credit at the end ofany tax period:

Provided that no refund of unutilized input tax credit shall be allowedin cases other than-

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of taxon inputs being higher than the rate of tax on output supplies(other than nil rated or fully exempt supplies), except suppliesof goods and services or both as may be notified by theGovernment on the recommendations of the Council:

Provided further that no refund of unutilized input tax credit shallbe allowed in cases where the goods exported out of India aresubjected to export duty:

Provided also that no refund of input tax credit shall be allowed, ifthe supplier of goods or services or both avails of drawback inrespect of central tax or claims refund of the integrated tax paidon such supplies.”

8. Rule 89 was originally inserted in the CGST Rules through theCentral Goods and Services Tax (Second Amendment) Rules 2017[6], 6 Notification No.10/2017- Central Tax by the Government of India, Ministry of Finance,Department of Revenue, Central Board Indirect tax and Customs A

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Awhich came into force on 1 July 2017. Rule 89(4) and Rule 89(5) werein the following terms:

“(4) […]

(B) “Net ITC” means input tax credit availed on inputsand input services during the relevant period;B

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(E) “Adjusted Total turnover” means the turnover in a State ora Union territory, as defined under sub-section (112) of section2, excluding the value of exempt supplies other than zero-ratedCsupplies, during the relevant period;(5) In the case of refund on account of inverted duty structure,refund of input tax credit shall be granted as per the followingformula: - Maximum Refund Amount= {(Turnover of inverted rated supplyDof goods) x Net ITC ÷ Adjusted Total Turnover} ? tax payable onsuch inverted rated supply of goods Explanation:- For the purposes of this sub rule, theexpressions “Net ITC” and “Adjusted Total turnover” shallhave the same meanings as assigned to them in sub-ruleE(4).”

9. On 18 April 2018, the Central Goods and Services Tax (FourthAmendment) Rules 2018[7] were notified. Rule 89(5) was amended inthe following termsF

“(5). In the case of refund on account of inverted duty structure,refund of input tax credit shall be granted as per the followingformula:- Maximum Refund Amount = {(Turnover of inverted rated supplyGof goods and services) x Net ITC ÷ Adjusted Total Turnover} ?tax payable on such inverted rated supply of goods and services.Explanation:- For the purposes of this sub-rule, the expressions- 7 Notification No.21/2018- Central Tax by the Government of India, Ministry of Finance,HDepartment of Revenue, Central Board Indirect tax and Customs

(a) “Net ITC” shall mean input tax credit availed on inputsduring the relevant period other than the input tax creditavailed for which refund is claimed under sub-rules 4(A)or (4B) or both; and (b) “Adjusted Total turnover” shall have the same meaning asassigned to it in sub-rule (4).”

(emphasis supplied)

The amendment was with prospective effect. Rule 89(5), as itstands at present, was substituted on 13 June 2018 by the Central Goodsand Services Tax (Fifth Amendment) Rules 2018[8]. By the amendment,Rule 89(5) was substituted with the retrospective effect from 1 July2017 in the following terms:

“(iii) with effect from 01[st] July 2017, in rule 89, for sub-rule(5), the following shall be substituted namely:- “(5) In the case of refund on account of inverted duty structure,refund of input tax credit shall be granted as per the followingformula:- Maximum Refund Amount = {(Turnover of inverted rated supplyof goods and services) x Net ITC ÷ Adjusted Total Turnover} ?tax payable on such inverted rated supply of goods and services.

Explanation:- For the purposes of this sub-rule, the expressions- (a) Net ITC shall mean input tax credit availed on inputsduring the relevant period other than the input tax creditavailed for which refund is claimed under sub-rules 4(A)or (4B) or both; and

(b) Adjusted Total turnover shall have the same meaning asassigned to it in sub-rule (4).””

The above sequence indicates that the definition of the expression‘Net ITC’ in Rule 89(5) originally meant “input tax credit availed oninput and inputs services”. By the amendment of 18 April 2018, thedefinition of ‘Net ITC’ was substituted so as to mean ITC availed on 8 Notification No.26/2018- Central Tax by the Government of India, Ministry of Finance,Department of Revenue of Central Board of Indirect Taxes and Customs A

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Ainputs, with prospective effect. On 13 June 2018, this definition wasmade applicable with retrospective effect from 1 July 2017.

10. Before we proceed to analyse the submissions and formulatethe points for consideration, it is necessary to emphasise at the outsetthat one of the core issues in the present batch of cases would turn uponBthe interpretation of the expression “inputs” in Section 54(3)(ii) of CGSTAct and the definition of “Net ITC” in the amended Rule 89(5). Duringthe course of the submissions, in the interest of maintaining clarity, Counselon both sides used the expression ‘input goods’ while dealing with goodsthat are used as inputs and ‘input services’ while dealing with servicesthat are used as inputs. We propose to use the same formulation toCensure conceptual clarity while distinguishing between goods which areused as inputs and services which are used as inputs. With this preface,we shall now proceed to deal with the submissions of the parties.

D Submissions

D.1 Union of IndiaD

D.1.1 Part I- Distinction between goods and services

11. Mr N Venkataraman, learned Additional Solicitor General[9] ledthe arguments on behalf of the Union Government in assailing thecorrectness of the decision of the Gujarat High Court (and supportingEthe decision of Madras High Court). Mr Venkataraman urged that:

(i) Goods and services are distinct at a constitutional level. Article366(12) of the Constitution defines goods, while Section366(26A) defines services. Under the CGST Act, theexpression ‘input’ in Section 2(59) means tangibleFcommodities other than capital goods, while on the other hand‘input service’ in Section 2(60) means any service used orintended to be used by a supplier for business. Hence, ‘goods’and ‘services’ and ‘inputs’ and ‘input services’ have distinctdefinitions; G(ii)Article 366(12A) defines ‘goods and services tax’ to meanany tax on the supply of goods or services or both excepttaxes on the supply of alcoholic liquor for human consumption;

(iii) Article 246A, which traces the source of power of taxationand identifies the fields of taxation, empowers the Parliament,the States and Union Territories to impose simultaneous taxboth on goods and services. Consequently, though goods andservices are brought to tax under a common code, both theConstitution and the statute have maintained a distinctionbetween goods and services. They remain distinct forprescription, treatment and interpretation; A

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(iv) Section 2(62) and Section 2(63) define ‘input tax’ and ‘inputtax credit’ which include taxes paid on goods (input goods)and services (input services) either under CGST, State Goodsand Services Tax Act[10] and Integrated Goods and ServicesTax Act 2017[11]; C

(v) Input tax means a tax charged both on goods and services.These are taxes paid by a supplier on their outward suppliesas defined under Section 2(83) which become inward supplyDfor the recipient under Section 2(67); and

(vi) The need to integrate both taxes on input goods and inputservices is to enable credit on a single pool for further crossutilisation on both goods and services.

D.1.2 Part II- Interpretation of Section 54(3)

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(i) The structure of Section 54(3) is as follows:

(a) The opening clause permits a registered person to claim refundof any unutilised ITC at the end of any tax period.

(b) The main clause permits:

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i. a claim;

ii. in the nature of refund;

iii. of any unutilized ITC; and

iv. at the end of the tax period.

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(ii) Section 54(3) contains three provisos, out of which the firstproviso falls for interpretation in this case. The three provisosshare common features which indicate that these provisos 10 “SGST Act”

11 “IGST Act”

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Aare in the nature of restrictions and not conditions (orqualifications);

(iii) The provisos to Section 54(3) should be construed asrestrictions for the following reasons:

(a) The expression employed in the main clause of Section54(3) is ‘claim’ whereas the provisos restrict this ambitby the use of the expression ‘allowed’. The expression‘allowed’ appears in all the three provisos; B

(b) The main clause of Section 54(3) uses the expression “anyunutilised ITC”. On the other hand, the expression ‘any’is conspicuous by its absence in all the provisos; C

(c) The main clause of Section 54(3) uses the expression “aregistered person may claim refund” while on the otherhand, the three provisos have employed a restrictiveexpression or a negative expression, that is, “no refund ofDunutilized ITC shall be allowed”; (d) When the main clause used the expression ‘any’, this isexpressly restricted by the use of the expression “no refundof unutilised ITC shall be allowed in cases other than”. Inother words, the expression ‘any’ has been restricted toE“other than”; and (e) In view of the above, the provisos under Section 54(3)have to be read and interpreted as restrictions and not asqualifications;

(iv) The first proviso restricts the refund of unutilized ITC only totwo situations and the subsequent two provisos further restrictit to one of the categories out of the two in the first proviso.The two situations contemplated in the first proviso deal withcontrasting situations with stark differences:

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(a) Sub clause (i) of the first proviso deals with zero ratedGsupplies which are exports. Exports of goods and servicesare not taxable. Hence, the taxes paid either on exportedgoods or services or on the input goods/input services orboth used in the export of such goods and services needto be totally refunded; H

(b) However, sub-clause (ii) of the first proviso deals withdomestic supplies which are taxable outward supplies, inrespect of which Parliament has chosen to allow refundof unutilised ITC only to the extent of the ‘creditaccumulated on account of rate of tax on inputs’;

(v) The first proviso cannot be read as a mere qualification oreligibility for the grant of refund on the entire unutilised ITCcomprising input goods and input services by a specifiedregistered person, for the following reasons:

(a) The expression used is ‘the credit’ and the accumulationis restricted only on account of ‘inputs’. This cannot beread or interpreted to include input services and capitalgoods; (b) The proviso limits the grant of refund only to twocircumstances and hence the limitation has to be read asit is without extending it to input services and capital goods,specifically since the legislature has not included them;

(c) If the intention was to allow refund of unutilised ITC onaccount of input services and capital goods, in addition toinput goods, such an intent would have been conveyedthrough statutory language, which is missing; (d) The expression ‘credit’ has to be read along with ‘inputs’and cannot be read as to extend a refund to input servicesand capital goods also, which are expressly not referredto in the proviso; (e) ‘The credit’ in sub clause (ii) can go only with theexpression ‘inputs’ and excludes accumulation of anycredit on account of rate of tax on input services or capitalgoods; (f)When there is an express inclusion limited only to the creditaccumulation arising out of ‘inputs’, it would not bepermissible to include input services and capital goods inthe face of the statutory provision. What has not beenincluded in the statute should not be included by way ofjudicial interpretation;

(xvi) The reason why Parliament has adopted the expression‘unutilised ITC’ in the main part of Section 54(3) and the A

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Afirst proviso, but has chosen to employ only the expression‘inputs’ is as follows:

(a) There is a significant difference between the mainprovision and the first proviso even in the use of theexpression ‘unutilized ITC’. The expression ‘any’ in theBmain Section is absent in the first proviso with the furtherlimitation that refund of ‘unutilized ITC’ is limited only totwo circumstances specified in the proviso; (b) The first situation deals with refund on account of zero-rated supplies which are exports where refund is grantedCon all the taxes paid on input goods, input services includingtaxes paid on export supplies. This is evident fromExplanation-I to Section 54(3) where the expression refundpermits the above;

(c) However, when it comes to an inverted duty tax structure,the refund is limited to only one category namely, ‘creditaccumulated on account of rate of tax on inputs’; D

(d) The expression ‘unutilized ITC’ could comprise of taxespaid both on input goods and input services, and the firstproviso and the main Section necessarily have to employthe expression ‘unutilized ITC’ to take care of zero-ratedsupplies which are exports under the first category; E

(e) When it comes to an inverted tax structure, it is limitedonly to ‘inputs’. It is a common fact that unutilized creditarising out of input services also partakes the characterof unutilized ITC; F

(f) Parliament has rightly used the expression ‘unutilised ITC’both in the main clause and in the first proviso to dealwith zero rated supplies and restricted refund to thosearising out of ‘inputs’ when it comes to an invertedstructure; G

(g) Parliament could not have used the expression ‘inputs’ inthe main clause and first proviso as this would act as adisability to zero rated supplies where Parliament intendedto grant a refund arising out of both input goods and inputservices; H

(h) Parliament has therefore appropriately employed theexpression ‘unutilized ITC’ in the main clause and thefirst proviso and has used the limited expression ‘inputs’in sub-clause (ii) to the first proviso in the invertedstructure;

(vii) Explanation-I to Section 54(3) defines refund in three parts:

(a) When it comes to zero rated supplies on exports, it extendsthe refund to ‘inputs’, ‘input services’ and also taxes paidon zero rated supplies of goods or services or both; (b) When it comes to deemed exports, it restricts the refundof tax only on the supply of goods;

(c) When it comes to inverted structure, it limits it as providedin the proviso to Section 54(3). This is one more reason toread the proviso to Section 54(3), as a restriction and notas a qualification. If the intent of Parliament was to granta refund arising both out of input goods and input serviceseven in the case of inverted tax structure, it would havedefined refund in Explanation-I at par with zero ratedsupplies and there was no need to limit it only to onesituation of the credit accumulation arising on account of‘inputs’.

D.1.3. Part III- Legal Propositions

(i) Article 265 of the Constitution provides that no tax shall belevied or collected except by authority of law. There beingno challenge either to the levy or collection of taxes in thesecases, taxes paid into the coffers of the Union Governmentor the States become the property of the Union/States;

(ii) The refund of taxes is neither a fundamental right nor aconstitutional right. The Constitution only guarantees thatthe levy should be legal and that the collection should be inaccordance with law. There is no constitutional right torefund. Refund is always a matter of a statutory prescriptionand can be regulated by the statute subject to conditionsand limitations;

(iii) Even in the case of an illegal levy or a levy which isunconstitutional, the decision of the nine judges Bench in A

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AMafatlal Industries Limited v. Union of India[12]heldthat the right of refund is not automatic. The burden ofproof lies on the claimant to establish that it would not causeunjust enrichment;

(iv) Though tax enactments are subject to Articles 14 andB19(1)(g) of the Constitution, this is subject to two well-settledprinciples:

(a) Discriminatory treatment under tax laws is not per seinvalid. It is invalid only when equals are treated unequallyor unequals are treated equally. Both under theCConstitution and the CGST Act, goods, services, input(goods) and input services are not one and the same.These are distinct species, though covered by a commoncode; and (b) The legislature is entitled to the widest latitude when itDidentifies categories of classification and unless thingsconstituting the same class are treated differently withouta rationale, the provision cannot be declared asunconstitutional;

(v) The doctrine of reading down is employed to narrow downEthe scope of a proviso under challenge, when it mayotherwise be unconstitutional. The doctrine cannot result inexpansion of a statutory provision for refund which wouldamount to rewriting the legislation;

(vi) Accepting the submission of the assessees that goods andFservices must be treated at par can lead to drasticconsequences in terms of:

(a) rates of taxes;

(b) concessions, benefits and exemptions;

(c) intervention in the areas of political, economic andGlegislative policies;

(vii) Refund of taxes is one form of granting exemption; H12 1997 (5) SCC 536

(viii) Once a refund is construed as a form of exemption fromAtaxes, the provision has to attract strict interpretation;

(ix) Exemptions, concessions and exceptions have to be treatedat par and must be strictly construed;

(x) ITC is not a matter of right and the burden of proof is onBthe assessee to establish a claim for a concession or benefit;

(xi) The manner in which a proviso can be construed has beenelucidated in the precedents of this Court. A proviso maynot be only an exception but may constitute a restriction onthe operation of the main statutory provision; and C

(xii) A legislative amendment which reflects a policy choice isnot subject to judicial review.

12. Mr Balbir Singh, learned ASG has adopted the submissions ofMr N Venkataraman, learned ASG.

D

D.2 Assessees

13. Mr V Sridharan, learned Senior Counsel appearing on behalfof the assessee[13] submitted:

(i) The assessee is, inter alia, engaged in the manufactureand supply of footwear which attracts output tax (goodsand services tax[14]) at the rate of 5%; E

(ii) The assessee, inter alia, procures input goods such assynthetic leather, PU Polyol and input services such as jobwork service, goods transport agency service on paymentof applicable GST for use in the course of business andavails ITC on the GST paid thereon. A majority of the inputgoods and input services attract tax at the rate of 12% or18%; F

(iii) The rate of GST paid by the assessee on procurement ofinput goods and input services is higher than the rate of taxpayable on their outward supply of footwear. Therefore,despite utilization of credit for payment of GST on outwardsupply, there is an accumulation of unutilized ITC in theelectronic credit ledger of the assessee; G

13 Appearing in SLP (Civil) No 14801 of 2020

14 “GST”

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A(iv)The assessee applied for refund of such unutilisedaccumulated ITC under Section 54(3) of the CGST Actread with Rule 89(5) of the CGST Rules;

(v) Rule 89(5) of the CGST Rules as originally enacted providedfor refund of ITC availed on both inputs (that is input goods)Band input services and was in line with Section 54(3) of theCGST Act. Accordingly, the assessee was granted refundof such unutilised ITC;

(vi) Rule 89(5) was substituted by Notification No. 21/2018-CT dated 18 April 2018 prescribing a revised formula forCdetermining the refund on account of inverted duty structure.The above substitution was given retrospective effect from1 July 2017 by Notification No. 26/2018-CT dated 13 June2018;

(vii) The revised formula inter alia excludes ‘input services’Dfrom the scope of ‘Net ITC’ for computation of the refundamount under the said Rule;

(viii) The substituted Rule 89(5) of the CGST Rules denies refundon the unutilised ITC availed on input services and allowsrelief of refund of ITC availed on input goods alone; E(ix)The Revenue is relying on amended Rule 89(5) to contendthat refund will not be allowed on taxes paid on inputservices; and

(x) The Revenue is allowing refund of accumulated ITC of taxpaid on input goods such as synthetic leather, and PU Polyol.FFurther, the Revenue is allowing accumulation of ITC paidon procurement of input services such as job work serviceand goods transport agency service. However, the refundof accumulated unutilised ITC paid on input services is beingdenied and refund already granted has been recovered fromthe assessee.G

14. Mr Sridharan urged that Rule 89(5) of the CGST Rules, to theextent to which it denies refund of ITC relatable to input services, isultra vires Section 54. The submission has been premised on thefollowing propositions:

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(i) GST is a destination-based consumption tax. The fundamentalAprinciple of GST laws worldwide is that it is a multistage tax.Each point in a supply chain is potentially taxed. However,suppliers are entitled to avail credit of taxes paid at an anteriorstage. This feature of GST leads to its description as being atax on value addition, with the final consumer alone ultimatelyBbearing the tax. The GST laws enacted in India are alsobased on this principle;

(ii) In All India Federation of Tax Practitioners v. Union ofIndia[15], this Court held that excise duty, service tax and valueadded tax legislation provide for taxes on value addition andare destination based-consumption taxes. These are notcharges on the business but on the consumer. Though theerstwhile tax legislation, prior to the enforcement of theConstitution (One Hundred and First Amendment) Act 2016,was based on the principle of value addition and consumptiontax, there was no seamless flow of credit between Centraland State levies. This anomaly was sought to be addressedby the constitutional amendment and by the legislation whichhas been enacted in pursuance of it; C

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(iii) The purpose of the One Hundred and First ConstitutionalAmendment was:

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(a) to replace a number of indirect taxes being levied by theUnion Government and the State Governments; (b) to obviate and remove the cascading effect of taxes; and

(c) to provide for a common national market for goods andservices.

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(iv) The Statement of Objects and Reasons accompanying thebill introducing the CGST Act also emphasised that therewould be a seamless transfer of ITC from one stage to anotherin the chain of value addition; G

(v) These principles reaffirmed the guidelines issued by theOrganisation of Economic Co-operation and Developmentwhich emphasise that A(a) value added tax systems are designed to tax finalconsumption; (b) only the consumers should bear the tax burden; and

(c) the main characteristic of a value added tax is of preservingneutrality in the value chain.

B

(vi) Compelling economic and fiscal realities necessitated the levyof value added tax like GST in place of traditional exciseduties, service tax, sales tax and other legislation;

(vii) In a tax regime which was not based on value added tax,Censuring refund of tax paid at various stages of manufacturingwould be cumbersome and complicated. It was to obviatethe problems of the earlier regime that GST legislation wasenacted by various countries including India to fully effectuatethe principle underlying value-added destination-basedconsumption tax; D

(viii) The situation in which the quantum of input taxes exceedsoutput tax is an anomaly, aberration and distortion resultingfrom various sources of taxes and conflicts with thefundamental principles of GST. The impact of thesedistortions can be revealed by practical examples involvingEsituations such as (a) Intermediate products attracting a lower rate of tax; and (b) Intermediate products attracting a higher rate of tax.

(ix) As a result, varied situations of economic distortion resultingFfrom a cascading effect of taxes in the form of unabsorbedITC emerged due to variations in the rate of taxes. This isagainst the basic tenets of GST. GST being a consumptiontax, postulates that the only tax in the entire chain should bethe tax charged to the end customer without any ‘sticking’or unabsorbed ITC;G

(x) Government may in the public interest impose lower rates oftax on products such as fertilizers, tractors and lower-pricefootwear. The objective of taxing such goods at a lower rateis frustrated if inputs for making the final products are taxedat a higher rate and no refund of unutilized credit is granted.H

Refund of unutilised7 ITC seeks to achieve the objective ofvalue-added consumption-based taxation in its true sense;

(xi) Cognizant of the anomaly resulting from inverted dutystructures, the erstwhile State Value Added Tax legislationsprovided for refund of unutilized ITC, even before the GSTlegislation saw the light of the day;

(xii) A near perfect GST legislation provides for refund of ITC ina situation involving an inverted duty structure. The provisionsfor refund ensure that anomalies in tax rates do not result indistortions to the fundamental features of GST which remainsa true consumption tax. ITC may accumulate for a varietyof reasons including (a) inverted duty structure, that is, GSTon output supplies is less than the GST on the input supplies;(b) stock accumulation; (c) capital goods; and (d) partialreverse charge mechanism for certain services;

(xiii) The cascading effect or sticking credit may arise on accountof higher taxes paid on input goods or input services. Refundof unutilized ITC will ensure the elimination of the cascadingeffect of taxes in a true sense;

(xiv) Section 54(3) has been enacted to achieve the objective ofremoving the cascading effect of unutilized ITC. Section54(3) provides for refund of “any unutilised input tax credit”but the refund is available in only two situations namely, (a)zero rated supplies; and (b) inverted duty structure. Thequantum of refund is provided by the main part of Section54(3) which stipulates the refund of any unutilised ITC. Thisincludes credit availed on input goods as well as on inputservices having regard to the definitions contained in Sections2(62) and 2(63);

(xv) The proviso only provides for cases in which the refund underthe main provisions of Section 54(3) will be available. Oncethe requirement of inverted duty structure in proviso (ii) isfulfilled, the entire unutilised ITC has to be refunded. Thereason why proviso (ii) defines the inverted duty structurewith reference to only input (goods) vis-a-vis output suppliesmay be that while services (barring a few) were leviable totax at 18 per cent, goods were subject to various categories A

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[2021] 15 S.C.R.

Aof rates. If input services were also considered fordetermining inverted duty structure, refund may be requiredto be granted practically to all the assessees. Hence, thelegislature defined inverted duty structure only with referenceto ‘inputs’ (input goods). However, once a case fulfils thecondition of an inverted duty structure, refund of the entireBunutilised ITC which is attributable to inverted duty structuresupplies is allowed, including the credit availed on input goodsand input services;

(xvi) A circular has been issued on 31 December 2018, beingCircular No. 79/53/2018-GST by the Central Board ofCIndirect Taxes and Customs[16]. In a situation where GST onsome inputs is higher than the rate of GST applicable on theoutput supply, while the rate of GST on other inputs is lowerthan the GST on the output supply, the circular provides thatrefund will be granted by taking the ITC availed on all inputs,Dincluding input services, which attract a lower rate of taxthan on output supply. The circular, in other words, does nottreat Section 54(3) read with the proviso (ii) as qualifyingthe extent of refund but only as a pre-condition to qualify forthe grant of refund; E(xvii)Proviso (ii) to Section 54(3) only lays down ‘cases’ whererefund is eligible but it does not define the quantum of refund.This will be evident from the following:

(a) The quantum of refund is provided in the main segment toSection 54(3). The expression “any” unutilised ITC meansFall unutilised ITC; (b)The definitions of ‘input tax credit’ under Section 2(63) and‘input tax’ in Section 2(62) would indicate that both inputgoods and input services are included;

(c) The proviso indicates the ‘cases’ in which refund will beGeligible. The expression ‘cases’ means situations orcircumstances;

(d) Clause (ii) of the first proviso commences with theexpression “where” which signifies that what follows willbe a situation or aspect of something;H16 “CBIC”

(e) The statutory provision must be read as a whole and in theAcontext of other provisions. All the three provisos refer tocases in which refund is allowed or, as the case may be,not allowed and do not refer to the quantum of refund; (f)Clause (ii) of the proviso refers to “the credit”. The use ofthe definitive article clearly indicates that the reference isBto unutilised ITC already mentioned in the main part ofSection 54(3). The expression ‘the’ signifies one particularsum or credit and any attempt to bifurcate it into credit oninput goods and input services will produce anomalousresults; C

(g) The expression ‘accumulated’ signifies the credit balancewhich is unutilized after credit has been availed and utilisedfor making payments on output tax on outward supplies; (h)Clause (ii) of the proviso uses the words “on account of”which means by reason of or because of. By stipulatingthat the proviso provides for the quantum of refunds, theRevenue is attempting to substitute the words “on accountof” with “to the extent of”; D

(i) The submission of the Revenue cannot be accepted becauseclause (ii) of the proviso refers to the rate of tax. To acceptthe interpretation of the Revenue, the words “and only tothe extent” will have to be added to the proviso; E

(j) Though the CGST Act makes a distinction between ‘inputs’and ‘input services’, this is only relevant at the stage priorto the availment of credit, namely to determine the eligibilityof credits under Sections 16 and 17 of the CGST Act. Afterthe credit has been availed, it goes in a common pool fromwhich the credit is utilised for making payment for outputtax. Utilization happens from the entire credit available forthe tax period in this common pool and it cannot be co-related to ITC availed on particular input goods or inputservices. The balance is the unutilised ITC at the end ofthe tax period. At this stage, it is not possible to determinewhether the balance pertains to ITC availed on input goodsor on input services; and F

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A(k)Alternatively, the words, “rate of tax on inputs” must beread to include whatever goes in the making of outputsupplies namely, both input goods and input services.

(xviii) Explanation (1) to Section 54 covers four cases of refund:(a) refund of tax paid on zero-rated supplies of goods orBservices; (b) refund of tax paid on input goods or inputservices used in making zero rated supplies (where no outputtax is paid); (c) refund of tax on the supply of goods regardedas deemed exports; (d) refund of unutilised ITC under sub-Section (3). In the case of (a) above, the legislature hasused the expression “goods or services”; in the case ofC(b), “inputs or input services”; in the case of (c), “goods orservices”. However, in respect of refund of unutilised ITC,it has only been provided that the refund will be granted asprovided under sub-Section (3). The explanation does notrestrict the refund only to credit availed on input goods inDthe case of an inverted rated structure;

(xix) Rule 89(5) by confining refund of unutilised ITC on inputgoods and denying refund of ITC on input services curtailsthe ambit of Section 54(3) and is hence ultra vires:

(a) Rule 89(5) originally provided for refund of ITC paid bothEon input goods and input services but it was amended withretrospective effect to restrict refund only to ITC availedon input goods;

(b) After the amendment in terms of the formula, the ratio ofproportionate turnover is applied only to ITC availed oninput goods. However, after arriving at the proportionatevalue, the entire amount of tax paid on output supplies isdeducted. The formula erroneously assumes that the entireoutput tax will be paid from ITC availed on input goodsand the credit on input services will not be utilised forpayment of output tax. If the rule took into computationITC availed on both input goods and input services, bothparts of the formula would be comparable and would resultin a correct amount of unutilised ITC attributable to aninverted duty structure. The rule is ultra vires Section 54(3)since it restricts the computation of refund only by taking F

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into account the credit availed on input goods. Section 54(3)provides for entitlement to refund, its quantum and thecases in which the refund is to be granted. Section 54(3)being a code in itself, there is no reference to a provisionenabling the Government to frame rules in this regard.Hence, with reference to Section 54(3), any exercise ofthe rule making power is unwarranted;

(xx) The general rule making power conferred by Section 164(1)is to carry out the provisions of the CGST Act and cannotsave the offending provisions of the Explanation to Rule89(5):

(a) Accumulation of credit may occur due to various reasonssuch as absence of outward supplies in a tax period, suppliesmade at a loss, bulk purchase of inputs, excess openingbalance of credit, and change in the rate of tax during thetax period; (b)A rule which provides for the identification of unutilisedITC which is attributable to supplies having an inverted dutystructure and bifurcating it from credit accumulating due toother causes would be for the purpose of carrying out theprovisions of the CGST Act;

(c) A rule may provide a proportionate formula for determiningthe pro-rata amount of credit relatable to the inverted dutystructure vis-a-vis total turnover. Such a formula may beneeded where the assessee is making supplies involving aninverted duty structure as well as supplies not involving it; (d)Where the entire supplies made by assessee are by way ofexport, the entire ITC is refundable under proviso (i).However, where an assessee is engaged in exporting goodsand in domestic supplies, the assessee should be eligible forclaiming refund from ITC attributable to exports while notbeing entitled to cash refund on ITC relatable to domesticsupplies. In such cases where an assessee makes bothdomestic supplies as well as exports, a formula may berequired to estimate the ITC relatable to exports which alonecan be refunded to the assessee in a similar manner if anassessee has output supplies. Where an assessee has output A

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Asupplies having an inverted duty structure and output suppliesnot having an inverted duty structure, refund is to be givenonly for the former and not for the latter. The formula wouldbe required for that purpose. Rule 89(4) relating to exportadopts pro-rata of export turnover to total turnover as thebasis. Rule 89(5) is similarly enacted to deal with an assesseeBhaving inverted duty structure supplies and other suppliesnot having an inverted duty structure. This should be thesole purpose of the formula for Rule 89(5); A

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(e) However, Rule 89(5) in the garb of fixing a formula fordetermining pro-rata the amount of credit relatable to theCinverted duty structure vis-à-vis total turnover has restrictedthe refund to ITC on input goods by denying it on inputservices. This has been done by defining ‘Net ITC’ to meanITC availed on all ‘inputs’, thus overlooking ITC relatableto input services. Such a rule cannot be treated as one forDcarrying out the purpose of the CGST Act;

(xxi) A delegated legislation can be struck down as ultra viresof a principal statute. The laying of delegated legislationbefore Parliament does not confer any validity on suchultra vires rules. The process of laying rules beforeEParliament and making them subject to modification orannulment cannot be equated with legislation which hasthe assent of the President, or the Governor, as the casemay be. The doctrine of ultra vires will apply even if aresolution is passed by Parliament approving or modifyingthe rules. Though, the CGST Rules have been laid beforeFParliament, any part which is ultra vires the CGST Act isliable to be struck down;

(xxii) The fact that the rules have been recommended by theGoods and Services Tax Council[17] does not elevate themto the status of a statute enacted by the legislature. TheGrecommendations made by the GST Council under Article279A(4) of the Constitution take effect only after they havebeen incorporated in the legislation passed by the Parliamentor the State legislature. The CGST Act and SGST Acthave been enacted on the recommendations of the GST

H17 “GST Council”

Council, in exercise of the power under Article 279A, whilethe CGST Rules have been framed on the recommendationsof the GST Council in exercise of the powers conferredby Section 2(87) and Section 164 of the CGST Act. Thereis a clear distinction between laws enacted by the legislatureand delegated legislation. A rule made on therecommendation of the GST Council must be in consonancewith the relevant legislation, failing which it would be ultravires; A

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(xxiii) Section 54(3) grants a refund of the entire unutilised ITCin the case of an inverted duty structure irrespective ofCwhether the credit pertains to input goods or input services.The amendment made in Rule 89(5) which restricts therefund of unutilised ITC availed only on ‘inputs’ is ultravires Section 54(3); and

(xxiv) By virtue of the doctrine of severability that portion of Rule89(5) which is ultra vires may be struck down. This wouldnot constitute judicial legislation. The challenge to the viresof Rule 89(5) is only because of the definition of ‘Net ITC’in the explanation to the rule. The explanation defines netITC to mean ITC availed on inputs during relevant period.Section 54(3) allows refund of any unutilized ITC and notonly credit on input goods. Consequently, only if theexpression “on inputs” employed in Explanation (a) to Rule89(5) is struck down, will Rule 89(5) be in line with Section54(3).

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15. Mr Sujit Ghosh, learned Counsel[18] submitted that F

(i) The meaning of the expression “unutilised ITC” is credit ongoods as well as services (which remains after paying outputtax) in view of the definitions contained in Section 2(63) readwith Section 2(62) of the CGST Act; G

(ii) In Explanation-I to Section 54, the expression ‘refund’ quazero rated supplies (a) is an inclusive definition which refers to unutilized ITC quaSection 54 (3); 18 Appearing in SLP (Civil) Nos 1552-1557 of 2021

A(b) covers a refund on both input goods and input services forthe purpose of Section 54(3);

(c) in relation to zero rated supplies, the expression refund inExplanation-I to Section 54 is clarificatory though it uses thewords “inputs” and “input services”;B

(d) The right to refund in the case of zero-rated supplies arisesin Section 16(3)(a); (e) The provision uses the phrase “refund of unutilised ITC inaccordance with Section 54”; and

(f) The meaning of the term ‘refund’ for both export and domesticsupplies is one and the same.

C

(iii) The construction of Section 54(3) must be based on thefollowing circumstances:

(a) The substantive part deals with the quantum of refund. TheDproviso is not a restriction but merely prescribes thresholdconditions; (b) Threshold conditions are evident from the use of theexpression “in cases”;

(c) Each of the three provisos lays down (i) situations; and (ii)Econditions, as evident from the following table:

F

G

H

(iv) The object and purpose of Section 54(3) must be borne inAmind:

(a) The purpose of the provision is to give effect to the doctrineof equivalence or neutrality which is the basic objective ofthe GST and this is sought to be achieved by grantingseamless credit through Section 16; B

(b) The legislative background and preparatory material dulysupport the purpose of the legislation;

(c) The State does not want the taxpayers to suffer the ill effectof tax cascading solely because of its decision to offer aCreduced rate of tax on outputs, relative to the tax rate oninputs; (d)In the case of the petitioner which is engaged in providingservices to Chennai Metro Rail, the original rate of outputtax used to be 18 per cent while the input tax on goods andservices was between 18 per cent to 28 per cent. As aDresult of Notification No. 1/2018 and a corresponding Statenotification, the rate of tax on output supplies, namelyconstruction of mono rails and metro rails, was reduced to12 per cent; E

(e) Section 54(3) is not intended to cover a situation where theinverted duty structure is created by assessee due to itsown actions such as discount/distress/non-supply asdistinguished from the rate structure created by the State; (f)The object of achieving tax neutrality is sought to beimplemented for the first time through the anti-profiteeringmeasure embodied in Section 171; F

(v) The international jurisprudence on GST and tax neutralitypostulates that such taxes are not a permanent cost to thebusiness and that businesses are pass through entities. Theessential character is of an economically neutral tax througha seamless flow of credit; G

(vi) A contextual interpretation of Section 54(3) must look atthe overall scheme of the statute. The substantive part ofSection 54(3) deals with the quantum of credit which isamplified by three attributes:

H

A(a)it connotes a finite sum and thus a quantum, since a timeperiod is prescribed for identifying such quantum by theuse of the phrase “at the end of any period”; (b)Section 54(3) needs to be read contextually with sub-Sections (4), (5) and (6) of Section 49 and Rule 86(3) andBRule 89(3); and

(c) Both the GST Council and the Union Government alsounderstood that the quantum of refund was the entireunutilised ITC and not only ITC accumulated on accountof input goods. This is evident from Notification No. 5/2017Cdated 28 June 2017. If the exception contemplated in clause(ii) of the first proviso to Section 54(3) contemplates denialof the entire basket of unutilised ITC (as argued by theState) a fortiori the first part of clause (ii) should bepresumed to include refund of the entire basket of unutilisedcredit. This is because unless the first part of clause (ii) didDnot entitle refund of the entire basket of ITC, carving outan exception for denial of the entire basket of ITC in thelatter part would be absurd.

(vii) The expression ‘claim’ means a demand made of right,calling upon another to pay something which is due.EAccordingly, a claim in the context of Section 54(3) is ademand for enforcement of a right of refund which becomesdue. The entitlement to the right is not through the processof allowance of the claim but instead, the enforcement ofthe right is through the process of allowance. TheFentitlement to the right of the entire basket of credit accruesfrom the substantive provision and its enforcement happensthrough the proviso;

(viii) The expression ‘allowed’ should be interpreted to meanverification of the claim and its sanction. Allowed cannotmean the ‘creation of an entitlement’ or else the mainGprovision of Section 54(3) would become redundant;

(ix) The phrase “wholly on account of” is conspicuous by itsabsence in proviso to Section 54(3); H

(x) The absence of the word ‘any’ in the proviso is not fatal.ADespite the absence of ‘any’, the words “unutilised ITC”refer to credit on goods and services both;

(xi) The proviso to Section 54(3) merely prescribes the conditionand does not deal with the quantum of refund since thequantum is prescribed by the substantive provision. TheBproviso is not an exception to the substantive part since itmakes a reference to the substantive condition to besatisfied. Both must be construed harmoniously. Thus, themain provision of Section 54(3) confers an entitlement tothe refund of the entire unutilised ITC and the proviso onlyCseeks to provide the condition and not to obliterate the mainprovision. The better view is that the entitlement is createdof the quantum of refund by the main provision while theproviso only indicates the conditions to be satisfied;

(xii) The convergence of credit takes place at the stage of availingand not at the stage of utilization; D

(xiii) The CGST Act contemplates that conditions and restrictionsare two distinct concepts;

(xiv) If the proviso was meant to deal with the quantum of refund,Parliament would have separately carved out a substantiveprovision for zero rated supplies and a separate provisionfor domestic supplies. Since that has not been done, bothcases derive their entitlement to refund of unutilised ITCthrough the substantive provision; E

(xv) Section 54(3) is not akin to an exemption but is aimed atFachieving tax neutrality;

(xvi) Reliance on the decision of the nine judge Bench in MafatlalIndustries Limited v. Union of India (supra) is out ofcontext since what is being claimed as a refund is notcontrary to the statutory drill, but a refund through anGappropriate construction of the statute;

(xvii) The main submissions, in summation, are that:

(a) The expression ‘input’ in the proviso if read contextually,and not by the strict statutory definition, would cover bothinput goods and input services; H

A(b)Grammatically ‘input’ covers labour and material and isopposite to ‘output’;

(c) Use of the word “output supplies” as opposed to the definedexpression “outward supplies” (Section 2(83)) emphasisesthe legislative intent to use common parlance words; B

(d) The substantive part of Section 54(3) should be construedto provide for the quantum of refund of the entire basket ofcredit and the proviso should be construed merely as athreshold condition that an “inverted duty structure” shouldexist qua goods; C

(e) If the above propositions are not acceptable, there wouldbe an invidious discrimination between input goods and inputservices violating Articles 14 and 19; and (f)The only way to save the provision in such a case is by (i)reading down the word “input” in the proviso to includeDboth goods and services or (ii) interpreting the proviso aslaying down conditions and the quantum of refund beingprescribed by the main part of Section 54(3); or (iii) strikingdown/severing the offending portion;

(xviii) The doctrine of reading down the words of the statute toEsave its constitutional validity also includes reading up. Iftwo interpretations are possible, the one which ensures thatthe provision is constitutionally valid must be adopted. Evenotherwise, if the phrase “on inputs being higher than rate oftax on output supplies” is struck down, the impermissibleFclassification between input goods and input services canbe severed, thereby enlarging the class. Under suchcircumstances Section 54(3) as re-cast should read asfollows:

“(3) Subject to provisions of Sub-section 10, a registeredperson may claim refund of any unutilized input tax credit atGthe end of any tax period:- PROVIDED THAT no refund of unutilized input tax creditshall be allowed in cases other than-

(i) Zero rated supplies made without payment of tax; H

(ii) Where the credit has accumulated on account of rateof tax (other than nil rated or fully exempt supplies),except supplies of goods or services or both as may benotified by the Government on the recommendationsof the Council.”

(xix) All registered persons demanding refund on account ofinverted duty structure for input goods and input servicesform a part of the same class and seek equality of privilegesin terms of Article 14:

(a) Class legislation

i.The class consists of all registered persons possessingunutilised ITC whether or not they are engaged in domesticsupplies or exports;

ii.The species consists of (i) exporters and (ii) domesticsuppliers where unutilised credit arises due to an invertedduty structure;

iii.Discrimination inter se the species or sub-species of thesame class would be a class legislation which is hit by Article14;

iv.To form a part of the same class, the claimant’s positionshould be substantially similar or in like circumstances, andconditions need not be identical; and

v.In order to ascertain whether the persons are similarly placedone must look beyond classification and into the purpose ofthe law.

(xx) Goods and services, though defined separately, are treatedsubstantially in a similar manner in several aspects both inthe Constitution and in the CGST Act;

(xxi) In examining discriminatory treatment, it is the real effectof the provision which must be considered:

(a) The real effect of the provision is to create an economywhich does not perpetuate a harmonized structure of GSTor a harmonized national market for goods and services,which is contrary to the constitutional object of GST asprovided in Article 279A(6); and A

B

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A(b)The effect that goods are tangible while services areintangible does not bear any reasonable relation to the objectof the legislation or to Article 279A(6). According to thesubmission, equal laws in respect of refunds of taxes incases involving an inverted duty structure would have to beapplied to everyone in the same situation whether dealingBin input goods or input services. Since the purpose of GSTis to achieve tax neutrality, equivalence and anti-profiteering,their position is substantially the same. The taxable event,person, measure of tax, machinery, penal and prosecutionprovisions are substantially the same. Hence the denial ofCthe privilege of refund to input services is arbitrary. Theclassification which is found to be valid in a given frame ofreference may be invalid in a different frame. From arevenue harvesting perspective, goods and services maybe treated as different. However, from the perspective ofneutrality and achieving a true consumption tax, goods andDservices cannot be treated differently;

(xxii) The limitation on the power of judicial review of taxlegislation on grounds of ‘wide latitude’ is subject toexception. The submission is that after treating tax on inputgoods and input services in an identical fashion by grantingEcredit (to achieve neutrality) and making the entire creditas a part of homogeneous basket, granting refund to inputgoods and not to input services (from that basket) is acolourable device to set at naught the doctrine of neutrality.The State having reduced the rate of tax on output suppliesF(leading to an inverted structure) the intent behind the refundwas to reduce the tax burden on the consumer. Denyingrefund on input services would lead to an indirect impacton the very consumer that the State wanted to benefit inthe first place. Moreover, the State has made no distinctionbetween input goods and input services at the time of grantingGcredit, thereby declaring an intent to achieve tax neutrality.The denial of refund on input services obliterates that intentand runs contrary to the purpose of the legislation; and

(xxiii) Denial of interest in the case of input services would be anunreasonable restriction and would not be saved by ArticleH19(6).

16. Mr Arvind Datar, learned Senior Counsel[19] urged the followingsubmissions:

(i) An interpretation of Section 54(3) first proviso (ii) which leadsto disallowance of credit on input services is impermissibleas, firstly, Articles 269A and 279A introduced by the OneHundred and First Constitutional Amendment seek toharmonise goods and services and remove the cascading effectof taxes. Secondly, the Statement of objects and reasonsassociated with the constitutional amendment and the Billintroducing the CGST Act emphasised the need to treat goodsand services as one combined category. The concept of onenation one tax introduced by GST laws cannot be ignoredonly at the time of refund;

(ii) The proviso to Section 54(3) speaks only of categories ofcases where refund would be available. It does not speak ofa restriction on the quantum of refund. This is for the followingreasons:

(a) The quantum is determined by the main sub-section (3),which speaks of “refund of any unutilised input taxcredit”; (b) The first proviso employs the word “cases” [“no refundof unutilised input tax credit shall be allowed in casesother than”] thus making it clear that it only lists categoriesof cases, and does not deal with quantum of credit;

(c) The first proviso does not mention “credit to the extentof” or “credit of an amount equal to” or any other suchwording indicative of quantum;

(d) Where the legislature intended to advert to the quantum,it has used the words “amount claimed as refund” in the4th proviso – such is not the phrase employed in the firstproviso; (e) The second and third provisos too refer only to ‘cases’ –it is thus clear that first, second and third provisos areintended to deal with cases and are in nature of conditions,while it is only the fourth proviso which adverts to the 19 Appearing in SLP (Civil) No 589 of 2020

A

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quantum and there again not to restrict the quantum butonly to refer to the amount claimed as refund under themain sub-section (3); and A

(f) It has been the Union Government’s case that every wordhas been carefully chosen in Section 54(3) first proviso(ii). It follows that where the provision speaks the languageof categories (i.e. ‘cases’) and not the language ofquantum (i.e. ‘amount’), it cannot be read as anyrestriction of quantum.

B

(iii) The word ‘inputs’ in the first proviso (ii) of Section 54(3)refers to the aggregate of goods and services that areused in output supplies. In the context of the first proviso(ii), the word ‘inputs’ has not been used to refer only toinput goods. The word employed in the proviso is “input(s)”whereas definition of ‘input’ under Section 2(59) refers togoods alone; C

D

(iv) The accumulation (of ITC) is because the total GST onall the inputs (goods or services or both) is more than theGST payable on the output supplies. The reference is toall the inputs used to produce the output supplies;

(v) The word “inputs” in Section 54(3) first proviso (ii) cannotbe restricted to goods because the CGST Act/ SGST Acttreats goods as services. For instance, transfer of right ingoods without transfer of title is deemed as “Supply ofServices” as per Clause 1(b) of Schedule II, which readsas follows:

E

F

“b. any transfer of right in goods or of undivided share ingoods without the transfer of title thereof, is a supply ofservices;”

(vi) Similarly, “Works Contract” as defined in Section 2(119)of the CGST Act is deemed as per Clause 6(a) of ScheduleGII as “Supply of Services” although it involves the supplyof goods. Section 2(119) and the relevant portion ofSchedule reads thus:

“Section. 2(119) “works contract” means a contractfor building, construction, fabrication, completion, H

erection, installation, fitting out, improvement,modification, repair, maintenance, renovation, alterationor commissioning of any immovable property whereintransfer of property in goods (whether as goods or insome other form) is involved in the execution of suchcontract”

Clause 6(a) of Schedule II provides:

“6. Composite supply

The following composite supplies shall be treated as a supply ofservices, namely:—

works contract as defined in clause (119) of section 2.”

(vii) Further, Article 366(29A) of the Constitution, which providesfor tax on sale or purchase of goods and which treats sixkinds of supplies as deemed sales of goods, pertains to andis part of the erstwhile Entry 54 of List II which deals onlywith goods. Article 366(29A) reads as follows:

“(29A) tax on the sale or purchase of goods includes (a) a tax on the transfer, otherwise than in pursuance of acontact, of property in any goods for cash, deferredpayment or other valuable consideration;

(b) a tax on the transfer of property in goods (whether asgoods or in some other form) invoked in the executionof a works contract;

(c) a tax on the delivery of goods on hire purchase or anysystem of payment by instalments; (d) a tax on the transfer of the right to use any goods forany purpose (whether or not for a specified period) forcash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporatedassociation or body of persons to a member thereof forcash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any serviceor in any other manner whatsoever, of goods, beingfood or any other article for human consumption or A

B

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Aany drink (whether or not intoxicating), where suchsupply or service, is for cash, deferred payment or othervaluable consideration, and such transfer, delivery orsupply of any goods shall be deemed to be a sale ofthose goods by the person making the transfer, deliveryor supply and a purchase of those goods by the personBto whom such transfer, delivery or supply is made;”

A

(viii) Chapter V (Section 16 to 21) of the CGST Act does notmake any distinction between credit of input tax on goodsor services. Under Section 17 of the CGST Act, the inputtax on both the goods and services used in exempt suppliesCor other classes of supplies specified therein, are notpermitted to be availed as ITC. The remaining/ balanceinput tax is eligible to be availed as ITC, which remains inthe electronic credit ledger of the taxpayer. After utilizingsuch ITC in terms of Section 49 of the CGST Act (towardsDoutput GST on supply of goods or services or both),which too makes no distinction between ITC accumulatedon account of input goods or input services, the balance isto be refunded in accordance with Section 54(3) of the Act.The relevant portion of Section 49 reads thus:

D

E“49. […]

(6) The balance in the electronic cash ledger or electroniccredit ledger after payment of tax, interest, penalty, fee orany other amount payable under this Act or the rules madethereunder may be refunded in accordance with theprovisions of section 54’’

F

(ix) There is no distinction between ITC on goods or serviceseither at the time of availing or taking of the credit or at thetime of utilization of credit. Therefore, it could not havebeen the intention of the Parliament to differentiate betweenthe two only at the time of refund in the case of an invertedduty structure envisaged under clause (ii) to the first provisoto section 54; G

(x) Without prejudice to the above submissions and assumingthat the words “inputs” means only input goods and notinput services, it is stated that even proceeding on the basisH

that the use of the words “on account of” suggests therequirement of a causal relationship between the higher rateof input goods and the accumulation of credit, once such arelationship is present, then the entire accumulation isavailable as refund, rather than just the portion relatable toinput goods. To elaborate:

(a) Parliament did not state “the credit has accumulated solely/only/entirely on account of rate of tax on inputs being higherthan the rate of tax on output supplies.”; (b)Thus, all that is required is that there is accumulation andthat the tax on input goods is higher than the output supplies.If these two criteria are met, it follows logically that at leastsome portion of the accumulation would be on account ofthe higher rate of input services; and

(c) Thereupon, the entire accumulation would be available asrefund in line with the main sub-section (3); and

(xi) The impugned notifications/delegated legislation, NotificationNo. 21/2018-CT (amending Rule 89(5)) dated 18 April 2018and Notification No. 26/2018 (retrospectively amending Rule89(5)) dated 13 June 2018, by disallowing the refund ofITC of tax on input services in an inverted duty structurescenario is not only ultra vires Section 54(3) proviso butalso beyond the scope of powers of the delegate i.e. theCentral Government, because such a restriction is a typicalpolicy change which could not have been done through adelegated legislation.

17. Appearing on behalf of intervenor, Mr G Natarajan, in thecourse of his submissions urged (for the purpose of his submissions) thathe does not dispute the position that under Section 54(3) read with rule89(5), refund of ITC accumulating only on account of “input goods” iseligible for refund and the credit accumulated on input services is notentitled for refund. Based on this hypothesis, the submissions of thelearned counsel are thus:

(i) The formula which has been prescribed in Rule 89(5) seeksto identify the quantum of ITC availed on inputs attributableto the outward supplies having an inverted rate structure.From the quantum of ITC on inputs, the tax payable by the A

B

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supplier on the supplies having an inverted rated structureis reduced to arrive at the quantum of the creditaccumulating on account of the inverted rate structure,which is available for refund; A

(ii) In the formula which is prescribed under Rule 89(5), whileBreducing the “tax payable on such inverted rated supply ofgoods or services” the tax payer should be allowed to firstutilise the ITC accumulated on account of input services,which is otherwise not eligible for refund;

(iii) If the formula prescribed under Rule 89(5) is not read downCin this manner, it will lead to gross inequality betweentaxpayers having only inverted rated supplies and taxpayerswho also have other supplies; and

(iv) The formula in Rule 89(5) should hence be read down bystipulating that while calculating the refund entitlement asDthe difference between Net ITC and tax payable on suchsupplies having inverted rated structure, the tax payableafter utilising the ITC availed on input services attributableto inverted rate supplies for payment of the tax should bereckoned.

E18. During the course of his oral submissions Mr Natarajan furtherelaborated on the above submissions by urging that

(i) Rule 89(5) suffers from the vice of treating unequals equally.This happens because a discrimination results betweenassessees who have only inverted rated supplies and thoseFwho have other supplies;

(ii) ITC is available both on input goods and input services;

(iii) At the end of every tax period, it is possible to note howmuch ITC has arisen from input goods or input services.However, once a credit in the electronic ledger is utilised, it isGnot possible to bifurcate what remains between input goodsand input services;

(iv) In the above backdrop, the manufacturer should be allowedto utilise the ITC on input services first for the payment oftaxes; and H

(v) The formula, as it stands, presumes that the outward taxAliability is paid out of the ITC accumulated only on account ofinput goods. Thus, what is granted by the statute in Section16 is indirectly taken away by the formula prescribed in therule. Thus, an order of utilization of credit should be providedfor payment of taxes to avail of credit on input services. InBother words, in the formula in Rule 89(5) the following wordsshould be read in at the end: “after utilising the input tax crediton input services pertaining to such inverted rate supply ofgoods and services.”

A

19. Appearing for another intervenor[20], Mr Shraff, learned Counselsubmitted that- C

(i) If the Explanation (a) to Rule 89(5) is ultra vires Section54(3), unutilised ITC should include capital goods in additionto input goods and input services;

(ii) The electronic ledger makes no distinction between inputgoods and input services. The credit arises under integratedtax, central tax and state tax. The electronic ledger representsa collective credit of input goods, input services and capitalgoods; D

(iii) The inequality arises because small and medium enterprises(SMEs) with one product, facing an inverted rate structure,would get a lesser amount while availing refund whereaslarge companies with multiple products would get refundsviolating Article 19(1)(g); and E

(iv) The retrospective amendment to Rule 89(5) takes awayvested or accrued rights.20. Mr Uchit Sheth, learned Counsel[21] has urged the followingsubmissions:

F

(i) Once tax credit is claimed and credited into the electroniccredit ledger, it forms a consolidated pool of credit, makingGit impossible to segregate into credit for input goods andcredit for input services. Hence, it is not possible to ascertain 20 IA 56717/2021

21 Appearing in SLP (Civil) Nos 2973 of 2021, 16003 of 2020, 677 of 2021 and 1340of 2021

the source of unutilized ITC. The proviso to Section 54(3)only lays down a condition precedent for claiming ITC andonce the condition is fulfilled, then refund is admissible onthe entire amount of unutilized input ITC; A

(ii) The amended formula in Rule 89(5) stipulates maximumBrefund permissible by deducting output tax from the NetITC qua inputs goods. In other words, it is presumed thatoutput tax is first adjusted against ITC pertaining to inputgoods and thereafter qua input services. There is no basisfor such hierarchy in utilization of tax credit and the anomalyarises because of an incorrect interpretation of Section 54(3)Cof the Act by the rule making authority;

(iii) Section 49(6) of the Act provides that the balance in theelectronic cash ledger or electronic credit ledger afterpayment of tax, interest, penalty, fee or any other amountpayable is to be refunded in accordance with Section 54.DThe legal obligation is to refund the balance in the ledger ifthe conditions specified in Section 54 are fulfilled. There isno legal basis for the artificial dissection of such a balance;

(iv) If the rate of tax on inputs is higher than the rate of tax onoutput supplies, the entire unutilized ITC is “on account” ofEsuch circumstance and the entire balance of tax credit isrequired to be refunded. The expression ‘on account of’cannot be read to mean ‘to the extent of’ particularly whenit is not possible to compute the unutilized ITC attributableto input goods or services;

F(v)There are two different connotations of the term ‘input’.The first distinguishes it as goods vis-a-vis services whilethe second distinguishes it from output. The expression‘input tax’ and ‘input tax credit’ have been defined to includetax in respect of both goods as well as services and there isGno phrase called “input service tax credit”. The expression‘inputs’ in the proviso to Section 54(3) has been used in thesecond sense to distinguish it from output; and

(vi) GST is a destination-based consumption tax and theimposition of the tax is on supply. A supplier is liable to paytax only to the extent it is payable on the output supply ofH

goods or services and the refund of excess balance of inputof ITC under inverted duty structure is a means to achievethis end. If the excess tax credit is not refunded, the taxliability of the supplier will be in excess of the liability fixedby the charging section and such interpretation should beavoided.

21. Dr Arvind Poddar, learned Counsel appearing on behalf of the respondents[22], urged that the respondents are in the business of providingdyeing and printing services for textile industries. For job work operations,they procure input goods (such as chemicals, stationeries and colours)and for providing outward supplies, they also avail of input services suchas contract labour, consultancies, repairs of plants and machinery. Therate on outward supply of job work on textile fabrics is 5 per cent, whilethe rate on input goods and the rate on input services is 12 per cent /18per cent. Thus, most of the input goods and input services attract ahigher rate of GST compared to rate of GST applicable on the outwardsupply which is 5 per cent. The inverted duty structure results where therate of GST on inverted supplies is higher than the outward supplies. Asa result, over a period of time, credit gets accumulated in the electroniccredit ledger. In this backdrop, the following submissions have been urged:

(i) Clause (ii) to the first proviso of Section 54(3) merelyprescribes the eligibility conditions subject to which a refundof unutilised ITC could be made. The main part of Section54(3) allows for a refund of any unutilised ITC subject tothe satisfaction of two conditions – either that the assesseeis making zero rated supplies without payment on taxes orwhere the credit is getting accumulated on account of therate of tax on inputs being higher than the rate of tax onoutput supplies. Clause (ii) of the first proviso merelyprescribes a condition of eligibility subject to which refundof unutilised ITC could be made;

(ii) Rule 89(5) while providing a procedure for computing refundunder Section 54(3) imposes an artificial restriction whichhas not been prescribed in the main statute and is patentlyarbitrary and illegal. Section 49 allows credit utilizationirrespective of whether it is out of input goods or input 22 Appearing in SLP (Civil) No 1868/2021

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Aservices. On the other hand, Rule 89(5) artificially restrictsthe credit by initiating the formula under which duty can bepaid out of credit on input goods and input services onlyand hence the credit of input services will keep onaccumulating. Rule 89(5) must allow the taxpayers to utiliseand make payment through input services first and then theBbalance through credit on inputs; and A

(iii) It is paradoxical that while on the one hand the definition ofnet ITC has been amended to exclude ITC availed on inputservices, on the other hand, turnover of inverted supply ofservices and tax payable on such inverted rated supply ofCservices has been included in the formula for calculatingthe maximum amount of refund.

D.3 Rejoinder by Union of India

22. In response to the submissions of the assessees, Mr NVenkataraman, the learned ASG, has submitted the following propositions:

D

(i) The submission of the respondents that Article 279A(6) ofthe Constitution mandates a harmonised structure of GSTand obligates parity of treatment amongst goods and servicesis misplaced for the following reasons:

E

(a) Article 279A(6) does not compel parity of treatmentbetween goods and services. In fact, Article 366(12) dealswith the definition of ‘goods’, Article 366(26A) deals withthe definition of ‘services’ and Article 366(12A) defines‘goods and services’. Thus, goods and services are identifiedFas two distinct aspects; (b)Article 279A deals with the GST Council. The purpose ofArticle 279A(6) is to ensure that the GST Council, whiledischarging its function, is guided by the need for aharmonised structure. Thus, the term ‘harmonised’ or,Gharmony in this context would mean uniformity, consistency,shared values and responsibilities between the UnionGovernment and State Governments. The essence of Article279(A)(6) is promotion of cooperative federalism; H

(c) If the interpretation of the respondents is accepted, it wouldArender Article 279A(4) otiose as it allows the GST Councilto make recommendations including rates and floor rateswith bands of GST.

(ii) Registered assessees having unutilised ITC do not form adistinct and separate class. Unutilised ITC can accumulateBon account of huge discounts on output supplies of goodsor services; as a business strategy to indulge in predatorypricing; loss of business resulting in undervaluation of goods;an Act of God; and inverted duty structure on account ofinputs or input services, among other reasons . Thus,Calthough registered assessees accumulating unutilised ITCconstitute one category, it has numerous species. Parliamentis entitled to choose the species out of the category andgrant concessions or benefits. This would amount to treatingequals equally, and unequals unequally; D

(iii) The doctrines of equivalence, neutrality or secondary stagecascading effect are inapplicable and should not be used toread in grant of refund for unutilised ITC on input services.Although the stated goal of the doctrines may beconvergence of a destination-based tax, policy issues as tohow to achieve the stated goal must be left to the discretionof the Union Government and the State Governments. Thelevel, type and time frame to achieve a completeconvergence is a policy issue which cannot be subject tojudicial review; E

(iv) After the ITC on account of both inputs and input servicesis booked into an electronic ledger, it forms a homogenousnucleus and the source of the ITC (that is whether it arisesfrom input or input services) cannot be determined. Thus,the formula provided in Rule 89(5) is necessary to makesuch a bifurcation; and F

G

(v) Prior to the enactment of GST, MODVAT/CENVAT Rulescontained formulae to determine the quantum of eligibilityof credit. Similarly, to legally dissect the homogenousunutilised ITC, a formula may be resorted to determineeligibility, restrictions, or refunds.

H

AE Constitutional Scheme of GST

23. The idea which permeates GST legislation globally is to imposea multi stage tax under which each point in a supply chain is potentiallytaxed. Suppliers are entitled to avail credit of tax paid at an anteriorstage. As a result, GST fulfils the description of a tax which is based onBvalue addition. Value addition is intended to achieve fiscal neutrality andto obviate a cascading effect of taxation which traditional tax regimeswere liable to perpetuate. In a sense therefore, the purpose of a tax onvalue addition is not dependent on the distribution or manufacturing model.The tax which is paid at an anterior stage of the supply chain is adjusted.The fundamental object is to achieve both neutrality and equivalence byCthe grant of seamless credit of the duties paid at an anterior stage of thesupply chain.

24. The State VAT legislation in India represented a significantstage in the evaluation of fiscal legislation based on the principle of valueaddition. In All India Federation of Tax Practitioners v. Union ofDIndia[23], this Court, speaking through a two judge Bench, noted theprinciple that VAT is a consumption tax as it is borne by the consumer.The Court observed that with its increasing importance in the economy,the service sector is “occupying the centre stage of the Indian economy”.As economists postulate, there is no distinction between consumption ofEgoods and consumption of services both of which satisfy human wantsand needs. The Court underscored that service tax is a destination-basedconsumption tax, not a charge on business but on the consumer of theservice.

25. Though the erstwhile regime recognised the principle of valueFaddition-based consumption taxes, there was an absence of a seamlessflow of credit, particularly between Central and State levies. Thebackground material antecedent to the adoption of the constitutional andlegal structure underlying GST in the country indicates the importancewhich was ascribed to developing a tax regime which would achieve acontinuous chain of set-off from the original producer and serviceGprovider’s point up to the retailer’s level in the supply chain and eliminatethe burden of cascading tax effects. Thus, the first discussion paper onGST in India published by the Empowered Committee of State FinanceMinisters on 10 November 2009 emphasised that :

H23 2007 (7) SCC 527

“1.14 … In the GST, both the cascading effects of CENVAT andservice tax are removed with set-off, and a continuous chain ofset-off from the original producer’s point and service provider’spoint upto the retailer’s level is established which reduces theburden of all cascading effects. This is the essence of GST, andthis is why GST is not simply VAT plus service tax but animprovement over the previous system of VAT and disjointedservice tax.”

26. The Statement of Objects and Reasons appended to theConstitution (One-Hundred and Twenty-Second Amendment) Bill 2014which eventually became the Constitution (One Hundred and FirstAmendment) Act 2016 postulates that GST shall replace a number ofindirect taxes levied by the Union Government and the State Governments.The object was to introduce a goods and service tax which would fulfiltwo fiscal priorities namely, (1) removing the cascading effect of taxes;and (2) providing for a common national market for goods and services.An extract from the Statement of Objects and Reasons is set out below:

“The Constitution is proposed to be amended to introduce the goodsand services tax for conferring concurrent taxing powers on theUnion as well as the States including Union territory with Legislatureto make laws for levying goods and services tax on everytransaction of supply of goods or services or both. The goods andservices tax shall replace a number of indirect taxes being leviedby the Union and the State Governments and is intended to removecascading effect of taxes and provide for a common national marketfor goods and services. The proposed Central and State goodsand services tax will be levied on all transactions involving supplyof goods and services, except those which are kept out of thepurview of the goods and services tax.”

27. Now, it is in this backdrop that it becomes necessary to advertto the constitutional amendment and the resulting legislation. The OneHundred and First Amendment to the Constitution is a watershedmoment in the evolution of cooperative federalism. Since its origin, theConstitution contained a three-fold distribution of legislative power. UnderArticle 246, the subjects of legislation enumerated in the Union List ofthe Seventh Schedule were assigned to Parliament, those in the StateList were assigned exclusively to the States and those in the ConcurrentList were assigned both to Parliament and the States with precedenceto Parliament under the provisions of Article 254.

A

B

C

D

E

F

G

H

A28. To illustrate, Entry 84 of the Union List provided for duties ofexcise on tobacco and other goods manufactured or produced in Indiaexcept – (a) alcoholic liquors for human consumption; and (b) opium,hemp and other narcotic drugs and narcotics. Entry 54 of the State Listprovided for taxes on sale or purchase of goods other than newspaperssubject to Entry 92A of the Union List which provided for taxes on theBsale or purchase of goods other than newspapers in the course ofinterstate trade or commerce. Entry 97, the residual entry of the UnionList subsumed within it among other subjects, taxes not mentioned in theUnion, State or Concurrent List, thereby bringing with its ambit the notionof ‘rag-bag’ legislation. The field contemplated by the erstwhile EntryC83 of the Union List (duties of customs including export duties) or Entry97 did not travel into the area of trading. State legislation in the area ofsales tax and VAT defined the ambit of the expression ‘inputs’, ‘capitalgoods’ and ‘input tax credit’.

29. The One Hundred and First Constitutional Amendment broughtDabout a significant merger by contemplating a fiscal umbrellacomprehending GST. Article 246A was adopted in terms of which,notwithstanding anything contained in Article 246 and Article 254,Parliament and (subject to Clause (2)), the State Legislature of everyState have the power to make laws with respect to GST imposed by theUnion or by the State under clause (2) of Article 246A[24]. Parliament hasEthe exclusive power to make laws with respect to goods and servicestax where the supply of goods or of services, or both takes place in thecourse of inter-State trade or commerce. With the enactment of theOne Hundred and First Constitutional Amendment, Entry 84 of the UnionList has been restructured to incorporate duties of excise on the followingFgoods manufactured or produced in India, namely –

24 “Article 246A. (1) Notwithstanding anything contained in articles 246 and 254,Parliament, and, subject to clause (2), the Legislature of every State, have power tomake laws with respect to goods and services tax imposed by the Union or by suchGState.

(2) Parliament has exclusive power to make laws with respect to goods and servicestax where the supply of goods; or of services, or both takes place in the course ofinter-State trade or commerce.

Explanation. – The provisions of this article, shall, in respect of goods and services taxreferred to in clause (5) of article 279A, take effect from the date recommended by theHGoods and Services Tax Council.”

(a) petroleum crude;

A

(b) high speed diesel;

(c) motor spirit (commonly known as petrol); (d) natural gas; B

(e) aviation turbine fuel; and

(f) tobacco and tobacco products.

30. Entry 54 of the State List has been restructured to provide fortaxes on the sale of petroleum crude, high speed diesel, motor spirit(commonly known as petrol), natural gas, aviation turbine fuel andalcoholic liquor for human consumption, other than in the course of inter-State trade or commerce.

C

31. Article 246A has brought about several changes in theconstitutional scheme:

(i) Firstly, Article 246A defines the source of power as wellas the field of legislation (with respect to goods and servicestax) obviating the need to travel to the Seventh Schedule; D

(ii) Secondly, the provisions of Article 246A are available bothto Parliament and the State legislatures, save and exceptfor the exclusive power of Parliament to enact GSTlegislation where the supply of goods or services takes placein the course of inter-State trade or commerce; and E

(iii) Thirdly, Article 246A embodies the constitutional principleof simultaneous levy as distinct from the principle ofconcurrence. Concurrence, which operated within the foldFof the Concurrent List, was regulated by Article 254.

32. The One Hundred and First Constitutional Amendment broughtin amendments to the constitutional dictionary of definitions contained inArticle 366. Clause 12 of Article 366 contained a definition of theexpression “goods” to include all materials, commodities and articles.Clause 12A has been introduced by the amendment to define “goodsand services tax”:

G

“Clause (12A) “goods and services tax” means any tax on supplyof goods, or services or both except taxes on the supply of thealcoholic liquor for human consumption”.

H

AClause 26A has been introduced to define “services”:

“Clause (26A) “Services” means anything other than goods”

‘Services’, therefore, under the constitutional scheme meansanything other than goods.

33. The constitutional scheme embodying GST is facilitated throughBthe composition of the GST Council under Article 279A. The GST Councilis to consist of the Union Finance Minister, the Union Minister of Statein charge of Revenue of Finance; and the Minister In-charge of Financeor Taxation or any other Minister nominated by each State Government.Clause (4) of Article 279(A) empowers the GST Council to makeCrecommendations to the Union and the States on the aspectscomprehended in sub-clauses (a) to (h) of Clause (4), which are extractedbelow:

“[…]

(a) the taxes, cesses and surcharges levied by the Union, theDStates and the local bodies which may be subsumed in thegoods and services tax; (b)the goods and services that may be subjected to, or exemptedfrom the goods and services tax;

(c) model Goods and Services Tax Laws, principles of levy,Eapportionment of Goods and Services Tax levied on suppliesin the course of inter-State trade or commerce under article269A and the principles that govern the place of supply; (d)the threshold limit of turnover below which goods and servicesmay be exempted from goods and services tax;F

(e) the rates including floor rates with bands of goods andservices tax; (f)any special rate or rates for a specified period, to raiseadditional resources during any natural calamity or disaster; (g)special provision with respect to the States of ArunachalPradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya,Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh andUttarakhand; and G

(h) any other matter relating to the goods and services tax, asthe Council may decide.”H

Clause (6) of Article 279A stipulates that:

“(6) While discharging the functions conferred by this article, theGoods and Services Tax Council shall be guided by the need for aharmonised structure of goods and services tax and for thedevelopment of a harmonised national market for goods andservices.”

34. Article 279A(6) indicates that in the discharge of its functions,the GST Council is to be guided by the need for a harmonised structureof goods and services tax and the development of a harmonised nationalmarket for goods and services. This emphasis on harmony is crucial toco-operative federalism. It underscores that in a federal arrangementwhere the States and Union are converging together for the first time toadopt the same event for taxation, both sets of partners must be guidedby the over-arching need to preserve harmony. Harmony postulatesbalance, an acceptance of mutual co-existence. Clauses (7) to (11) ofArticle 279A contain provisions for quorum, procedure and voting. Clause(9) is a clear indicator of the absence of supremacy either of the Unionof the States. Under sub clause (a) of Clause 9, the vote of the UnionGovernment is to have a weightage of one-third of the total votes cast,while the votes of all the State Governments together are to have aweightage of two-thirds of the total votes cast. Every decision of theCouncil is to be taken by a majority of not less than three-fourths of theweighted votes of the members present and voting. The principle ofharmony does not postulate exact coincidence in all points of comparisonor reference. Harmony is a postulate of cooperative federalism and isfounded on the principle of mutual co-existence, deference and equalityof the coexisting units.

F CGST Act

F.1 Definitions

35. While understanding the provisions of Section 54(3), it becomesnecessary to advert to some of the key definitions contained in the CGSTAct.

Section 2 (52) defines the expression goods in the following terms:

“goods” means every kind of movable property other than moneyand securities but includes actionable claim, growing crops, grassand things attached to or forming part of the land which are agreedto be severed before supply or under a contract of supply.”

A

B

C

DE

F

G

H

A36. The expression ‘goods’ is defined on the basis of a ‘meansand includes’ formula. Following well-settled principles of statutoryinterpretation, the legislature uses the expression ‘means’ when it intendsthe definition to be exhaustive. The use of the expression ‘includes’ isintended to convey an expansive meaning. By using the expression “meansand includes”, the legislature intends to employ an extensive definition,Bincorporating subjects which may not ordinarily fall within the commonunderstanding of the expression. Thus, the expression ‘goods’ is definedto mean every kind of movable property other than money and securities.It also includes certain other items incorporated in the inclusive part(“but includes”) of the definition. The expression ‘goods’ is broadlyCdefined. The expression ‘services’ is defined in Section 2(102) in thefollowing terms:

“Section 2(102) “services” means anything other than goods,money and securities but includes activities relating to the use ofmoney or its conversion by cash or by any other mode, from oneDform, currency or denomination, to another form, currency ordenomination for which a separate consideration is charged.

Explanation: For the removal of doubts, it is hereby clarified thatthe expression “services” includes facilitating or arrangingtransactions in securities.”

EThe expression ‘services’ is thus distinguished from goods sincethe expression means “anything other than goods”.

37. The definition of the expression ‘input’ is contained in Section2(59) which reads thus:

F“2(59) “input” means any goods other than capital goods used orintended to be used by a supplier in the course or furtherance ofbusiness”

The expression ‘input’ is thus defined to mean goods other thancapital goods. The definition however, incorporates a requirement ofuse, actual or intended, by a supplier or in the course or furtherance ofGbusiness.

38. ‘Input service’ is defined in Section 2(60) as follows:

“input service” means any service used or intended to be used bya supplier in the course or furtherance of business;”

H

The definition of “input service” is parallel to that of “input”, withthe important distinction that while ‘input’ is defined with reference to“any goods”, ‘input service’ is defined in relation to “any service”. Bothsets of definitions incorporate the further requirement of use or intendeduse by a supplier in the course or furtherance of business.

39. The expression “input tax” is defined in Section 2(62) :

“Input tax” in relation to a registered person, means the Centraltax, State tax, integrated tax or Union territory tax charged on anysupply of goods or services or both made to him and includes—

(a) the integrated goods and services tax charged on import ofgoods; (b) the tax payable under the provisions of sub-sections (3)and (4) of section 9;

(c) the tax payable under the provisions of sub-sections (3)and (4) of section 5 of the Integrated Goods and Services TaxAct; (d) the tax payable under the provisions of sub-sections (3)and (4) of section 9 of the respective State Goods and ServicesTax Act; or (e) the tax payable under the provisions of sub-sections (3)and (4) of section 7 of the Union Territory Goods and ServicesTax Act, but does not include the tax paid under the composition levy.”

The expression ‘input tax’ in relation to a registered person means(i) the Central, State, Integrated or Union Territory tax; (ii) charged onany supply of goods or services or both made to a registered person.This is followed by an inclusive definition.

40. The expression ‘input tax credit’ is defined in Section 2 (63):

“2(63) “input tax credit” means the credit of input tax”

Evidently, since input tax credit means the credit on input tax, thedefinition of the expression ‘input tax’ has to be read into Section 2(63)in understanding the ambit of the expression ‘input tax credit’. Now,input tax is the tax charged on the supply of goods or services or both.Apart from the above definitions there are three other definitions which A

B

C

D

E

F

G

H

Amust be noted at this stage. The expression ‘inward supply’ is defined inSection 2 (67) in the following terms:

“2(67) “inward supply” in relation to a person, shall mean receiptof goods or services or both whether by purchase, acquisition orany other means with or without consideration.”

B

41. The expression ‘output tax’ is defined in the following terms:

“2(82) “output tax” in relation to a taxable person, means the taxchargeable under this Act on taxable supply of goods or servicesor both made by him or by his agent but excludes tax payable byhim on reverse charge basis”

C

The expression ‘outward supply’ is defined in Section 2(83) thus:

“2(83) “outward supply” in relation to a taxable person, meanssupply of goods or services or both, whether by sale, transfer,barter, exchange, licence, rental, lease or disposal or any othermode, made or agreed to be made by such person in the course orfurtherance of business.”

D

42. Again, as in the case of inward supply, the expression “outwardsupply” incorporates the supply of goods or services or both. Theexpression “output tax” in other words means tax chargeable under theAct on the taxable supply of goods or services or both. The abovedefinitions fall into three clusters: the first cluster relates to receipt –Section 2(62), Section 2(63) and Section 2(67); the second cluster consistsof outward supply and output tax - Section 2(82) and Section 2(83); andthe third cluster consists of goods, services, input and input services –Section 2(52), Section 2(102), Section 2(59) and Section 2(60).

E

F

F.2 Section 16 & Section 49 of the CGST Act

43. Section 16 is comprised in Chapter V and is titled as ‘input taxcredit’. The marginal note to Section 16 indicates that the provision relatesto eligibility and conditions for taking ITC. Sub-Section (1) of Section 16is in the following terms:

G

“16 Eligibility and conditions for taking input tax credit. – (1) Everyregistered person shall, subject to such conditions and restrictionsas may be prescribed and in the manner specified in section 49, beentitled to take credit of input tax charged on any supply of goodsor services or both to him which are used or intended to be used in H

the course or furtherance of his business and the said amountshall be credited to the electronic credit ledger of such person.”

44. Under sub-Section (1) Section 16:

(i) every registered person shall be entitled to take credit to inputtax charged on any supply of goods and services or both tohim;

(ii) which are used or intended to be used in the course orfurtherance of his business;

(iii) subject to such conditions and restrictions as may beprescribed; and

(iv) in the manner specified in Section 49.

45. The amount of input tax credit is to be credited in the electroniccredit ledger of the registered person. Sub-Section (2) spells out theconditions upon the fulfilment of which the entitlement to the credit ofinput tax in respect of any supply of goods or services can be availed.Sub- Section (2) of Section 16 is in the following terms:

“16. […]

(2) Notwithstanding anything contained in this section, no registeredperson shall be entitled to the credit of any input tax in respect ofany supply of goods or services or both to him unless,––

(a) he is in possession of a tax invoice or debit note issued by asupplier registered under this Act, or such other tax payingdocuments as may be prescribed; (aa) the details of the invoice or debit note referred to in clause (a)has been furnished by the supplier in the statement of outwardsupplies and such details have been communicated to the recipientof such invoice or debit note in the manner specified under Section37

(b) he has received the goods or services or both.

Explanation.—For the purposes of this clause, it shall be deemedthat the registered person has received the goods or, as thecase may be, services-

(i) where the goods are delivered by the supplier to a recipientor any other person on the direction of such registered person, A

B

C

D

E

F

G

H

whether acting as an agent or otherwise, before or duringmovement of goods, either by way of transfer of documents oftitle to goods or otherwise; A

(ii) where the services are provided by the supplier to any personon the direction of and on account of such registered person.

B

(c) subject to the provisions of section 41, the tax charged in respectof such supply has been actually paid to the Government, either incash or through utilisation of input tax credit admissible in respectof the said supply; and (d) he has furnished the return under section 39:

C

Provided that where the goods against an invoice are received inlots or instalments, the registered person shall be entitled to takecredit upon receipt of the last lot or instalment:

Provided further that where a recipient fails to pay to the supplierDof goods or services or both, other than the supplies on which taxis payable on reverse charge basis, the amount towards the valueof supply along with tax payable thereon within a period of onehundred and eighty days from the date of issue of invoice by thesupplier, an amount equal to the input tax credit availed by therecipient shall be added to his output tax liability, along with interestEthereon, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of thecredit of input tax on payment made by him of the amount towardsthe value of supply of goods or services or both along with taxpayable thereon”F

46. Section 16(2) indicates that the credit of input tax charged onany supply of goods or services, or both, can be availed of by a registeredperson subject to the conditions which are set out in the provisos. Inputtax, as we have already seen, has been defined in Section 2(62) as taxcharged on any supply of goods or services or both. The credit of inputGtax is, therefore, relatable both to the supply of goods and services.Whether tax is paid on the supply of goods or services, the recipientsreceive ITC in a similar manner. Taxes on goods and services areidentifiable, but upon credit to the electronic ledger they form a commonpool for utilization. Section 16(1) indicates that the manner in whichinput tax credit can be utilized is spelt out in Section 49. Sub- Section (1)Hof Section 49 provides:

“Section 49 (1) - Every deposit made towards tax, interest, penalty,fee or any other amount by a person by internet banking or byusing credit or debit cards or National Electronic Fund Transfer orReal Time Gross Settlement or by such other mode and subject tosuch conditions and restrictions as may be prescribed, shall becredited to the electronic cash ledger of such person to bemaintained in such manner as may be prescribed...”

47. Sub-Section (3) of Section 49 envisages that the amountavailable in the electronic cash ledger may be used for making anypayment towards tax, interest, penalty, fees or any other amount payableunder the provisions of the Act or its rules in the manner and subject toconditions and within such time as is prescribed. Similarly, sub-Section(4) of Section 49 stipulates that the amount available in the electroniccredit ledger can be used for making payment towards output tax underthe CGST Act or under the IGST Act in such manner and subject to theconditions and within such time as is prescribed. Sub-Section (5) ofSection 49 spells out the priorities according to which the amount of ITCavailable in the electronic credit ledger can be utilized. Sub Section (6)of Section 49 is significant and provides as follows:

“(6) The balance in the electronic cash ledger or electronic creditledger after payment of tax, interest, penalty, fee or any otheramount payable under this Act or the rules made thereunder maybe refunded in accordance with the provisions of Section 54.”

48. The provisions of Section 16 and Section 49 indicate thefollowing position:

(i) The ITC in the electronic credit ledger may be availed offor making any payment towards output tax under the CGSTAct or under the IGST Act;

(ii) The amount available in the electronic cash ledger may beused for making any payment towards tax, interest, penalty,fees or any other amount payable under the CGST Act orits rules;

(iii) The balance in the electronic cash ledger or electronic creditledger after the payment of tax, interest, penalty, fees orany other amount payable under the Act or rules may berefunded in accordance with the provisions of Section 54;and A

B

C

D

E

F

G

H

A(iv)Sub Section (6) of Section 49, in other words contemplatesa refund of the balance which remains in the electronic cashledger or electronic credit ledger in the manner stipulatedby the provisions of Section 54.

F.3 Interpretation of Section 54(3) of the CGST ActB

49. The controversy in the present case turns upon theinterpretation of Section 54, which is found in Chapter XI titled as‘Refunds’. The marginal note of Section 54 is titled “Refund of Tax”.Section 54(1) provides thus:

“54. (1) Any person claiming refund of any tax and interest, if any,Cpaid on such tax or any other amount paid by him, may make anapplication before the expiry of two years from the relevant datein such form and manner as may be prescribed:

Under sub-Section (1) of Section 54, an application has to bemade within two years of the relevant date by a person claiming refundDof tax and interest (if any, paid on the tax or any other amount paid), insuch form and manner as prescribed. Explanation 1 to Section 54 is inthe following terms:

“Provided that a registered person, claiming refund of any balancein the electronic cash ledger in accordance with the provisions ofEsub-section (6) of section 49, may claim such refund in the returnfurnished under section 39in such manner as may be prescribed.”

Sub-Section (3) of Section 54 is in the following terms:

“Subject to the provisions of sub-section (10), a registered personmay claim refund of any unutilised input tax credit at the end ofFany tax period:

Provided that no refund of unutilised input tax credit shall be allowedin cases other than––

(i) zero rated supplies made without payment of tax; G

(ii) where the credit has accumulated on account of rate of tax oninputs being higher than the rate of tax on output supplies (otherthan nil rated or fully exempt supplies), except supplies of goodsor services or both as may be notified by the Government on therecommendations of the Council:

H

Provided further that no refund of unutilised input tax credit shallbe allowed in cases where the goods exported out of India aresubjected to export duty:

Provided also that no refund of input tax credit shall be allowed, ifthe supplier of goods or services or both avails of drawback inrespect of central tax or claims refund of the integrated tax paidon such supplies.”

50. The submission which was urged by the assessees before theGujarat and Madras High Courts, as well as this Court, is that under thesubstantive part of Section 54(3), Parliament has contemplated that theclaim of refund may extend to any unutilized ITC. ITC means credit ofinput tax and since ‘input tax’ is defined with reference to the tax chargedon the supply of goods or services or both, a refund may be claimed notonly of the tax charged on input goods but also input services as a whole.According to the Revenue, the first proviso to Section 54(3) is a restriction.On the other hand, assessees have urged that the first proviso sets outonly a condition or provision for eligibility and once it is fulfilled, therefund is available on the entirety of the unutilized ITC including thecredit which is relatable to tax paid on input goods and input services.

51. The crux of the dispute in the present case pertains to howsub-Section (3) to Section 54 and Explanation 1 to sub-Section (1) ofSection 54 are to be understood and interpreted. For convenience ofanalysis, the interpretation of sub-Section (3) of Section 54 can bedistributed in its main tier and the three provisos. The main part of sub-Section (3) provides that a registered person may claim refund of anyunutilized ITC at the end of any tax period. Tax period is defined inSection 2(106) as the period for which the return is required to befurnished. While enacting Section 54(3), Parliament has envisaged aclaim for the refund of unutilized ITC by a registered person at the endof the tax period. The first tieris the main provision of Section 54(3)which lays down four conditions:

(i) A claim of refund;

(ii) By a registered tax person;

(iii) Of any unutilized ITC; and

(iv) At the end of any tax period, subject to the provisions of sub-Section (10).

ABC

D

E

F

G

H

A52. The second tier is the first proviso. The first proviso beginswith the expression “no refund of unutilized ITC shall be allowed incases other than” which is followed by clauses (i) and (ii). The openingline of the first proviso contains two expressions of significance, namely,“no refund shall be allowed” and “in cases other than”. The expression‘allowed’ in the proviso must be contrasted with the expression ‘claim’Bin the substantive part of sub-Section (3). A refund can be allowed onlyin the eventualities envisaged in clauses (i) and (ii). The expression ‘otherthan’ operates as a limitation or restriction.

53. The third tier of sub-Section 54(3) consist of the two clausesCof the first proviso which deal with two distinct cases: Clause (i) dealswith zero-rated supplies made without payment of tax, while Clause (ii)deals with credit which has accumulated on account of the rate of taxon inputs being higher than the rate of tax on output supplies. Proviso (ii)embodies the concept of an inverted duty structure. Proviso (ii) statesthat the refund of unutilized ITC shall be allowed only when the creditDhas accumulated because the rate of tax of inputs is higher than the rateof tax on output supplies. Input, as we have already noted, is defined inSection 2(59) to mean goods other than the capital goods. ‘Outputsupplies’ is not defined in the statute. As seen above, Section 16 stipulatesthe eligibility and conditions for availing ITC. ITC accumulates whenEthe credit cannot be utilized either partly or in whole and this may occurfor a variety of reasons. The credit of ITC may accumulate for severalreasons. Without spelling out an exhaustive list of circumstances, theaccumulation may be due to: (a) an inverted duty structure when theGST on output supplies is less than the GST on inputs; (b) stockaccumulation; (c) capital goods; and (d) partial reverse mechanism forFcertain services. There could be other reasons as well, such as excessivediscounts or predatory pricing.

54. The distortion caused by unutilized accumulated ITC wasnoticed before the advent of the GST regime, in the context of the StateVAT legislation under the erstwhile regime. A White Paper on State-Glevel Value Added Tax by the Empowered Committee of State FinanceMinisters dated 17 January 2005 contemplated that if any credit remainedunutilized in a month, it will be carried forward. If even at the end ofsecond year there is an excess unadjusted ITC, the same will be refunded:

“Carrying Over of Tax CreditH

2.4 If the tax credit exceeds the tax payable on sales in a month,the excess credit will be carried over to the end of next financialyear. If there is any excess unadjusted input tax credit at the endof second year, then the same will be eligible for refund….”

Based on this, a provision for refund of unadjusted ITC wasinserted in Section 11 of the Gujarat Value Added Tax Act read withRule 15(6) of the Gujarat Value Added Tax Rules 2006[25]. When theGST regime was under discussion, the first discussion paper by theEmpowered Committee of State Finance Ministers published on 10November 2009 acknowledged the problem of the accumulation of ITCon account of the rate of input tax being higher than output tax andsuggested that a refund be provided of accumulated ITC. The relevantextract from the discussion paper dealing with the ‘Salient features ofthe GST model’ reads thus:

“3.2…(vi) Ideally, the problem related to credit accumulation onaccount of refund of GST should be avoided by both the Centreand the States except in the cases such as exports, purchase ofcapital goods, input tax at higher rate than output tax etc. where,again refund/adjustment should be completed in a time boundmanner.”

55. The report of the Joint Committee, Empowered Committee ofState Finance Ministers on Business Process for GST and on RefundProcess published in August 2015 noted that under the proposed GSTlaw, ITC will be allowed, so as to remove the cascading effect of taxesand it is the ultimate customer who should bear the burden of taxes.However, the report noticed that there can be cases where there is anaccumulation of credit due to an inverted duty structure. The reportenvisaged that there would fewer rates of taxes and exemptions under 25 Rule 15

“(6) Where the tax credit (other than tax credit on capital goods) admissible in the yearremains unadjusted against the output tax as per section 11, such amount shall berefunded not later than expiry of two years from the end of the year in which such taxcredit had become admissible:

Provided that the dealer claiming such refund shall have to prove to the satisfaction ofthe assessing authority that the purchases of the goods on which such tax credit hadbeen calculated have been disposed off in the manner referred to in sub-section (3) ofsection 11 within the period by which refund under this sub-rule becomes admissible.”See also, Section 51 of the Maharashtra Value Added Tax Act 2002 read with Rule 60of the Maharashtra Value Added Tax Rules 2005

A

B

C

D

E

F

G

H

AGST and hence, the chances of an inverted duty structure would be“minimal”. At the same time, it recommended a refund of carried forwardITC in the following terms:

“(H) REFUND OF CARRY FORWARD INPUT TAX CREDIT:

i) As stated earlier, ITC is allowed to remove cascading and underBmodern VAT laws, tax is charged on value addition only and tax isnot charged on tax. It is for this reason that the ultimate consumeris liable to bear the tax burden.

ii) It is noted that the ITC may accumulate on account of thefollowing reasons :

Ca) Inverted Duty Structure i.e. GST on output supplies is lessthan the GST on the input supplies;

b) Stock accumulation;

c) Capital goods; and

Dd) Partial Reverse charge mechanism for certain services.

iii) As regards the accumulated ITC attributed to accumulation ofstock or capital goods, it is recommended that GST Law mayprovide that refund of carried forward ITC may not be allowedand such amount would be carried forward to the next tax periodE(s). The GST Law may provide for appropriate provisions in thisregard.

iv) Under the proposed GST law, it is proposed to have fewertax rates and fewer exemptions and therefore it is felt thatchances of inverted duty structure would not be there orwould be very minimal. But still there might be a possibilityFthat ITC may accumulate on account of inverted dutystructure.

v) It is recommended that in such case, cash refund may begranted after due audit and should be sanctioned only afterthe input tax credit has been matched from the purchaseGand sales statements filed along with monthly returns. Therefund would be granted on submission of application. Itmay be mentioned, however, that presently the Centre doesnot grant refund in such cases.…”

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UNION OF INDIA v. VKC FOOTSTEPS INDIA PVT LTD.[DR DHANANJAYA Y CHANDRACHUD, J.]

While enacting Clause (ii) of the first proviso to Section 54(3) inthe CGST Act, Parliament, took legislative notice of a specific eventualitynamely “where the credit has accumulated on account of the rate of taxon inputs being higher than the rate of tax on output supplies”. Parliamentwould be cognizant of the fact that ITC may accumulate for a variety ofreasons, of which an inverted duty structure is one situation. Parliamentwas legislating to provide for a refund and therefore restricted it to thetwo situations spelt out in clauses (i) and (ii) of the first proviso. Theopening words of the substantive part of Section 54(3) contemplate aclaim of refund of “any unutilized input tax credit”. Undoubtedly, anyunutilized ITC would include credit on account of tax charged on anysupply of goods or services or both. The opening sentence of Section54(3) provides for (i) a claim of refund by a registered person; (ii) of anyunutilized input tax credit; (iii) at the end of any tax period. But theimpact of the first proviso, as its opening words indicate, is that :

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(i) “No refund” of unutilized ITC “shall be allowed” “in casesother than” (i) and (ii); D

(ii) The expression “claim” in the substantive part must bedistinguished from the phrase “shall be allowed” in theopening sentence of the first proviso. Likewise, theexpression “may claim refund” in the opening part must bedistinguished from “no refund” in the opening part of thefirst proviso; E

(iii) The impact of the first proviso is that a refund of unutilizedITC shall be allowed only in cases falling under (i) and (ii).The expression ‘only’ in the previous sentence is not a judicialaddition to statutory language but follows plainly from theexpressions “no refund” of unutilized ITC shall be allowed“in cases other than”; F

(iv) The expression “in cases other than” is a clear indicatorthat clauses (i) and (ii) are restrictive and not conditions ofeligibility. A refund, in other words, can be allowed in theGtwo contingencies spelt out in clauses (i) and (ii) of the firstproviso;

(v) There is a clear distinction between clause (i) and clause(ii) of the first proviso: (a) in the case of exports, thecontingency is zero-rated supplies without any distinction H

between input goods or input services; (b) in contrast fordomestic supplies, clause (ii) relates to the accumulation ofcredit on account of rate of tax on inputs being higher thanthe rate of tax on output supplies; A

(vi) The legislative draftsperson has made a clear distinctionBbetween clause (i) and clause (ii) of the first proviso and itwas in this context that the opening words of Section 54(3)have used the expression “may claim refund of any unutilizedITC”;

(vii) Explanation 1 to Section 54, while defining the expressionC“refund” for the purposes of the section adopts an inclusivedefinition covering (a) refund of tax paid on zero ratedsupplies of goods or services or both; (b) refund of tax paidon input goods or inputs services used in making such zero-rated supplies; (c) refund of tax on supply of goods regardedas deemed exports; and (d) refund of unutilized ITC asDprovided under sub-section(3) of Section 54; and

(viii) Explanation 1 indicates that with reference to exports, thelegislature has brought within its fold ITC on input goodsand input services. In contrast, in the case of domesticsupplies it has contemplated refund of unutilized ITC “asEprovided under sub-section(3)”. The Explanation is a clearindicator that in respect of domestic supplies, it is onlyunutilized credit which has accumulated on the rate of taxon input goods being higher than the rate of output suppliesof which a refund can be allowed. Clause (ii) of the firstFproviso in other words is a restrictionand not a merecondition of eligibility.

56. The fulcrum of the argument of the assessees before theGujarat and Madras High Courts and before this Court is that clause (ii)of the first proviso prescribes a condition of eligibility and not a restrictionGon the entitlement to refund. The entire basket of unutilized ITC, whethertraceable to goods or services, is in the submission, eligible for refund.This submission has been made before the Court on three planes. Thefirst plane on which the submission has been urged is that the purposeof enacting Section 54(3) was to ensure against a cascading effect or‘sticking’ inputs tax. According to the assesses, the GST regime is aHresult of a long-standing exercise of legislative preparation in the doctrine

of equivalence and tax neutrality. According to the submission, thedoctrine of equivalence postulated an equivalence between goods andservices in the VAT regime, which must a fortiori be so under the auspicesof a unified GST legislation which contemplates that businesses are onlypass-through entities. The second plane of the submission is that thefunction of the GST Council, as specified in Article 279A(6), is that it isto be guided by the need for a harmonized structure of GST and aharmonized national market for goods and services. Clause (12A) ofArticle 366 provides for the levy of GST on both- goods and services. Inthis context, it was urged that in any fiscal regime, there are five essentialcomponents comprising of (a) taxable events; (b) taxable persons; (c)measure of tax; and (d) rate of tax; and (e) administrative machinery. Inall these, it is urged that the CGST makes absolutely no distinction betweengoods and services. Section 16 which provides for the utilization of ITCmakes no distinction between goods and services. The pale of the law, itwas urged, applies substantive provisions similarly in the case of goodsas well as services except as regard rates. But as regards rates, it wasurged that even within the category of goods, the rates may or do vary.The legislature, for the first time, introduced anti-profiteering provisionsbased on the precept that a reduction in the rate of tax must be passedon to the consumer. When neutrality was not intended, as in the case ofSection 17(5), a specific provision has been made by the legislature wherethe ITC cannot be availed of in those cases. Once the threshold ofSection 17(5) is crossed, tax neutrality must, in their submission, beachieved. Finally, it was also urged that an inverted duty structure arisesin many cases where the rate of tax on output supplies is reduced inorder to fulfil certain objectives guided by public interest such asencouraging infrastructure development. In this backdrop, it wassubmitted that where the reduction of the rate of tax on outward suppliesis in pursuance of the policy of the State, the ultimate object of achievingtax neutrality must be given full effect by fully effectuating a refundunder Section 54(3) by allowing a refund of unutilized ITC, whetherrelatable to goods or services.

57. The submission based on the doctrine of equivalence placesreliance on the decision of a three judge Bench of this Court inAssociation of Leasing and Financial Service Companies v. Unionof India[26]. Chief Justice S H Kapadia, speaking for a three judge Bench,dealt with the validity of the provisions of Sections 65(12) and 65(105)26 2011 (2) SCC 352

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A(zm) of the Finance Act 1994, in so far as the said provisions sought tolevy service tax on leasing and hire purchase. The levy of service tax onfinancial leasing services was challenged as being beyond thecompetence of Parliament by virtue of Article 366(29A) of theConstitution. While construing the issue, the Court adverted to the decisionin All India Federation of Tax Practitioners (supra) and observed:B

“Service tax is an economic concept based on the principle ofequivalence in a sense that consumption of goods and consumptionof services are similar as they both satisfy human needs. Todaywith the technological advancement there is a very thin line whichdivides a “sale” from “service”. That, applying the principle ofCequivalence, there is no difference between production ormanufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by theservice provider for consideration, which correspondingly standsconsumed by the service receiver. It is this principle of equivalenceDwhich is inbuilt into the concept of service tax under the FinanceAct, 1994. That service tax is, therefore, a tax on an activity. That,service tax is a value added tax. The value addition is on accountof the activity which provides value addition, for example, anactivity undertaken by a chartered accountant or a broker is anactivity undertaken by him based on his performance and skill.EThis is from the point of view of the professional. However, fromthe point of view of his client, the chartered accountant/broker ishis service provider. The value addition comes in on account ofthe activity undertaken by the professional like tax planning,advising, consultation, etc. It gives value addition to the goodsFmanufactured or produced or sold. Thus, service tax is imposedevery time service is rendered to the customer/client. This is clearfrom the provisions of Section 65(105)(zm) of the Finance Act,1994.”

58. The above formulation of the doctrine of equivalence dweltGon the economic rationale underlying the enactment of service tax. Theeconomic rationale is based on the equivalence of goods and services,both of which are instruments for the satisfaction of human needs. Theprinciple recognizes that there is, in economic terms, an equivalencebetween production or manufacture of saleable goods and production ofmarketable and saleable services. The issue before this Court, however,H

is whether an a priori equivalence between goods and services for thepurpose of bringing both within a composite tax regime must result in theconclusion that a refund of unutilized ITC must be made available toboth - input goods as well as input services, disregarding the provisionwhich has been inserted by the legislature in the present case in theform of Section 54(3). The answer to this is clear. The Court whileinterpreting the provisions of Section 54(3) must give effect to its plainterms. The Court cannot redraw legislative boundaries on the basis ofan ideal which the law was intended to pursue.

59. Sub-Section (6) of Article 279A has provided that whiledischarging its functions the GST Council shall be guidedby the need for(a) a harmonised structure of goods and service tax; and (b) thedevelopment of a harmonised national market for goods and services. Inemphasizing the need, the constitutional provision reflects a goal, objectand aspiration to be achieved. By emphasizing this, the provisionunderscores the vision that the GST Council should bear in mind in thedischarge of its constitutional functions. The constitutional object ishowever to be realized under the auspices of legislation duly enactedunder the provisions of Article 246A. The GST Council is intended tofunction towards the advancement of a harmonised structure for GSTand market for goods and services. Contemporary doctrine would suggestthat these objects of the fiscal regime may be furthered by bearing inmind (i) the doctrine of equivalence; (ii) the doctrine of neutrality; and(iii) the need of obviating secondary stage cascading effects. Therealpolitik of tax policy and governance in the real world may not alwaysmatch up to ideals. In an ideal tax regime, with a uniform rate of taxeson inputs goods, input services and outward supplies, the chance ofaccumulating unutilized ITC as a result of an inverted rate structurewould be minimal. An inverted duty structure arises where the rate oftax on inputs exceeds the rate of tax on output supplies as a result ofwhich the unutilized ITC may get accumulated. The jurisprudentialmaterial which has been relied upon by the assesses portrays an idealstate of GST legislation. In the well-known treatise on VAT, Alan Schenkand Oliver Oldman[27] explained the principled basis in VAT/GST legislationfor the grant of refund of excess input tax credit. According to the authors:

27 Alan Schenk and Oliver Oldman, VALUE ADDED TAX: A COMPARATIVE APPROACH(Cambridge Tax Law Series, 2007)

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A“II. Treatment of Excess Input Credits –Carry Forward, Offset,or Refund:

As was discussed earlier and will be discussed in detail in Chapter7, most countries define the jurisdictional reach of their VATs underthe destination principle. Applying the destination principle,Bexports are free of tax (zero rated). As a result, exporterscommonly report excess input VAT in their periodic VATreturns. In addition, even registered persons making salestaxable at a positive rate may experience occasional excessinput VATs, such as when they make capital purchasesgenerating substantial input credits or when they increaseCtheir inventory as part of an expansion of their businesses.

There is an implicit assumption in VAT systems that registeredpersons will recover input VAT used in making taxable sales sothat the input VAT does not enter into the pricing structure forthose sales. To accomplish that goal, a normative or well-structuredDVAT must grant registered persons the right to recover excessinput VATs within a reasonable period of time after incurring theinput t(a)x (sic). …

In the EU, the Sixth Directive provides that if there are excessinput tax deductions, “Member States may either make a refundEor carry the excess forward to the following period according toconditions which they shall determine. For Member States, excesscredits must be refunded after being carried forward six months.However, Member States may refuse to refund or carry forwardif the amount of the excess is insignificant…”

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60. The jurisprudential basis furnishes a depiction of an ideal stateof existence of GST legislation within the purview of a modern economy,as a destination-based tax. But there can be no gain saying the fact thatfiscal legislation around the world, India being no exception, makesGcomplex balances founded upon socio-economic complexities anddiversities which permeate each society. The form which a GSTlegislation in a unitary State may take will vary considerably from itsavatar in a nation such as India where a dual system of GST law operateswithin the context of a federal structure. The ideal of a GST frameworkwhich Article 279A(6) embodies has to be progressively realized. The H

doctrines which have been emphasized by Counsel during the course ofthe arguments furnish the underlying rationale for the enactment of thelaw but cannot furnish either a valid basis for judicial review of thelegislation or make out a ground for invalidating a validly enacted lawunless it infringes constitutional parameters. While adopting theconstitutional framework of a GST regime, Parliament in the exercise ofits constituent power has had to make and draw balances to accommodatethe interests of the States. Taxes on alcohol for human consumption andstamp duties provide a significant part of the revenues of the States.Complex balances have had to be drawn so as to accommodate theconcerns of the states before bringing them within the umbrella of GST.These aspects must be borne in mind while assessing the jurisprudentialvision and the economic rationale for GST legislation. But abstract doctrinecannot be a ground for the Court to undertake the task of redrawing thetext or context of a statutory provision. This is clearly an area of lawwhere judicial interpretation cannot be ahead of policy making. Fiscalpolicy ought not be dictated through the judgments of the High Courts orthis Court. For it is not the function of the Court in the fiscal arena tocompel Parliament to go further and to do more by, for instance, expandingthe coverage of the legislation (to liquor, stamp duty and petroleum) or tobring in uniformity of rates. This would constitute an impermissible judicialencroachment on legislative power. Likewise, when the first proviso toSection 54(3) has provided for a restriction on the entitlement to refundit would be impermissible for the Court to redraw the boundaries or toexpand the provision for refund beyond what the legislature has provided.If the legislature has intended that the equivalence between goods andservices should be progressively realized and that for the purpose ofdetermining whether refund should be provided, a restriction of the kindwhich has been imposed in clause (ii) of the proviso should be enacted,it lies within the realm of policy.

61. The submission which has been urged on behalf of theassessees is that registered persons constitute a class within the meaningof sub-Section (3) of Section 54 and each of them is entitled to claim arefund of unutilized ITC whether its origin lies in input goods or inputservices. In other words, it has been urged that Section 54(3) constitutesone homogenous class of registered persons who have unutilized ITC.The fallacy of the argument is in the hypothesis that unutilized ITC cannotbe unbundled for the purpose of fiscal legislation. Accumulated ITCmay result due to a variety of circumstances, some of which may while AB

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Aothers may not lie within the volition of a registered person. We havereferred to some of these factors earlier, including

(i) High discount pricing;

(ii) Predatory pricing;

B(iii) Shut down of business or industry;

(iv) Business loss;

(v) Economic compulsion to sell at below value prices; and

(vi) Stoppage of work.C62. These examples are indicators that the class, comprising ofregistered persons with unutilized ITC, covers a bundle of species asopposed to one unique or homogenous specie. Once we recognize this,it is necessary to allow the legislature the latitude to distinguish betweencredits arising out of the input goods stream and input service stream.DGST legislation in India is the product of hard constitutional and legislativework which stretched over several decades. Our fiscal regime is yet toarrive at an ideological position of one bundle for goods and servicesbased on a single rate structure. Broadly speaking, goods and servicesare taxed at 5 per cent, 12 per cent, 18 per cent and 40 per cent. As ondate, there is an absence of uniformity in rates and it is the multiplicity ofErates which has given rise to an inverted duty structure. Registeredpersons with unutilized ITC may conceivably form one class but it is notpossible to ignore that this class consists of species of different hues.Given these intrinsic complexities, the legislature has to draw the balancewhen it decides upon granting a refund of accumulated ITC which hasFremained unutilized. In doing so, Parliament while enacting sub-Section(3) of Section 54 has stipulated that no refund of unutilized ITC shall beallowed other than in the two specific situations envisaged in clauses (i)and (ii) of the first proviso. Whereas clause (i) has dealt with zero ratedsupplies made without the payment of tax, clause (ii), which governsdomestic supplies, has envisaged a more restricted ambit where the creditGhas accumulated on account of the rate of tax on inputs being higherthan the rate of tax on output supplies. While the CGST Act defines theexpression ‘input’ in Section 2(59) by bracketing it with goods other thancapital goods, it is true that the plural expression ‘inputs’ has not beenspecifically defined. But there is no reason why the ordinary principle of H

construing the plural in the same plane as the singular should not beapplied. To construe ‘inputs’ so as to include both input goods and inputservices would do violence to the provisions of Section 54(3) and wouldrun contrary to the terms of Explanation-I which have been noted earlier.Consequently, it is not open to the Court to accept the argument of theassessee that in the process of construing Section 54(3) contextually,the Court should broaden the expression ‘inputs’ to cover both goodsand services.

F.4 Construing the proviso

63. Provisos in a statute have multi-faceted personalities. Asinterpretational principles governing statutes have evolved, certain basicideas have been recognized, while heeding to the text and context. JusticeGP Singh, in his seminal text, Principles of Statutory Interpretation[28]formulates the governing principles of interpretation which have beenadopted by courts while construing a statutory proviso. The first rule ofinterpretation is that:

“The normal function of a proviso is to except somethingout of the enactment or to qualify something enacted thereinwhich but for the proviso would be within the purview ofthe enactment. As stated by LUSH, J.: “When one finds a provisoto a section the natural presumption is that, but for the proviso, theenacting part of the section would have included the subject- matterof the proviso. In the words of LORD MACMILLAN: “The properfunction of a proviso is to except and to deal with a case whichwould otherwise fall within the general language of the mainenactment and its effect is confined to that case.” The provisomay, as LORD MACNAGHTEN laid down, be “a qualificationof the preceeding enactment which is expressed in terms toogeneral to be quite accurate”. The general rule has been stated byHIDAYATULLAH, J., in the following words: “As a general rule,a proviso is added to an enactment to qualify or create an exceptionto what is in the enactment, and ordinarily, a proviso is notinterpreted as stating a general rule”. And in the words of KAPUR,J.: “The proper function of a proviso is that it qualifies the generalityof the main enactment by providing an exception and taking out as 28 Justice GP Singh, PRINCIPLES OF STATUTORY INTERPRETATION 215-234, (14th Ed., LexisNexis)

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it were, from the main enactment, a portion which, but for theproviso would fall within the main enactment.”[29]

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64. But then these principles are subject to other principles ofstatutory interpretation which may supplement or even substitute theBabove formula. These other rules which have been categorized by JusticeGP Singh are summarized as follows:

(i) A proviso is not construed as excluding or adding somethingby implication:

C“Except as to cases dealt with by it, a proviso has norepercussion on the interpretation of the enacting portion of thesection so as to exclude something by implication which isembraced by clear words in the enactment.”[30]

(ii) A proviso is construed in relation to the subject matter of theDstatutory provision to which it is appended:

“The language of a proviso even if general is normally to beconstrued in relation to the subject-matter covered by the sectionto which the proviso is appended. In other words normally aproviso does not travel beyond the provision to which it is aproviso. “It is a cardinal rule of interpretation”, observedEBHAGWATI, J., “that a proviso to a particular provision of astatute only embraces the field which is covered by the mainprovision. It carves out an exception to the main provision towhich it has been enacted as a proviso and to no other.”[31]

(iii) Where the substantive provision of a statute lacks clarity, aFproviso may shed light on its true meaning:

“If the enacting portion of a section is not clear, a provisoappended to it may give an indication as its true meaning. Asstated by LORD HERSCHELL: “ Of course a proviso may beused to guide you in the selection of one or other of two possibleGconstructions of the words to be found in the enactment, andshow when there is doubt about its scope, when it may 29 Id 30 Id at p. 218H31 Id at p. 221

reasonably admit of doubt as to having this scope or that, whichis the proper view to take of it.”[32]

(iv) An effort should be made while construing a statute to givemeaning both to the main enactment and its proviso bearingin mind that sometimes a proviso is inserted as a matter ofabundant caution:

“The general rule in construing an enactment containing aproviso is to construe them together without making either ofthem redundant or otiose. Even if the enacting part is cleareffort is to be made to give some meaning to the proviso and tojustify its necessity. But a clause or a section worded as aproviso, may not be a true proviso and may have been placedby way of abundant caution.”[33]

(v) While ordinarily, it would be unusual to interpret the provisoas an independent enacting clause, as distinct from its mainenactment, this is true only of a real proviso and the draftspersonof the statute may have intended for the proviso to be, insubstance, a fresh enactment:

“To read a proviso as providing something by way of anaddendum or as dealing with a subject not covered by the mainenactment or as stating a general rule as distinguished from anexception or qualification is ordinarily foreign to the properfunction of a proviso. However, this is only true of a real proviso.The insertion of a proviso by the draftsman has not alwaysstrictly adhered to its legitimate use and at times a section wordedas a proviso may wholly or partly be in substance a freshenactment adding to and not merely excepting something outof or qualifying what goes before.”[34]

65. Perhaps the most comprehensive and oft-cited precedentgoverning the interpretation of a proviso is the decision of this Court in SSundaram Pillai v. V R Pattabiraman[35]. Justice S Murtaza Fazal Alispeaking for a three judge Bench of this Court held:

32 Id at p. 22333 Id at p. 22634 Id at p. 22835 (1958) 1 SCC 591

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A“43. …To sum up, a proviso may serve four different purposes:(1) qualifying or excepting certain provisions from the mainenactment:

(2) it may entirely change the very concept of the intendment ofthe enactment by insisting on certain mandatory conditions to beBfulfilled in order to make the enactment workable:

(3) it may be so embedded in the Act itself as to become an integralpart of the enactment and thus acquire the tenor and colour of thesubstantive enactment itself; and

(4) it may be used merely to act as an optional addenda to theCenactment with the sole object of explaining the real intendmentof the statutory provision.”

66. While enunciating the above principles, S Sundaram Pillai(supra) took note of the decision in Hiralal Rattanlal v. State of UP[36]where Justice KS Hegde, speaking for a four judge Bench of this Courtobserved that while ordinarily, a proviso is in the nature of an exception,Dthe precedents indicate that sometimes a proviso is in the nature of aseparate provision, with a life of its own. The Court held:

“22… Ordinarily a proviso to a section is intended to take out apart of the main section for special treatment. It is not expected toenlarge the scope of the main section. But cases have arisen inEwhich this Court has held that despite the fact that a provision iscalled a proviso, it is really a separate provision and the so-calledproviso has substantially altered the main section.In CIT v. Bipinchandra Maganlal & Co. Ltd., Bombay [AIR1961 SC 1040 : (1961) 2 SCR 493 : (1961) 41 ITR 290] this CourtFheld that by the fiction in Section 10(2)(vii) second proviso readwith Section 2(6-C) of the Indian Income Tax Act, 1922 what isreally not income is, for the purpose of computation of assessableincome, made taxable income.”

Besides the decision in CIT v. Bipinchandra Maganlal[37], theCourt in Hiralal Rattanlal (supra) adverted to the earlier decisions inGState of Rajasthan v. Leela Jain[38] and Bihar CooperativeDevelopment Cane Marketing Union Ltd. v. Bank of Bihar[39].

36 (1973) 1 SCC 21637 AIR 1961 SC 104038 AIR 1965 SC 1296H39 AIR 1967 SC 389

67. In their effort to persuade this Court to accept the submissionthat the first proviso to Section 54(3) is in the nature of an eligibilitycondition as distinct from a restriction on the substantive part (containedin the opening words) of the provision, Counsel appearing on behalf ofthe assessees have sought to buttress their submissions with the followingfacets:

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(i) Clause (ii) of the first proviso refers to “rate of tax” asdistinct from the quantum of tax;

(ii) The expression “in cases other than where…” adverts tosituations or circumstances; C

(iii) The expression “on account of” would mean “due to”;

(iv) The use of the expression ‘inputs’ (the singular being definedin Section 2(59) but not the plural) and the correspondinguse of the expression “output supplies” (which is not defined,though “outward supply” is defined in Section 2(83)); D

(v) Section 54(8) and Section 49(6) provide that the balance inthe electronic credit ledger is to be refunded and makes nodistinction between a credit relatable to goods or to services;

(vi) The expression “on account of” has been used in Section22(3) and Section 18(3) and is distinct from the use of theEexpression “to the extent of” in Section 23(1)(b) and theproviso to Section 12(2). “To the extent of” is a limitingexpression and has a distinct connotation from “on accountof”;

(vii) The Ministry of Finance has issued a circular dated 31December 2018[40] clarifying the following position:

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“4. Representations have been received stating that whileprocessing the refund of unutilized ITC on account ofinverted tax structure, the departmental officers are denyingthe refund of ITC of GST paid on those inputs which areprocured at equal or lower rate of GST than the rate ofGST on outward supply, by not including the amount of suchITC while calculating the maximum refund amount as G

40 Circular No 79/53/2018-GST available at <https://www.cbic.gov.in/resources//htdocs-cbec/gst/Circular-No-79.pdf;jsessionid=CFAC18978FCA5664090473EACD101561>(accessed on 12 September 2021)

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[2021] 15 S.C.R.

Aspecified in rule 89(5) of the CGST Rules. The matter hasbeen examined and the following issues are clarified:

a)Refund of unutilized ITC in case of inverted tax structure,as provided in section 54(3) of the CGST Act, is availablewhere ITC remains unutilized even after setting off ofBavailable ITC for the payment of output tax liability. Wherethere are multiple inputs attracting different rates of tax, inthe formula provided in rule 89(5) of the CGST Rules, theterm “Net ITC covers the ITC availed on all inputs in therelevant period, irrespective of their rate of tax.

Cb)The calculation of refund of accumulated ITC on accountof inverted tax structure, in cases where several inputs areused in supplying the final product/output, can be clearlyunderstood with help of the following example:

i.Suppose a manufacturing process involves the use of aninput A (attracting 5 per cent GST) and input B (attracting18 per cent GST) to manufacture output Y (attracting 12per cent GST).

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ii.The refund of accumulated ITC in the situation at (i) above,will be available under section 54(3) of the CGST Actread with rule 89(5) of the CGST Rules, which prescribesthe formula for the maximum refund amount permissiblein such situations.

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iii.Further assume that the claimant supplies the output Yhaving value of Rs. 3,000/- during the relevant period forFwhich the refund is being claimed. Therefore, the turnoverof inverted rated supply of goods and services will be Rs.3,000/-. Since the 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/- andInput B, having value of Rs. 2,000/-, have been purchasedGin the relevant period for the manufacture of Y, then NetITC shall be equal to Rs. 385/- (Rs. 25/- and Rs. 360/- onInput A and Input B respectively).

v.Therefore, multiplying Net ITC by the ratio of turnover ofinverted rated supply of goods and services to the adjustedHtotal turnover will give the figure of Rs. 385/-.

vi.From this, if we deduct the tax payable on such invertedrated supply of goods or services, which is Rs. 360/-, weget the maximum refund amount, as per rule 89(5) of theCGST Rules which is Rs. 25/-.”

68. Para 4(b) of the Circular thereafter proceeds to give certainillustrations. The above circular, it is urged, would demonstrate that thephrase “on account of” in the proviso is interpreted by the State quagoods as a threshold condition. Hence even if one input in the basket ofinputs of a manufacturer results in an inverted duty structure, the wholeof the accumulated ITC can be availed of. On the other hand, for servicesthe same phrase is interpreted so as to mean ‘to the extent of’. Theexpression “on account of” as understood for goods by the above circularmust apply for services as well, meaning thereby that it is a thresholdcondition alone.

69. The above submissions demonstrate the scholarship whichhas been brought to bear upon the controversy by Counsel appearing onbehalf of the assessees. The above aspects of the statutory provision –Section 54(3) - must be juxtaposed together with all the features of thestatutory provision including Explanation- I which have been adverted toearlier. The analysis earlier indicates why on a reading of the provisionas a whole, clauses (i) and (ii) of the first proviso are restrictions and notmere conditions of eligibility. It is not possible for the Court to restrictthe ambit of clause (ii) of the proviso, based on a circular which hasbeen issued by the Ministry of Finance on 31 December 2018. Insubstance, the argument boils down to an effort to lead this Court to holdthat in spite of the language which has been used in clause (ii) of the firstproviso, (where the credit is accumulated on account of rate of tax oninputs being higher than the rate of tax on output supplies), input servicesmust be read into the term “inputs”. The assessees argue that theDepartmental understanding, as reflected in the circular, should be thebasis of interpreting a statutory provision. Such an exercise would beimpermissible, when its effect is to expand the area of refundcontemplated by the first proviso to cover input services in addition toinput goods despite statutory language to the contrary. Sub-Section (3)of Section 54 begins, in its main part, with the stipulation that a registeredperson may claim refund of any ‘unutilised ITC at the end of any taxperiod’. Whether we construe the first proviso as an exception or in thenature of a fresh enactment, the clear intent of Parliament was to confine A

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Athe grant of refund to the two categories spelt out in clauses (i) and (ii)of the first proviso. That clauses (i) and (ii) are the only two situations inwhich a refund can be granted is evident from the opening words of thefirst proviso which stipulates that “no refund of unutilised input taxcredit shall be allowed in cases other than”. What follows is clauses(i) and (ii). The intent of Parliament is evident by the use of a double –Bnegative format by employing the expression “no refund” as well as theexpression “in cases other than”. In other words, a refund is contemplatedin the situations provided in clauses (i) and (ii) and no other. To put itdifferently, the first proviso can be recast, without altering its meaning toread that a refund of unutilised ITC shall be allowed only in the casesCgoverned by clauses (i) and (ii). Clause (i) deals with zero rated supplieswithout payment of tax. Explanation-1 to Section 54 clarifies that theexpression ‘refund’ includes refund of tax paid on zero rated supplies ongoods or services or both, or on inputs or input services used in makingsuch zero-rated supplies. On the other hand, in the case of deemedexports, Explanation-1 refers to a refund of tax on the supply of goods.DLikewise in regard to domestic supplies, governed by clause (ii) of thefirst proviso, the expression ‘refund’ means refund of unutilised ITC asprovided under sub-Section (3). With the clear language which has beenadopted by Parliament while enacting the provisions of Section 54(3),the acceptance of the submission which has been urged on behalf of theEassessee would involve a judicial re-writing of the provision which isimpermissible in law. Clause (ii) of the proviso, when it refers to “onaccount of” clearly intends the meaning which can ordinarily be said toimply ‘because of or due to’. When proviso (ii) refers to “rate of tax”, itindicates a clear intent that a refund would be allowed where and only ifthe inverted duty structure has arisen due to the rate of tax on inputFbeing higher than the rate of tax on output supplies. Reading the expression‘input’ to cover input goods and input services would lead to recognisingan entitlement to refund, beyond what was contemplated by Parliament.

70. We must be cognizant of the fact that no constitutional right isbeing asserted to claim a refund, as there cannot be. Refund is a matterGof a statutory prescription. Parliament was within its legislative authorityin determining whether refunds should be allowed of unutilised ITCtracing its origin both to input goods and input services or, as it haslegislated, input goods alone. By its clear stipulation that a refund wouldbe admissible only where the unutilised ITC has accumulated on accountHof the rate of tax on inputs being higher than the rate of tax on output supplies, Parliament has confined the refund in the manner which wehave described above. While recognising an entitlement to refund, it isopen to the legislature to define the circumstances in which a refund canbe claimed. The proviso to Section 54(3) is not a condition of eligibility(as the assessees’ Counsel submitted) but a restriction which must governthe grant of refund under Section 54(3). We therefore, accept thesubmission which has been urged by Mr N Venkataraman, learned ASG.

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F.5 Constitutional validity: The ultra vires doctrine

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F.5 Constitutional validity: The ultra vires doctrine

71. The submission which has been urged on behalf of theassessees is that if Section 54(3) is construed to confine a refund ofunutilised ITC only to the extent that the accumulation arises on accountof the rate of tax on inputs (meaning input goods) exceeding the rate oftax on outward supplies, the principles underlying Article 14 of theConstitution would be attracted and the statutory provision would sufferfrom the vice of arbitrariness. The submission is that this has become anincident of a class legislation: the class consists of registered personshaving unutilised ITC. The class comprises of the following species (i)domestic suppliers; and (ii) exporters. The sub-species are (i) input goods;and (ii) input services. Opposing this submission, the learned ASG’ssubmission is that this is a valid classification, denying one of the speciesnamely input services the benefit of refund.

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72. The principle which Counsel for the assesses espouse is soughtto be buttressed by relying upon the decision in State of Jammu &Kashmir v. Triloki Nath Khosa[41] and in Re The Special CourtsBill, 1978[42]. The principles which are gleaned by Counsel from theabove decisions, in their application to the present case, are that:

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(i) Once the ITC comes within the fold of the electronic creditledger and is comprised into a homogenous credit, a ‘microdistinction’ cannot be carried out; and

(ii) A similarity of features between species comprised in theclass is sufficient: in the case of goods as well as services,the taxable event is the value addition tax and theGadministrative machinery treats goods as well as servicessimilarly. The mere fact of goods being tangible is a matterof no consequence.

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A73. Equality, it has been stressed in the above submission, cannotbe cabined, cribbed and confined. Differentiating between goods andservices, it has been urged, is not permissible and does not have areasonable nexus to the object sought to be achieved. There is an evidentdifference in the rates at which goods and services are taxed but,according to the submission, this is not a provision for revenue harvesting.BFinally, on this limb of submission, it has been urged that the wide latitudewhich is available with the legislature in the case of fiscal legislation isonly where a revenue harvesting measure is involved. The twin test ofreasonableness and the nexus with the object sought to be achievedmust be demonstrated. The nexus (a) must be based on the object of theClegislation alone; and (b) indicate a discernible principle which emanatesfrom the classification. With the clarification on inputs by the Ministry ofFinance, it is urged that no discernible principle emerges.

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74. Counsel for the assesses also argued that before the HighCourts of Gujarat and Madras, the Union Government did not urge thatDoutflow of finance was the reason to exclude refunds on input servicesand it is not open to the Court to conjure up a reason. In support of theabove submissions on constitutional validity, which have been urged byMr Sujit Ghosh, learned Counsel, Mr Arvind Datar, learned SeniorCounsel has urged that it would be paradoxical to posit on the one handthat goods and services are pari materia for the purpose of levy, collectionEand penalty but, that a distinction will be made between them for thepurpose of refund.

75. As a matter of first principle, it is not possible to accept thepremise that the guiding principles which impart a measure of flexibilityto the legislature in designing appropriate classifications for the purposeFof a fiscal regime should be confined only to the revenue harvestingmeasures of a statute. The precedents of this Court provide abundantjustification for the fundamental principle that a discriminatory provisionunder tax legislation is not per se invalid. A cause of invalidity ariseswhere equals are treated as unequally and unequals are treated as equals.GBoth under the Constitution and the CGST Act, goods and services andinput goods and input services are not treated as one and the same andthey are distinct species.

76. Parliament engrafted a provision for refund Section 54(3). Inenacting such a provision, Parliament is entitled to make policy choicesHand adopt appropriate classifications, given the latitude which our constitutional jurisprudence allows it in matters involving tax legislationand to provide for exemptions, concessions and benefits on terms, as itconsiders appropriate. The consistent line of precedent of this Courtemphasises certain basic precepts which govern both judicial reviewand judicial interpretation of tax legislation. These precepts are:

(i) Selecting the objects to be taxed, determining the quantumof tax, legislating for the conditions for the levy and thesocio-economic goals which a tax must achieve are mattersof legislative policy. Chief Justice M. Hidayatullah, speakingfor the Constitution Bench in Assistant Commissionerof Urban Land Tax v. Buckingham and Carnatic Co.Ltd.[43] held:

“10…The objects to be taxed, the quantum of tax to belevied, the conditions subject to which it is levied and thesocial and economic policies which a tax is designed tosubserve are all matters of political character and thesematters have been entrusted to the Legislature and not tothe Courts. In applying the test of reasonableness it is alsoessential to notice that the power of taxation is generallyregarded as an essential attribute of sovereignty andconstitutional provisions relating to the power of taxationare regarded not as grant of power but as limitation uponthe power which would otherwise be practically withoutlimit.

(ii) The same principle has been reiterated in Federation ofHotel & Restaurant Association of India v. Union ofIndia[44], where Justice MN Venkatachaliah (as the learnedChief Justice then was), speaking for the Constitution Benchheld:

“46. It is now well settled that though taxing laws are notoutside Article 14, however, having regard to the wide varietyof diverse economic criteria that go into the formulation ofa fiscal policy legislature enjoys a wide latitude in the matterof selection of persons, subject-matter, events, etc., fortaxation. The tests of the vice of discrimination in a taxing 44 (1989) 3 SCC 634

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law are, accordingly, less rigorous. In examining theallegations of a hostile, discriminatory treatment what islooked into is not its phraseology, but the real effect of itsprovisions. A legislature does not, as an old saying goes,have to tax everything in order to be able to tax something.If there is equality and uniformity within each group, thelaw would not be discriminatory. Decisions of this Court onthe matter have permitted the legislatures to exercise anextremely wide discretion in classifying items for taxpurposes, so long as it refrains from clear and hostilediscrimination against particular persons or classes.

47. But, with all this latitude certain irreducible desiderataof equality shall govern classifications for differentialtreatment in taxation laws as well. The classification mustbe rational and based on some qualities and characteristicswhich are to be found in all the persons grouped togetherand absent in the others left out of the class. But this aloneis not sufficient. Differentia must have a rational nexus withthe object sought to be achieved by the law. The State, inthe exercise of its governmental power, has, of necessity, tomake laws operating differently in relation to different groupsor classes of persons to attain certain ends and must,therefore, possess the power to distinguish and classifypersons or things. It is also recognised that no precise or setformulae or doctrinaire tests or precise scientific principlesof exclusion or inclusion are to be applied. The test couldonly be one of palpable arbitrariness applied in the contextof the felt needs of the times and societal exigencies informedby experience.”

(iii) In matters of classification, involving fiscal legislation, thelegislature is permitted a larger discretion so long as thereis no transgression of the fundamental principle underlyingthe doctrine of classification. In Hiralal Rattanlal (supra),Justice KS Hegde, speaking for a four judge Benchobserved:

“20. It must be noticed that generally speaking the primarypurpose of the levy of all taxes is to raise funds for publicgood. Which person should be taxed, what transaction should be taxed or what goods should be taxed, depends uponsocial, economic and administrative considerations. In ademocratic set up it is for the Legislature to decide whateconomic or social policy it should pursue or whatadministrative considerations it should bear in mind. Theclassification between the processed or split pulses andunprocessed or unsplit pulses is a reasonable classification.It is based on the use to which those goods can be put.Hence, in our opinion, the impugned classification is notviolative of Article 14.”

(iv) More recently in Union of India v. NITDIP TextileProcessors Private Limited[45], a two judge Benchobserved:

“67. It has been laid down in a large number of decisions ofthis Court that a taxation statute, for the reasons of functionalexpediency and even otherwise, can pick and choose to taxsome. A power to classify being extremely broad and basedon diverse considerations of executive pragmatism, thejudicature cannot rush in where even the legislature warilytreads. All these operational restraints on judicial power mustweigh more emphatically where the subject is taxation.Discrimination resulting from fortuitous circumstancesarising out of particular situations, in which some of the tax-payers find themselves, is not hit by Article 14 if thelegislation, as such, is of general application and does notsingle them out for harsh treatment. Advantages ordisadvantages to individual assessees are accidental andinevitable and are inherent in every taxing statute as it hasto draw a line somewhere and some cases necessarily fallon the other side of the line.”

77. The principles governing a benefit, by way of a refund of taxpaid, may well be construed on an analogous frame with an exemptionfrom the payment of tax or a reduction in liability (AssistantCommissioner of Commercial Tax (Asst.) v. Dharmendra TradingCompany[46]).

45 (2012) 1 SCC 22646 (1988) 3 SCC 570

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A78. In Elel Hotels and Investments Limited and Others v.Union of India[47], Justice MN Venkatachaliah (as the learned ChiefJustice then was) held that:

“20…It is now well settled that a very wide latitude is available tothe legislature in the matter of classification of objects, personsBand things for purposes of taxation. It must need to be so, havingregard to the complexities involved in the formulation of a taxationpolicy. Taxation is not now a mere source of raising money todefray expenses of Government. It is a recognised fiscal tool toachieve fiscal and social objectives. The differentia of classificationpresupposes and proceeds on the premise that it distinguishes andCkeeps apart as a distinct class hotels with higher economic statusreflected in one of the indicia of such economic superiority. Thepresumption of constitutionality has not been dislodged by thepetitioners by demonstrating how even hotels, not brought into theclass, have also equal or higher chargeable receipts and how theDassumption of economic superiority of hotels to which the Act isapplied is erroneous or irrelevant.”

79. In Spences Hotel Pvt Ltd. v. State of West Bengal[48], atwo judge Bench, speaking through Justice KN Saikia, revisited theprecedents of this Court governing the principles of classification in taxElegislation and held:

“24…The history of taxation is one of evolution as is the case inall human affairs. Its progress is one of constant growth anddevelopment in keeping with the advancing economic and socialconditions; and the fiscal intelligence of the State has beenFadvancing concomitantly, subjecting by new means and methodshitherto untaxed property, income, service and provisions totaxation. With the change of scientific, commercial and economicconditions and ways of life new species of property, both tangibleand intangible gaining enormous values have come into existenceand new means of reaching and subjecting the same to contributeGtowards public finance are being developed, perfected and putinto practical operation by the legislatures and courts of this country,of course within constitutional limitations.”

80. The Court held that the principle of equality does not precludethe classification of property, trade, profession and events for taxation –subjecting one kind to one rate of taxation and another to a differentrate. The State may exempt certain classes of property from any taxationat all and impose different specific taxes upon different species which itseeks to regulate. The Court held:

“27. ”Perfect equality in taxation has been said time and again, tobe impossible and unattainable. Approximation to it is all that canbe had. Under any system of taxation, however, wisely andcarefully framed, a disproportionate share of the public burdenswould be thrown on certain kinds of property, because they arevisible and tangible, while others are of a nature to elude vigilance.It is only where statutes are passed which impose taxes on falseand unjust principle, or operate to produce gross inequality, so thatthey cannot be deemed in any just sense proportional in their effecton those who are to bear the public charges that courts can interposeand arrest the course of legislation by declaring such enactmentsvoid.” “Perfectly equal taxation”, it has been said, “will remain anunattainable good as long as laws and government and man areimperfect.” ‘Perfect uniformity and perfect equality of taxation’,in all the aspects in which the human mind can view it, is a baselessdream.”

81. Parliament while enacting the provisions of Section 54(3),legislated within the fold of the GST regime to prescribe a refund. Whiledoing so, it has confined the grant of refund in terms of the first provisoto Section 54(3) to the two categories which are governed by clauses (i)and (ii). A claim to refund is governed by statute. There is no constitutionalentitlement to seek a refund. Parliament has in clause (i) of the firstproviso allowed a refund of the unutilized ITC in the case of zero-ratedsupplies made without payment of tax. Under clause (ii) of the firstproviso, Parliament has envisaged a refund of unutilized ITC, where thecredit has accumulated on account of the rate of tax on inputs beinghigher than the rate of tax on output supplies. When there is neither aconstitutional guarantee nor a statutory entitlement to refund, thesubmission that goods and services must necessarily be treated at paron a matter of a refund of unutilized ITC cannot be accepted. Such aninterpretation, if carried to its logical conclusion would involve unforeseenconsequences, circumscribing the legislative discretion of Parliament to A

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Afashion the rate of tax, concessions and exemptions. If the judiciarywere to do so, it would run the risk of encroaching upon legislative choices,and on policy decisions which are the prerogative of the executive. Manyof the considerations which underlie these choices are based on complexbalances drawn between political, economic and social needs andaspirations and are a result of careful analysis of the data and informationBregarding the levy of taxes and their collection. That is precisely thereason why courts are averse to entering the area of policy matters onfiscal issues. We are therefore unable to accept the challenge to theconstitutional validity of Section 54(3).

G Rule 89(5)C

82. Rule 89(5) of the CGST Rules provides for the computationof the refund of ITC on account of an inverted duty structure. The rule,as it was originally enacted, provided for a refund of ITC paid both oninput goods and input services. Rules 89(5) was amended on 18 April2018 with prospective effect. On 13 June 2018, Rule 89(5) as amendedDwas substituted with retrospective effect from 1 July 2017. The effectof this amendment is that refund of unutilized ITC can only be availed oninput goods.

83. Section 164 of the CGST Act empowers the ‘government’(the expression ‘government’ being defined in Section 2(53) to mean theECentral Government) to make rules for carrying out the provisions ofthe Act on the recommendations of the GST Council. Sub-Section (3) ofSection 164 stipulates that that power to make rules shall include thepower to make rules with retrospective effect not earlier than the dateon which the provisions of the Act came into force. As a result of theFamendment of Rule 89(5), the formula which has been specified for therefund of ITC is as follows:

“Maximum Refund Amount = {(Turnover of inverted rated supplyof goods and services) x Net ITC ÷ Adjusted Total Turnover} –tax payable on such inverted rated supply of goods and services.

GExplanation- For the purposes of this sub-rule, the expressions- (a)Net ITC shall mean input tax credit availed on inputs duringthe relevant period other than the input tax credit availedfor which refund is claimed under sub-rules (4A) or (4B) orboth; and H

(b) Adjusted Total turnover shall have the same meaning asassigned to them in sub-rule (4).”

G.1 The validity of Rule 89(5) of CGST Rules in exercise ofthe rule-making power under Section 164 of the CGST Act

84. A preliminary submission which has been urged byMr V Sridharan, learned Senior Counsel is that the rule-making powerunder Section 164 of the CGST Act can only be used if specific authorityfor making the rule is granted by the particular section of the CGST Act.Elaborating on this submission, Mr V Sridharan has submitted that underthe CGST Act, various sections expressly employ the word “prescribed”to indicate that rules may be formulated by way of delegated legislationfor that particular section. As an instance, Mr Sridharan points out thatSection 9 provides that the manner in which tax is to be collected maybe ‘prescribed’; Section 16(1) provides for conditions and restrictionsfor availing ITC which may be ‘prescribed’ and Section 31(2) providesthat the time within which a person supplying a taxable service mustissue an invoice may be ‘prescribed’. These are examples where thestatute has expressly contemplated that rules would have to be framedto give effect to a specific provision. It is the submission of Mr Sridharanthat in the absence of such words in the text of the legislation, thegovernment cannot exercise its authority under Section 164 of the CGSTAct to frame rules for other sections. Thus, since Section 54(3) does notprovide any words which indicate that specific authority has been grantedfor framing rules, Rule 89(5) is (according to the submission) invalid.

85. We are unable to accept the above submission as it proceedson a misconception. Under Section 164(1), confers an express poweron the Central Government to make rules for carrying out the provisionsof the CGST Act on the recommendations of the GST Council. It maybe true that in certain specific statutory provisions, the Act recognizes,by using the expression ‘prescribes’, that rules may be framed for thatpurpose. But the converse cannot be assumed inferentially, by presumingthat in other areas, recourse to the rule making power cannot be taken.By its very nature, a statutory provision may not visualize everyeventuality which may arise in implementing the provisions of the Act.Hence it is open to the rule making authority to frame rules, so long asthey are consistent with the provisions of the parent enactment. Therules may interstitially fill-up gaps which are unattended in the mainlegislation or introduce provisions for implementing the legislation. So A

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Along as the authority which frames the rules has not transgressed aprovision of the statute, it cannot be deprived of its authority to exercisethe rule making power. The wide powers given under Section 164 of theCGST Act are only limited by the provisions of the Act itself, infurtherance of which a rule maybe framed. It is for this reason that thepowers under Section 164 are not restricted to only those sections whichBgrant specific authority to frame rules. If such a construction, as MrSridharan has hypothesised, were to be acceptable, it would render theprovisions of Section 164 otiose. Thus, we find that the absence of thewords “as may be prescribed” in Section 54(3) does not deprive the rulemaking authority to make rules for carrying out the provisions of theCAct.G.2 The vires of Rule 89(5) vis-à-vis Section 54(3) of theCGST Act

86. The next submission which has been urged by Mr V Sridharan,learned Senior Counsel is that Rule 89(5) is not in line with SectionD54(3). The rule, as retrospectively amended, is asserted to be ultra viresSection 54(3) in as much as it restricts the computation of refund bytaking into account only the credit availed on input goods. Moreover,under Section 54(1), the CGST Rules can provide only the form andmanner in which an application for refund can be made and the substantiveEprovisions of the CGST Act cannot, it is urged, be curtailed by making acontrary rule. The above submission which seeks to apply the doctrineof ultra vires is based on the hypothesis that the rule is not in line withSection 54(3). The submission, in other words, is based on the assumptionthat Section 54(3) allows for a refund of unutilized ITC as a result of aninverted duty structure due to input goods as well as input services.F

87. The second limb of Mr Sridharan’s submission is that anyrules framed under Section 164 of the CGST Act must be for “carryingout the provisions of the Act”. According to the submission, Section54(3) provides for entitlement to refund of unutilized ITC, its quantumand for cases in which refund is to be granted. This is a complete codeGwhich does not require any rules for its operations and there is noreference in Section 54(3) enabling the Government to frame rules inthis regard. Hence, the exercise of the rule making power is urged to beunnecessary and unwarranted.

88. The rule-making power under Section 164(1) of the CGSTAct may be exercised in numerous situations. As we have already noticedearlier in this judgment accumulation of credit may occur due to a varietyof reasons including the absence of outwards supplies in a tax period,making supplies at a loss including by discount or predatory pricing, bulkpurchase of inputs, large opening balance of credit or change in the rateof tax during the tax period. A rule providing for identifying unutilizedITC which is attributable to supplies having an inverted duty structureand bifurcating it from credit which has accumulated due to other causeswould be a rule required for carrying out the provisions of the Act. Asecond instance to illustrate the same point is that a rule may provide aproportionate formula for determining the pro rata amount of ITC relatableto the inverted duty structure vis-à-vis the total turnover. Such a formulais necessary where the assessee is engaged in outward supplies involvingan inverted duty structure as well as those not involving an inverted dutystructure. In fact, Mr Sridharan in his submissions also accepts thatsuch a formula would be a rule made for carrying out provisions of theAct. The third illustration in the link is with reference to exports. Underthe CGST Act, ITC relatable to exports (which are zero-rated supplies)has to be refunded. The assessee may have both domestic sales as wellas exports in which event there is a need for a proportionate formula.Rule 89(4) provides a formula for refund of ITC to cover a situation inwhich zero-rated supplies of goods or services or both has been donewithout payment of tax under bond or letter of undertaking in accordancewith Section 16(3) of the IGST Act.

89. Mr Sridharan, while arguing that Section 54(3) is a completecode in itself and does not warrant a rule to further the provisions of theAct, fairly concedes in his written note that a formula maybe requiredfor bifurcating the accumulated ITC for the purpose of refund. Accordingto the illustration which has been furnished by Mr Sridharan in his writtennote, where an assessee has supplies which fall under an inverted dutystructure and supplies which do not, a refund of unutilized ITC can beavailed of only related to the former but not the latter. A formula wouldbe required to compute the ITC attributable to the two categories so thata refund is granted to the former and not the latter. Rule 89(5) estimatesthe refund attributable to the inverted duty structure by adopting aproportionate turnover basis, that is by dividing the turnover of invertedduty structure supplies by the adjusted total turnover and multiplying it AB

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Awith the ‘Net ITC’. The submission proceeds to concede that the needand rationale for the formula contained in Rule 89(5) in considering theturnover of supplies relating to inverted duty structure vis-à-vis overallturnover is “understandable and reasonable”.

90. The grievance however is that Rule 89(5) goes beyond theB“provisions of the Act” when in the garb of fixing a formula, it restrictsthe refund of ITC to input goods by denying ITC of input services. Thisis done by defining ‘Net ITC’ to mean ITC availed of inputs. Thegravamen of the challenge is that this consequently ignores ITC relatableto input services. In other words, the submission is that Rule 89(5) cannotbe construed to be a rule for carrying out the “provisions of the Act”.C

91. Mr V Sridharan has also submitted that in case a rule restrictsthe purpose of the legislation, it can be struck down if it is ultra vires theprincipal statute. This is because despite a provision for laying rulesbefore a House of Parliament, subjecting them to the procedure formodification and annulment, a rule can never be equated with the processDof legislation since in particular the rule lacks the assent of the Presidentor the Governor as the case may be. In support of his submission, he hasrelied on the decision of a Constitution Bench in Kerala State ElectricityBoard v. Indian Alluvium Co. Ltd.[49]and the decision in Bharat HariSinghania v. Commissioner of Wealth Tax (Central)[50] rendered byEa three judge Bench.

92. The second limb of the line of challenge is that even thoughthe rules are required to be recommended by the GST Council this willnot elevate them to the status of a law enacted by the legislature. Thesubmission which has been urged by Mr V Sridharan proceeds on anFunderlying assumption which is that Rule 89(5) by restricting the definitionof Net ITC to mean ITC availed on input goods is an affront to Section54(3). It is on this foundation, that it has been urged that a rule which iscontrary to the statute cannot be saved merely on the ground that either(i) the rule has been laid before Parliament and is subject to its power ofmodification annulment or amendment; or (ii) the rule was made on theGrecommendations of the GST Council. The application of the secondlayer of the argument does not arise in the present case for the simplereason that Rule 89(5) in defining Net ITC to mean “input tax creditavailed on inputs” does not transgress the statutory restriction which is 49 (1976) 1 SCC 466H50 (1994) Supp 3 SCC 46

49 (1976) 1 SCC 466H50 (1994) Supp 3 SCC 46

contained in proviso (ii) of Section 54(3). The challenge to Rule 89(5) asa piece of delegated legislation on the ground that it is ultra vires Clause(ii) of the first proviso to Section 54(3) is therefore lacking in substance.As reasoned in the earlier part of this judgment, Clause (ii) of the firstproviso is not merely a condition of eligibility for availing of a refund buta substantive restriction under which a refund of unutilized ITC can beavailed of only when the accumulation is relatable to an inverted dutystructure, namely the tax on input goods being higher than the rate of taxon output supplies. There is therefore no disharmony between Rule 89(5)on the one hand and Section 54(3) particularly Clause (ii) of its firstproviso on the other hand.

93. For the sake of clarity, it is necessary to reproduce para 24.6and para 24.7 of the written submissions of Mr V Sridharan:

“24.5 Similarly, this… court has in several cases extended thebenefit of exemption/ lower rate in case where such denial to aparticular case was ultra vires or unconstitutional, thereby enlargingthe scope of beneficial provision.

24.6 In the present case, challenge to the vires of Rule 89(5) isonly because of definition of Net ITC in Explanation to the saidrule which defines “Net ITC” as under:

“Net ITC” shall mean input tax credit availed on inputs during therelevant period other than the input tax credit availed for whichrefund is claimed under sub-rules (4A) or (4B) or both”

94. Mr Sridharan urges that the words ‘inputs’ in Explanation (a)to Rule 89(5) be struck down as being severable to bring it “entirely inline with the main provision”. We are unable to accept this submission.Explanation (a) to Rule 89(5) in defining ‘Net ITC’ to mean ITC availedon inputs (goods) is, as a matter of fact, entirely in line with the mainprovision, Section 54(3). On the contrary, to accept the submission ofMr Sridharan, would expand the ambit of Rule 89(5) beyond the termsgoverning the admissibility of a refund under Section 54(3) and would behence impermissible.

G.3 The validity of the formula prescribed in Rule 89(5)

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Athe formula prescribed in Rule 89(5) which seeks to grant refund of theITC accumulated on account of input goods, is inherently flawed andwill lead to anomalous results. The alternative submission is made on theassumption that Section 54(3)(ii) read with Rule 89(5) is restricted torefund of ITC accumulated on account of input goods only, and not inputservices.B

96. Mr G Natarajan, learned Counsel appearing on behalf of theintervenor, has submitted that as it was originally framed, ‘Net ITC’ inRule 89(5) allowed for a refund on account of an inverted duty structureboth for input goods and input services. The position was amended initiallyon 18 April 2018 with prospective effect and thereafter on 13 June 2018Cwith retrospective effect on 1 July 2017. The formula prescribed in Rule89(5) seeks to identify the quantum of ITC availed on input goodsattributable to the outward supplies having an inverted rate structure.From such quantum of ITC on input goods, the tax payable by the supplieron such inverted rated supplies of goods and services is reduced to arriveDat the quantum of credit accumulating on account of inverted ratestructure, which is eligible for refund. The submission of Mr Natarajanis that in the formula prescribed under Rule 89(5), while reducing “taxpayable on such inverted rated supplies of goods or services”, the tax-payer should first be allowed to utilize the ITC availed on input serviceswhich is otherwise not eligible for refund. If the formula prescribed underERule 89(5) is not construed in the above manner, it is alleged that it willlead to inequality between taxpayers dealing with outward suppliesinvolving only an inverted rate structure (single line of goods) andtaxpayers dealing with outward supplies having both an inverted ratestructure and those not having inverted rate structure. Thus, it has beenFsubmitted that the Court should read down the formula prescribed inRule 89(5) to the effect that while calculating the refund entitlement asthe difference between Net ITC and tax payable on such supplies havinginverted rate structure, it is presumed that the ITC accumulated onaccount of input services be allowed to be used for payment of taxpayable on inverted goods and services, and the remaining balance ofGtax, which is paid out of accumulated ITC on account of input goods, isdeducted from Net ITC in the formula.

97. Mr G Natarajan’s submission indicates an aberration wherea registered person with a single product with an inverted duty structureis neither able to use the unutilized ITC for the payment of tax on outputH

supply nor is allowed a refund. On the other hand, a registered personwith products involving an inverted duty structure and otherwise, is in aposition to utilise the ITC availed on input services for payment of tax onturnover not having an inverted rate structure. Mr G Natarajan has giventhe following example:

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98. The submission of Mr Natarajan has also been supported byMr V Sridharan in rebuttal. The formula in Rule 89(5) is reproducedbelow:

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{(Turnover of inverted rated supply of goods and services) x NetITC ÷ Adjusted Total Turnover} ? tax payable on such invertedGrated supply of goods and services”

99. Mr V Sridharan has urged that the second leg of the formula,that is, “tax payable on such inverted rated supply of goods and services”

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Atakes into account the entire tax payable on output supplies. In reality,the tax payable on output supplies would have been discharged by utilisingthe ITC on input goods and input services. However, the formula underRule 89(5) presumes that nothing has been utilised from the ITC oninput services and the entire tax on output supplies is discharged byutilising ITC on input goods. It was urged that although the statedBobjective of the formula is to grant refund of unutilised ITC accumulatedon account of input goods, by deducting the entire sum of tax payable onoutput supplies, the quantum of such refund is reduced and the cascadingeffect of taxes is maximised. As a solution to the said anomaly, MrSridharan has proposed that for the purposes of Rule 89(5), an assumptionCmust be made that ITC accumulated on account of input services, whichis not refundable under Section 54(3), is used for discharging the outputtax payable on inverted rate supply of goods and services. The remainingbalance of output tax, must be then presumed to have been dischargedfrom the ITC accumulated on account of input goods and it is only thisremaining balance that should be deducted from the formula to calculateDthe refund. In other words, Mr Natarajan and Mr Sridharan propose anorder of utilisation in the formula by which the ITC accumulated onaccount of input services is used first for discharging the tax liability andonly then is the ITC accumulated on account of input goods used. Duringthe course of his submissions, Mr Sridharan has relied on the decision ofEthis Court in Commissioner of Income Tax, Coimbatore v. LakshmiMachine Works[51] and has urged before us to adopt a purposeful andschematic interpretation to the formula which will make it comparableand workable.

100. Mr Sujit Ghosh has urged before us that the formula in Rule F89(5) creates a distinction between suppliers of services having a highercomponent of input goods than input services as against suppliers ofservices having a higher component of input services than input goods.In his submissions, Rule 89(5) would favour the former as they would beentitled to a larger quantum of refund on account of more use of inputgoods.G

101. In response to these submissions, Mr N Venkataraman,learned ASG, has conceded that certain inadequacies might exist in theformula. However, he has sought to justify the need for a formula inRule 89(5). The ASG has submitted that under the scheme of the CGST

H51 (2007) 11 SCC 126

Act, the accumulated ITC arising out of input goods and input servicesis booked into the electronic credit ledger and is to be utilised thereafterfor payment of tax on outward supplies on goods and services inaccordance with Section 49 of the CGST Act. Once payments are madefrom the electronic ledger, the remaining quantum of unutilised ITCbecomes one homogenous nucleus and it is impossible to attribute theunutilised ITC to its source, that is, it cannot be identified whether thebalance unutilised ITC is arising from input goods or input services. Inorder to bifurcate the unutilised ITC into input goods and input servicesfor the purpose of granting refund in accordance with Section 54(3)(ii)on ITC on inputs, Rule 89(5)3 has resorted to prescribing a formula tolegally dissect the unutilised ITC. The learned ASG has urged that theprescription of formulae to artificially determine refund or utilisation is acommon practice in the field of taxation and was used prior to theenactment of the CGST Act in MODVAT/CENVAT Rules fordetermining quantum of eligibility of credit. Another instance is Rule 42and 43 of the CGST Rules 2017 which provide specific formulae inrestricting the ITC when a registered supplier uses input goods, inputservices and capital goods for purpose of business and other than businesspurposes.

102. The ASG, having justified the need for a formula, has thenargued that a formula prescribed by delegated legislation may not beperfect and may have certain aberrations. However, a wide discretion isgiven to the policy makers in this regard and only if the formula is arbitraryand violative of Article 14 of the Constitution, can it be struck down. Forthis, the ASG has relied on the decision of a Constitution Bench of thisCourt in RK Garg v. Union of India[52], where it was observed thateconomic legislation ought not to be measured by abstract symmetry,since it is essentially empirical in nature and is based on experimentation.We note however, that the ASG has not refuted the anomalies point outby the Counsel for the assessees.

103. In our view, the justification of the formula under Rule 89(5)given by the ASG to create a legal bifurcation is valid. In this context, itwould be material to advert to the provisions of Rule 42. Rule 42(1)provides that the ITC in respect of input goods or input services whichattract the provisions of sub-Section (1) or sub-Section (2) of Section 17being partly used for the purpose of business and partly for other purposes AB

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Aor partly used for affecting taxable supplies including zero rated suppliesand partly for effecting exempts supplies shall be attributed for thepurposes of business or for effecting taxable supplies in the mannerwhich is indicated in the Rule. Sub-Section (1) of Section 17 providesthat where the goods and services or both are used by a registeredperson partly for the purposes of any business and partly for any otherBpurpose, the amount of credit shall be restricted to so much of the inputtax as is attributable to the purpose of its business. Sub-Section (2) ofSection 17 provides that where the goods or services or both are usedby a registered person partly for effecting taxable supplies includingzero rated supplies under the CGST Act or under the IGST Act andCpartly for effecting exempt supplies the amount of credit shall be restrictedto so much of the input tax as is attributable to the taxable suppliesincluding zero rated supplies. Rule 42, in other words, provides for themanner in which the attributions of ITC in respect of the input or inputservices under sub-Sections (1) or (2) of Section 17 shall be carried out.Rule 43 similarly provides the manner in which ITC in respect of capitalDgoods attracting the provisions of sub-Section (1) of Section 17, usedpartly for business and partly for other purposes or partly for effectingtaxable supplies including zero rated supplies and partly for effectingexempt supplies would be attracted to the purpose of business or foreffecting taxable supplies. Both Rules 42 and 43 provide for a formulaEfor attribution. Rule 86 provides for the maintenance of an electroniccredit ledger. Rule 89(5) provides for a refund. In both sets of rule clusters,Rules 42 and 43 on the one hand and Rule 89(5) on the other hand, aformula is used for the purpose of attribution in a post assimilated scenario.The use of such formulae is a familiar terrain in fiscal legislation includingdelegated legislation under parent norms and is neither untoward norFultra vires.

104. We now turn to the submissions of the counsel for theassessees regarding the anomalies in the formula. In our view, thesubmission of Mr Sujit Ghosh, that the formula creates a distinctionbetween suppliers having a higher component of input goods than thoseGhaving a higher component of input services, and must be read downaccordingly, must be rejected. The purpose of the formula in Rule 89(5)is to give effect to Section 54(3)(ii) which makes a distinction betweeninput goods and input services for grant of refund. Once the principlebehind Section 54(3)(ii) of the CGST Act is upheld, the formula cannotHbe struck down merely for giving effect to the same.

105. The aberrations which have been pointed out by the MrSridharan and Mr G Natarajan certainly indicate that the formula is notperfect. The formula makes a presumption that the output tax payableon supplies has been entirely discharged from the ITC accumulated onaccount of input goods and there has been no utilisation of the ITC oninput services. While a similar formula is provided in Rule 89(4) withregard to zero rated supplies, in that case, the ‘Net ITC’ includes inputgoods and input services and thus, there is no imbalance between thedifferent components of the formula. The formula prescribed in Rule89(5) however, seeks to deduct the total output tax from only onecomponent of the ITC, namely ITC on input goods. This in our view is atodds with reality, where the ITC on both input goods and input servicesis accumulated in the electronic ledger and is then utilised for the paymentof output tax. In making such an assumption, the formula tilts the balancein favour of the Revenue by reducing the refund granted. We are equallycognizant of the fact that the proposed solution, that is prescribing anorder of utilisation of the ITC accumulated on input services and inputgoods, may tilt the balance entirely in favour of the assessee as thatwould make a contrary assumption that the output tax is discharged bythe ITC accumulated on account of input services entirely. Anotherpossible solution could be that the Rule itself provides for a statutoryassumption or a deeming fiction of utilisation of a certain percentage ofITC on input services towards the payment of output tax for the purposeof calculation of refund.

106. While we are alive to the anomalies of the formula, an anomalyper se cannot result in the invalidation of a fiscal rule which has beenframed in exercise of the power of delegated legislation. In RK Garg(supra), Justice P N Bhagwati (as the learned Chief Justice then was)speaking for the Constitution Bench underscored the importance of therationale for viewing laws relating to economic activities with greaterlatitude than laws touching civil rights. The Court held:

“8. Another rule of equal importance is that laws relating toeconomic activities should be viewed with greater latitude thanlaws touching civil rights such as freedom of speech, religion etc.It has been said by no less a person than Holmes, J., that thelegislature should be allowed some play in the joints, because ithas to deal with complex problems which do not admit of solutionthrough any doctrinaire or strait-jacket formula and this is AB

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particularly true in case of legislation dealing with economic matters,where, having regard to the nature of the problems required to bedealt with, greater play in the joints has to be allowed to thelegislature. The court should feel more inclined to give judicialdeference to legislative judgment in the field of economic regulationthan in other areas where fundamental human rights are involved.Nowhere has this admonition been more felicitously expressedthan in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)]where Frankfurter, J., said in his inimitable style:

“In the utilities, tax and economic regulation cases, there aregood reasons for judicial self-restraint if not judicial deferenceto legislative judgment. The legislature after all has theaffirmative responsibility. The courts have only the power todestroy, not to reconstruct. When these are added to thecomplexity of economic regulation, the uncertainty, the liabilityto error, the bewildering conflict of the experts, and the numberof times the judges have been overruled by events — self-limitation can be seen to be the path to judicial wisdom andinstitutional prestige and stability.”

The Court must always remember that “legislation is directed topractical problems, that the economic mechanism is highly sensitiveand complex, that many problems are singular and contingent, thatlaws are not abstract propositions and do not relate to abstractunits and are not to be measured by abstract symmetry”; “thatexact wisdom and nice adaption of remedy are not always possible”and that “judgment is largely a prophecy based on meagre anduninterpreted experience”. Every legislation particularly ineconomic matters is essentially empiric and it is based onexperimentation or what one may call trial and error methodand therefore it cannot provide for all possible situations oranticipate all possible abuses. There may be crudities andinequities in complicated experimental economic legislationbut on that account alone it cannot be struck down as invalid.The courts cannot, as pointed out by the United StatesSupreme Court in Secretary of Agriculture v. Central RoigRefining Company [94 L Ed 381 : 338 US 604 (1950)] beconverted into tribunals for relief from such crudities andinequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating thelegislation, because it is not possible for any legislature toanticipate as if by some divine prescience, distortions andabuses of its legislation which may be made by those subjectto its provisions and to provide against such distortions andabuses. Indeed, howsoever great may be the care bestowedon its framing, it is difficult to conceive of a legislation whichis not capable of being abused by perverted human ingenuity.The Court must therefore adjudge the constitutionality of suchlegislation by the generality of its provisions and not by its cruditiesor inequities or by the possibilities of abuse of any of its provisions.If any crudities, inequities or possibilities of abuse come to light,the legislature can always step in and enact suitable amendatorylegislation. That is the essence of pragmatic approach which mustguide and inspire the legislature in dealing with complex economicissues.” (emphasis supplied)

107. The dictum in RK Garg (supra) squarely applies to the presentcase in which the Government has exercised its powers of delegatedlegislation to frame a formula, which has certain inequities. However,these inequities are to be ironed out by the Government in the course ofthe application of the formula. We are affirmatively of the view that thisCourt should not in the exercise of the power of judicial review allowitself to become a one-time arbiter of any and every anomaly of a fiscalregime despite its meeting the jurisdictional framework for the validityof the legislation, including delegated legislation.

108. Mr Sridharan had also urged that the formula may be readdown as was done by this Court in Lakshmi Machine Works (supra).In this case, the Court was faced with a question of whether excise dutyand sales tax were to be included in the ‘total turnover’, which was adenominator in the formula prescribed under Section 80-HHC(3) of theIncome Tax Act 1961 for the purpose of arriving at the deduction fromprofits retained for export business. In order to arrive at the deduction,the formula apportioned business profits by the ratio of export turnoverto total turnover. Various amendments had been made by the legislatureto the formula in Section 80-HHC(3) to make the formula workable.The Court, speaking through Justice SH Kapadia (as the learned ChiefJustice then was), observed that A

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“21. According to The Law and Practice of Income Tax by Kangaand Palkhivala, the word “profits” in Section 28 should beunderstood in normal and proper sense. However, subject to specialrequirements of the income tax, profits have got to be assessedprovided they are real profits. Such profits have got to beascertained on ordinary principles of commercial trading andaccounting. However, the Income Tax Act has laid down certainrules to be applied in deciding how the tax should be assessed andeven if the result is to tax as profits what cannot be construed asprofits, still the requirements of the Income Tax Act must becomplied with. Where a deduction is necessary in order to ascertainthe profits and gains, such deductions should be allowed. Profitsshould be computed after deducting the expenses incurred forbusiness though such expenses may not be admissible expresslyunder the Act, unless such expenses are expressly disallowed bythe Act (see p. 455 of The Law and Practice of Income Tax byKanga and Palkhivala). Therefore, schematic interpretation formaking the formula in Section 80-HHC workable cannot be ruledout. Similarly, purposeful interpretation of Section 80-HHC whichhas undergone so many changes cannot be ruled out, particularly,when those legislative changes indicate that the legislature intendedto exclude items like commission and interest from deduction onthe ground that they did not possess any element of “turnover”even though commission and interest emanated from exports. Wehave to read the words “total turnover” in Section 80-HHC aspart of the formula which sought to segregate the “export profits”from the “business profits”. Therefore, we have to read the formulain entirety. In that formula the entire business profit is not givendeduction. It is the business profit which is proportionately reducedby the above fraction/ratio of export turnover ÷ total turnover whichconstitutes Section 80-HHC concession (deduction). Income inthe nature of “business profits” was, therefore, apportioned. Theabove formula fixed a ratio in which “business profits” underSection 28 of the Act had to be apportioned. Therefore, one has togive weightage not only to the words “total turnover” but also tothe words “export turnover”, “total export turnover” and “businessprofits”. That is the reason why we have quoted hereinabove extensively the illustration from the Direct Taxes (Income Tax)Ready Reckoner of the relevant word.”

109. The Court in Lakshmi Machine Works (supra) was dealingwith a question of interpretation, where the formula was silent on inclusionof sales tax or excise duty, in the definition of total turnover. Thus, aschematic interpretation was adopted to give effect to the intent of thelegislature.

110. In Commissioner of Income Tax v. HCL TechnologiesLimited[53], a two judge Bench of this Court considered whether, whilecalculating ‘export profit’ for the deduction under Section 10-A of theIncome Tax Act 1961, software development charges are to be excludedfrom the definition of ‘total turnover’. For calculating the export profit,the total profits of the business were apportioned by the ratio of exportturnover to total turnover. The issue was complicated as these chargeswere allowed to be deducted from export turnover, which was acomponent of the total turnover and the numerator in the formula.However, the Revenue had denied the deduction from the total turnover,the denominator. The Court interpreted and revised the formula asotherwise it would lead to undesirable results. In doing so, Justice RKAgrawal observed that “16. The respondent Company has claimed deduction under Section10-A as per certificates filed on Form 56-F. The respondent, whilecomputing the deduction, has taken the same figure of exportturnover as of total turnover. […]

17. In the above backdrop, we are of the opinion that the definitionof total turnover given under Sections 80-HHC and 80-HHE cannotbe adopted for the purpose of Section 10-A as the technicalmeaning of total turnover, which does not envisage the reductionof any expenses from the total amount, is to be taken intoconsideration for computing the deduction under Section 10-A.When the meaning is clear, there is no necessity of importing themeaning of total turnover from the other provisions. If a term isdefined under Section 2 of the IT Act, then the definition would beapplicable to all the provisions wherein the same term appears. As A

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[…]

22. In the instant case, if the deductions on freight,telecommunication and insurance attributable to theCdelivery of computer software under Section 10-A of the ITAct are allowed only in export turnover but not from thetotal turnover then, it would give rise to inadvertent,unlawful, meaningless and illogical result which would causegrave injustice to the respondent which could have neverDbeen the intention of the legislature.

23. Even in common parlance, when the object of the formula isto arrive at the profit from export business, expenses excludedfrom export turnover have to be excluded from total turnover also.Otherwise, any other interpretation makes the formula unworkableEand absurd. Hence, we are satisfied that such deduction shall beallowed from the total turnover in same proportion as well.

In Arun Kumar and Others v. Union of India[54], a challengeFwas raised to the validity of the Rule 3 of the Income Tax Rules 1962which amended the method of computing valuation of a ‘perquisite’(which includes rent free accommodation provided to an assessee bytheir employer) under Section 17(2) of the Income Tax Act 1961. Theappellants argued that the amended Rule did not provide the assesseewith the right to claim before the assessing officer that there was noG“concession” in the matter of rent with respect to the accommodationprovided and thus, Section 17(2) and Rule 3 were not applicable. Anargument was raised to “read down” the Rule by introducing the principle of audi alteram partem. Rejecting this argument, the Court, speakingthrough Justice CK Thakker, noted that “55. The doctrine of “reading down” is well known in the field ofconstitutional law. Colin Howard in his well-knownwork Australian Federal Constitutional Law states:

Reading down puts into operation the principle that so far as it isreasonably possible to do so, legislation should be construed asbeing within power. It has the practical effect that where an Act isexpressed in language of a generality which makes it capable, ifread literally, of applying to matters beyond the relevant legislativepower, the Court will construe it in a more limited sense so as tokeep it within power.”

The Court after reviewing the judicial precedents on this pointobserved:

“61. But it is equally well settled that if the provision of lawis explicitly clear, language unambiguous and interpretationleaves no room for more than one construction, it has to beread as it is. In that case, the provision of law has to betested on the touchstone of the relevant provisions of lawor of the Constitution and it is not open to a court to invokethe doctrine of “reading down” with a view to save thestatute from declaring it ultra vires by carrying it to the pointof “perverting the purposes of the statute.

[…]

65. As we have already indicated earlier, Rule 3 prior to itsamendment in 2001 was totally different. It dealt with the methodof calculation of concession keeping in view the concept of “fairrental value”. In the light of the principle and phraseology in Rule3, the rule-making authority provided an opportunity to the assesseeto satisfy the assessing officer that the rent sought to be recoveredfrom the employee could not be said to be “concession” as it was“fair rent”, “reasonable rent”, “market rent” or “standard rent’.When the rule is amended and the concept of “fair rental value”has been done away with and the only method which has been A

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Aadopted is to calculate the rent on the basis of population of thecity in question, it cannot be successfully contended that theintention of the rule-making authority was to afford an opportunityto the assessee to convince the assessing officer that the rentrecovered by the employer from his employee was not in the natureBof concession. Nor a court of law would, by interpretative process,grant such opportunity to the assessee so as to enable him toconvince the assessing officer that the rent fixed was not coveredby Section 17(2)(ii) of the Act and therefore was not a “perquisite”.We are, therefore, unable to accept the argument of Mr Salve andCallow import of the principles of natural justice in Rule 3.”

111. The above judicial precedents indicate that in the field oftaxation, this Court has only intervened to read down or interpret a formulaif the formula leads to absurd results or is unworkable. In the presentDcase however, the formula is not ambiguous in nature or unworkable,nor is it opposed to the intent of the legislature in granting limited refundon accumulation of unutilised ITC. It is merely the case that the practicaleffect of the formula might result in certain inequities. The reading downof the formula as proposed by Mr Natarjan and Mr Sridharan byEprescribing an order of utilisation would take this Court down the path ofrecrafting the formula and walk into the shoes of the executive or thelegislature, which is impermissible. Accordingly, we shall refrain fromreplacing the wisdom of the legislature or its delegate with our own insuch a case. However, given the anomalies pointed out by the assessees,Fwe strongly urge the GST Council to reconsider the formula and take apolicy decision regarding the same.

H Conclusion

112. Having devoted our attention to the submissions at the Bar,we have come to the conclusion that the judgment of the Madras HighGCourt needs to be affirmed by dismissing the appeals challenging thatverdict while the appeals against the judgment of the Gujarat High Courtby the Union of India should be allowed.

113. The Division Bench of the Gujarat High Court having examinedHthe 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 ITCaccumulated on account of input services, the delegate of the legislaturehad acted contrary to the provisions of sub-Section (3) of Section 54 ofthe CGST Act which provides for a claim of refund of any unutilizedITC. The Gujarat High Court noted the definition of ITC in Section2(62) and held that Rule 89(5) by restricting the refund only to inputgoods had acted ultra vires Section 54(3). The Division Bench of theMadras High Court on the other hand while delivering its judgment inTvl. Transtonnelstory Afcons Joint Venture (supra) declined to followthe view of the Gujarat High Court noting that the proviso to Section54(3) and, more significantly, its implications do not appear to have beentaken 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 affirmthe view of the Madras High Court and disapprove of the view of theGujarat High Court. We accordingly order and direct that:

(i) The appeals[55] filed by the Union of India against the judgmentof the Gujarat High Court dated 4 July 2020 in VKCFootsteps India Pvt. Ltd. (supra) and connected casesare allowed and the judgment shall be set aside;

(ii) The appeals[56] filed by the assessees against the judgmentof the Madras High Court in Tvl. TranstonnelstroyAfcons Joint Venture (supra) and connected cases dated21 September 2020 shall stand dismissed. As a consequence,the writ petition filed by the assessees shall also standdismissed. There shall no order as to costs; and 55 SLP (Civil) No 14801 of 2020; SLP (Civil) No 16003 of 2020; SLP (Civil) No 1340of 2021; SLP (Civil) No 16032 of 2020; SLP (Civil) No 677 of 2021; SLP (Civil) No1868 of 2021; SLP (Civil) No 2951 of 2021; SLP (Civil) No 2456 of 2021; SLP (Civil)No 2973 of 2021

56 SLP (Civil) No 589 of 2021; SLP (Civil) No 1418 of 2021; SLP (Civil) Nos 1742-1748 of 2021; SLP (Civil) Nos 1552-1557 of 2021; SLP (Civil) Nos 8008-8009 of2021

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282SUPREME COURT REPORTS[2021] 15 S.C.R.

A(iii)The observations in paragraphs 104 to 111 shall beconsidered by the GST Council to enable it to take aconsidered view in accordance with law.

114. Pending application(s), if any, stand disposed of.

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Appeals disposed of.

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