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 RefundSection 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 PetitionersThe 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 refundDivergent Views Of Gujarat and Madras High CourtsThe 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 ...

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

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