Refund For Unutilised Input Tax Credit Can't Be Claimed On Account Of Input Services: Supreme Court Upholds Validity Of Section 54(3) CGST Act

The Supreme Court held that Section 54(3) of the Central Goods and Services Act excludes unutilised input tax credit that accumulated on account of input services.

When there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted, the court observed while rejecting the challenge against Section 54(3) on the ground that it violates equality doctrine under Article 14 of the Constitution.

The bench of Justices DY Chandrachud and MR Shah set aside the Gujarat High Court judgment which held that Rule 89(5) of Central Goods and Service Tax Rules, 2017, by restricting the refund only to input goods, had acted ultra vires Section 54(3) of the CGST Act. It approved a Madras High Court judgment which upheld the Rule.

GST Act and Rules On Refund

Section 54 of the CGST Act provides for 'refund of tax'.

Sub-Section (3) reads: Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period

Proviso to this sub-section states that no refund of unutilized input tax credit shall be allowed in cases other than- (i) zero rated supplies made without payment of tax; (ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods and services or both may be notified by the Government on the recommendations of the Council.

There are two more provisos: Provided further that no refund of unutilized input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty ; Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.

Rule 89(5) provides a formula for the refund of Input Tax Credit, in "a case of refund on account of inverted duty structure" . Explanation (a) to this rule provides that Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under subrules 4(A) or (4B) or both.

Contention of Petitioners

The petitioners before the High Courts had contended that Section 54(3) allows for a refund of ITC originating in inputs as well as input services, Rule 89(5) is ultra vires in so far as it excludes tax on input services from the purview of the formula. They further contended that if Section 54(3) is interpreted as a restriction against a claim for refund of accumulated ITC by confining it only to tax on inputs, it would be unconstitutional as it would lead to discrimination between inputs and input services. According to them, clause (ii) of the first proviso prescribes acondition of eligibility and not a restriction on the entitlement to refund

Divergent Views Of Gujarat and Madras High Courts

The Gujarat High Court in VKC Footsteps India Pvt. Ltd. v. Union of India held that "Explanation (a) to Rule 89(5) which denies the refund of "unutilised input tax" paid on "input services" as part of "input tax credit" accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017. The court observed:

(1) The provisions of Sub-section 3 of Section 54 of the CGST Act,2017 which provides for claim of refund of "any unutilised input tax credit".

(2) The word "Input tax credit" is defined in Section 2(63) means the credit of input tax. The word "input tax" is defined in Section 2(62), whereas the word "input" is defined in Section 2(59) means any goods other than capital goods and "input service" as per Section 2(60) means any service used or intended to be used by a supplier. Whereas "input tax" as defined in section 2(62) means the tax charged on any supply of goods or services or both made to any registered person. Thus "input" and "input service" are both part of the "input tax" and "input tax credit".

(3) As per provision of sub-section 3 of Section 54 of the CGST Act,2017, the legislature has provided that registered person may claim refund of "any unutilised input tax", therefore, by way of Rule 89(5)of the CGST Rules,2017, such claim of the refund cannot be restricted only to "input" excluding the "input services" from the purview of "Input tax credit".

(4) Clause (ii) of proviso to Sub-section 3 of Section 54 also refers to both supply of goods or services and not only supply of goods 

In Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India, the Madras High Court dismissed the challenge and held that the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised input tax credit that accumulated on account of input services is a valid classification and a valid exercise of legislative power. 

(1) The definition of 'input' expressly excludes capital goods, whereas if the common parlance meaning is adopted, capital goods would be included and one would be drawing conclusions that are antithetical to the text.

(2) The immediate context, namely, Section 54 contains more than a few usages of the terms "inputs" and "input services" in other sub-sections. By way of illustration, reference may be made to Section 54(8)(a) which uses the words "inputs" and "input services" separately and distinctively in the context of refund of tax paid to exporters. Similarly, the Explanation to Section 54 uses the terms "inputs" and "input services" separately and distinctively, thereby indicating the legislative intent to distinguish one from the other.

(3) Rule 89(5) provides a formula for the refund of Input Tax Credit, in "a case of refund on account of inverted duty structure" .The revised formula inter alia excludes 'input services' from the scope of 'Net ITC' for computation of the refund amount under the said Rule. Rule 89(5) of the CGST Rules denies refund on the unutilised ITC availed on input services and allows relief of refund of ITC availed on input goods alone

Interpretation Of Inputs

The crux of the dispute in the present case pertained to how sub-Section (3) to Section 54 and Explanation 1 to sub-Section (1) of Section 54 are to be understood and interpreted, the court observed. 

The opening sentence of Section 54(3) provides for (i) a claim of refund by a registered person; (ii) of any unutilized input tax credit; (iii) at the end of any tax period. But the impact of the first proviso, as its opening words indicate, is that : 

1. "No refund" of unutilized ITC "shall be allowed" "in cases other than" (i) and (ii);
2. The expression "claim" in the substantive part must be distinguished from the phrase "shall be allowed" in the opening sentence of the first proviso. Likewise, the expression "may claim refund" in the opening part must be distinguished from "no refund" in the opening part of the first proviso;
3. The impact of the first proviso is that a refund of unutilized ITC shall be allowed only in cases falling under (i) and (ii). The expression 'only' in the previous sentence is not a judicial addition to statutory language but follows plainly from the expressions "no refund" of unutilized ITC shall be allowed "in cases other than";
4. The expression "in cases other than" is a clear indicator that clauses (i) and (ii) are restrictive and not conditions of eligibility. A refund, in other words, can be allowed in the two contingencies spelt out in clauses (i) and (ii) of the first proviso;
5. There is a clear distinction between clause (i) and clause (ii) of the first proviso: (a) in the case of exports, the contingency is zero-rated supplies without any distinction between input goods or input services; (b) in contrast for domestic supplies, clause (ii) relates to the accumulation of credit on account of rate of tax on inputs being higher than the rate of tax on output supplies;
6. The legislative draftsperson has made a clear distinction between clause (i) and clause (ii) of the first proviso and it was in this context that the opening words of Section 54(3) have used the expression "may claim refund of any unutilized ITC";
7.  Explanation 1 to Section 54, while defining the expression "refund" for the purposes of the section adopts an inclusive definition covering (a) refund of tax paid on zero rated supplies of goods or services or both; (b) refund of tax paid on input goods or inputs services used in making such zerorated supplies; (c) refund of tax on supply of goods regarded as deemed exports; and (d) refund of unutilized ITC as provided under sub-section(3) of Section 54; and
8. Explanation 1 indicates that with reference to exports, the legislature has brought within its fold ITC on input goods and input services. In contrast, in the case of domestic supplies it has contemplated refund of unutilized ITC "as provided under sub-section(3)". The Explanation is a clear indicator that in respect of domestic supplies, it is only unutilized credit which has accumulated on the rate of tax on input goods being higher than the rate of output supplies of which a refund can be allowed. Clause (ii) of the first proviso in other words is a restriction and not a mere condition of eligibility.

On challenge to the constitutional validity of Section 54(3)

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 first proviso to 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 constitutional entitlement to seek a refund.

Parliament has in clause (i) of the first proviso allowed a refund of the unutilized ITC in the case of zero-rated supplies made without payment of tax. Under clause (ii) of the first proviso, Parliament has envisaged a refund of unutilized ITC, where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies.

When there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted. Such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions. If the judiciary were to do so, it would run the risk of encroaching upon legislative choices, and on policy decisions which are the prerogative of the executive. Many of the considerations which underlie these choices are based on complex balances drawn between political, economic and social needs and aspirations and are a result of careful analysis of the data and information regarding the levy of taxes and their collection. That is precisely the reason why courts are averse to entering the area of policy matters on fiscal issues. We are therefore unable to accept the challenge to the constitutional validity of Section 54(3)

Expression 'input' can't be broadened to include 'services'

While the CGST Act defines the expression 'input' in Section 2(59) by bracketing it with goods other than capital goods, it is true that the plural expression 'inputs' has not been specifically defined. But there is no reason why the ordinary principle of construing the plural in the same plane as the singular should not be applied. To construe 'inputs' so as to include both input goods and input services would do violence to the provisions of Section 54(3) and would run 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 the assessee that in the process of construing Section 54(3) contextually, the Court should broaden the expression 'inputs' to cover both goods and services

Case: Union of India vs. VKC Footsteps India Pvt Ltd. ; CA 4810 of 2021
Citation: LL 2021 SC 446
Coram: Justices DY Chandrachud and MR Shah

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