REFUND UNDER INVERTED DUTY STRUCTURE: SUPREME COURT UPHOLDS VALIDITY OF RULE 89(5) OF CGST RULES

REFUND UNDER INVERTED DUTY STRUCTURE: SUPREME COURT UPHOLDS THE VALIDITY OF RULE 89(5) OF CGST RULES

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE/ORIGINAL JURISDICTION

Union of India & Ors.
Vs. 
VKC Footsteps India Pvt Ltd.

Civil Appeal No 4810 of 2021 

Date  of judgement : September 13, 2021

HEADNOTE-

A division Bench of Supreme Court in the matter of Union of India v. VKC Footsteps India Pvt Ltd, has upheld the validity of Rule 89(5) of the CGST Rules, 2017 thereby disallowed the input services under inverted duty structure. Resultantly, the earlier decision made by the Madras High Court in the case of Transtonnelstroy Afcons Joint Venture V. Union of India disallowing the refund of input services has been affirmed by the Court. Appeals are disposed of. 

IMPORTANT PARAGRAPHS-

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 The rule, as it was originally enacted, provided for a refund of ITC paid both on input goods and input services.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

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

85. We are unable to accept the above submission as it proceeds on a misconception. Under Section 164(1), confers an express power on the Central Government to make rules for carrying out the provisions of the CGST Act on the recommendations of the GST Council. It may be true that in certain specific statutory provisions, the Act recognizes, by using the expression ‘prescribes’, that rules may be framed for that purpose. But the converse cannot be assumed inferentially, by presuming that in other areas, recourse to the rule making power cannot be taken. By its very nature, a statutory provision may not visualize every eventuality which may arise in implementing the provisions of the Act. Hence it is open to the rule making authority to frame rules, so long as they are consistent with the provisions of the parent enactment. The rules may interstitially fill-up gaps which are unattended in the main legislation or introduce provisions for implementing the legislation. So long as the authority which frames the rules has not transgressed a provision of the statute, it cannot be deprived of its authority to exercise the rule making power. The wide powers given under Section 164 of the CGST Act are only limited by the provisions of the Act itself, in furtherance of which a rule maybe framed. It is for this reason that the powers under Section 164 are not restricted to only those sections which grant specific authority to frame rules. If such a construction, as Mr Sridharan has hypothesised, were to be acceptable, it would render the provisions of Section 164 otiose. Thus, we find that the absence of the words “as may be prescribed” in Section 54(3) does not deprive the rule making authority to make rules for carrying out the provisions of the Act. 

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 High Court needs to be affirmed by dismissing the appeals challenging that verdict while the appeals against the judgment of the Gujarat High Court by the Union of India should be allowed. 

113. The Division Bench of the Gujarat High Court having examined the provisions of Section 54(3) and Rule 89(5) held that the latter was ultra vires. In its decision in VKC Footsteps India Pvt. Ltd. (supra), the Gujarat High Court held that by prescribing a formula in sub-Rule (5) of Rule 89 of the CGST Rules to execute refund of unutilized ITC accumulated on account of input services, the delegate of the legislature had acted contrary to the provisions of sub-Section (3) of Section 54 of the CGST Act which provides for a claim of refund of any unutilized ITC. The Gujarat High Court noted the definition of ITC in Section 2(62) and held that Rule 89(5) by restricting the refund only to input goods had acted ultra vires Section 54(3). The Division Bench of the Madras High Court on the other hand while delivering its judgment in Tvl. Transtonnelstory Afcons Joint Venture (supra) declined to follow the view of the Gujarat High Court noting that the proviso to Section 54(3) and, more significantly, its implications do not appear to have been taken into consideration in VKC Footsteps India Pvt. Ltd. (supra) except for a brief reference. Having considered this batch of appeals, and for the reasons which have been adduced in this judgment, we affirm the view of the Madras High Court and disapprove of the view of the Gujarat High Court. 

ORDER-

1. The appeals filed by the Union of India against the judgment of the Gujarat High Court dated 4 July 2020 in VKC
   Footsteps India Pvt. Ltd. (supra) and connected cases are allowed and the judgment shall be set aside;
2. The appeals filed by the assessees against the judgment of the Madras High Court in Tvl. Transtonnelstroy Afcons Joint Venture (supra) and connected cases dated 21 September 2020 shall stand dismissed. As a consequence, the writ petition filed by the assessees shall also stand dismissed. There shall no order as to costs; and
3. The observations in paragraphs 104 to 111 shall be considered by the GST Council to enable it to take a considered view in accordance with law.