Net ITC Means 'Input Tax Credit' Availed On 'Inputs' And 'Input Services': Gujarat HC Reads Down Explanation (a) to Rule 89(5) Of CGST Rules [Read Judgment]

This was after the Court 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 held that the net Input Tax Credit (ITC) formula used for GST refund under the inverted tax structure can cover input services as well.

 As a result of the judgment, assessees will be eligible to claim a refund of input services in case of inverted duty structure.

A division bench comprising Justices J B Pardiwala and Bhargav D Karia gave the ruling in a batch of cases titled VKC Footsteps Pvt Ltd vs Union of India and others and connected cases.

The Court held :

"Explanation (a) to the Rule 89(5) is read down to the extent that Explanation (a) which defines "Net Input Tax Credit' means "input tax credit" only. The said explanation (a)of Rule 89(5) of the CGST Rules is held to be contrary to the provisions of Section 54(3) of the CGST Act. In fact the Net ITC should mean "input tax credit" availed on "inputs" and "input services" as defined under the Act".

Section 54(3) of CGST Act states :

(3) Subject to the provisions of sub-section (10), a registered person may claim a refund of any unutilized input tax credit at the end of any tax period: Provided that no refund of the unutilised 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 or services or both as may be notified by the Government on the recommendations of the Council:"

Rule 89(5) provides the formula as–

[(5) In the case of refund on account of inverted duty structure, a refund of the input tax credit shall be granted as per the following formula:-

Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} – tax payable on such an 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 inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both;  

The grievance of the petitioner was that only the "inputs" is referred to in explanation (a) to sub-rule 5 of Rule 89 of CGST Rules 2017 and therefore, "input tax credit" on "input services" are not eligible for calculation of the amount of refund by applying Rule 89(5). Thus, it results into violation of provision of sub-section 3 of Section 54 of the CGST Act, 2017, which entitles any registered person to claim refund of "any" unutilised input tax credit.

The Court applied the principle that a rule cannot be contrary to the provision of the parent statute.

The Court observed :

"From the conjoint reading of the provisions of Act and Rules, it appears that by prescribing the formula in Sub-rule 5 of Rule 89 of the CGGST Rules,2017 to exclude refund of tax paid on "input service" as part of the refund of unutilised input tax credit is contrary to 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". 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". Therefore, 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". Moreover, 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 as per amended Rule 89(5) of the CGST, Rules 2017".  

"In view of the above analysis of the provisions of the Act and Rules keeping in mind scheme and object of the CGST Act, the intent of the Government by framing the Rule restricting the statutory provision cannot be the intent of law as interpreted in the Circular No.79/53/2018- GST dated 31.12.2018 to deny the registered person refund of tax paid on "input services' as part of refund of unutilised input tax credit". 

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