Expression ‘input’ does not cover input goods & input services, observes Apex Court while upholding constitutional validity of Sec. 54(3)(ii) & Rule 89(5) of CGST Act & Rules, 2017

Read Judgment: Union of India vs. VKC Footsteps

Pankaj Bajpai

New Delhi, September 14, 2021: While stating that Section 54(3)(ii) of CGST Act, 2017 is not violative of Article 14 of the Constitution, the Supreme Court has ruled that reading the expression ‘input’ to cover input goods and input services would lead to recognizing an entitlement to refund, beyond what was contemplated by Parliament.  

The Division Bench of Justice D.Y Chandrachud and Justice M.R. Shah observed that when provisions of Section 54(3)(ii) are unambiguous and explicitly clear in nature, there is no requirement of bringing in any uniformity in its implementation by exercising powers u/s 168(1).

Absence of words ‘as may be prescribed’ u/s 54(3) does not deprive the rule making authority to make rules for carrying out the provisions of the Act, added the Bench.

The observation came pursuant to the dispute as to whether it is necessary to interpret Rule 89(5) of CGST Rules, 2017 and,in particular, the definition of Net ITC therein so as to include the words ‘input services’.

In addition, it was also disputed as to whether Section 54(3)(ii) is violative of Article 14 of the Constitution or Rule 89(5) is in conformity with Section 54(3)(ii), which came to be challenged by the Union of India (UoI) against the judgment of the Gujarat High Court in VKC Footsteps dated July 24, 2020.

The Division Bench observed that the Legislature has to draw the balance when it decides upon granting a refund of accumulated ITC which has remained unutilized. In doing so, Parliament while enacting sub-Section (3) of Section 54 has stipulated that no refund of unutilized ITC shall be allowed other than in the two specific situations envisaged in clauses (i) and (ii) of the first proviso.

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, added the Bench.

The Top Court highlighted that the clear intent of Parliament was to confine the 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 in which a refund can be granted is evident from the opening words of the first proviso which stipulates that “no refund of unutilized input tax credit shall be allowed in cases other than”.

The intent of Parliament is evident by the use of a double – negative format by employing the expression “no refund” as well as the expression “in cases other than”, added the Court.

Hence, the Top Court opined that with the clear language which has been adopted by Parliament while enacting the provisions of Section 54(3), the acceptance of the submission which has been urged on behalf of the assessee would involve a judicial re-writing of the provision which is impermissible in law.

Refund is a matter of a statutory prescription and the Parliament was within its legislative authority in determining whether refunds should be allowed of unutilized ITC tracing its origin both to input goods and input services or, as it has legislated, input goods alone, added the Court.

The Division Bench went on to reiterate that while recognizing an entitlement to refund, it is open to the legislature to define the circumstances in which a refund can be claimed. The proviso to Section 54(3) is not a condition of eligibility but a restriction which must govern the grant of refund u/s 54(3).

The Bench further highlighted that the precedents of this Court provide abundant justification for the fundamental principle that a discriminatory provision under tax legislation is not per se invalid.

A cause of invalidity arises where equals are treated as unequally and un-equals are treated as equals. Both under the Constitution and the CGST Act, goods and services and input goods and input services are not treated as one and the same and they are distinct species, added the Bench.

Refusing to accept the challenge to the constitutional validity of Section 54(3) of the Act, 2017, the Top Court observed that: “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”.

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, added the Court.

“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.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, were to be acceptable, it would render the provisions of Section 164 otiose”, observed the Division Bench.

The Apex Court noted that Clause (ii) of the first proviso is not merely a condition of eligibility for availing of a refund but a substantive restriction under which a refund of unutilized ITC can be availed of only when the accumulation is relatable to an inverted duty structure, namely the tax on input goods being higher than the rate of tax on output supplies.

There is, therefore, no disharmony between Rule 89(5) on the one hand and Section 54(3) particularly Clause (ii) of its first proviso on the other hand, added the Court.

The Top Court elaborated that Explanation (a) to Rule 89(5) in defining ‘Net ITC’ to mean ITC availed on inputs (goods) is, as a matter of fact, entirely in line with the main provision, Section 54(3).

The ASG had conceded that certain inadequacies might exist in the formula. The use of such formulae is a familiar terrain in fiscal legislation including delegated legislation under parent norms and is neither untoward nor ultra vires.

Therefore, an anomaly per se cannot result in the invalidation of a fiscal rule which has been framed in exercise of the power of delegated legislation. However, these inequities are to be ironed out by the Government in the course of the application of the formula, opined the Top Court while stating that this Court should not in the exercise of the power of judicial review allow itself to become a one-time arbiter of any and every anomaly of a fiscal regime despite its meeting the jurisdictional framework for the validity of the legislation, including delegated legislation.

In the present case however, the formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on accumulation of unutilized ITC. It is merely the case that the practical effect of the formula might result in certain inequities, noted the Top Court.

Therefore, the Apex Court concluded that reading down of the formula as proposed by prescribing an order of utilization would take this Court down the path of re-crafting the formula and walk into the shoes of the executive or the legislature, which is impermissible.

However, given the anomalies pointed out by the assessees, the Division Bench strongly urged the GST Council to reconsider the formula and take a policy decision regarding the same.