Rule Whittling Down Input Taxes Refund Paid In Course Of Making A Zero-Rated Supply Is Ultra Vires: Karnataka High Court

The Karnataka High Court has an amendment to Rule 89(4) (C) of the CGST Rules by Notification 16/2020-CT dated 23.03.2020 is illegal, arbitrary, unreasonable, irrational, unfair, unjust, and ultra vires Section 16 of the IGST Act and Section 54 of the CGST Act.

The Bench of Justice S.R.Krishna Kumar has observed that Rule 89(4)(C) of the CGST Rules is ultra vires Section 54 of the CGST Act and Section 16 of the IGST Act. The very intention of the zero-rating is to make the entire supply chain of "exports" tax-free, i.e., to fully 'Zero-rate’ the exports by exempting them from both input tax and output tax. Section 16(3) of the IGST Act allows a refund of input taxes paid in the course of making a Zero-rated Supply, i.e., supplies that cover exports as well as supplies to SEZs. The rule in whittling down such refund is ultra vires in view of the well-settled principle of law that rules cannot override the parent legislation.

The High Court noted that Rule 89(4)(C) of the CGST Rules is ultra vires Article 269A read with Article 246A of the Constitution of India as the Parliament has no legislative competence to levy GST on the export of goods. There is no Neither in Article 246A nor in Article 269A is there a reference to the treatment of export of goods or services, while in Article 269A reference is made to the import of goods or services or both, particularly when referring to export of goods or services in Article 286 is only for the purpose of placing restrictions on the powers of the State Legislature.

The petitioner, M/s Tonbo Imaging India Pvt Ltd, is in the business of designing, developing, building, and deploying various types of advanced imaging and sensor systems to sense, understand and control complex environments.

The petitioner exported various customized or unique products during the period from May 2018 to March 2019. Since exports made by the petitioner are "zero-rated" under Section 16 of the Integrated Goods and Services Act, 2017 (IGST Act), the petitioner filed refund applications with the respondents on 25.05.2020, 27.05.2020 and 28.05.2020 and claimed refund of unutilized input tax credit read with Rule 89 of the CGST Rules.

Meanwhile, Rule 89(4)(C) of the CGST Rules has been amended w.e.f. 23.03.2020, Show Cause Notices were issued by the respondents on the ground that the petitioner had not given proof, which was required to be given in terms of the amended Rule 89(4)(C) of the CGST rules. Therefore, the refund claims were not considered.

The petitioner submitted that the amended Rule 89(4)(C) of the CGST Rules would not be applicable as the period for which the refund was being claimed (i.e., May 2018 to March 2019) was much prior to the amendment of rule 89(4)(C) (i.e., on 23.03.2020). Therefore, the petitioner would be governed by the old/un-amended Rule 89(4)(C) and not the amended rule 89(4)(C).

The petitioner submitted that Rule 89(4)(C) of the CGST Rules, as amended on 23.03.2020 is ultra vires and invalid and deserves to be declared unconstitutional and struck down. It was further submitted that the order was illegal, arbitrary, and without jurisdiction or authority of law and deserved to be quashed and the respondents be directed to accept/allow the subject refund claims of the petitioner and grant the refund of taxes along with interest in favor of the petitioner.

The petitioner contended that Rule 89(4)(C) of the CGST Rules also suffers from the vice of vagueness for the reason that the words "like goods" and "similarly placed supplier" in the impugned Rule 89(4)(C) are completely open-ended and are not defined anywhere in the CGST Act/Rules or the IGST Act/Rules. Considering the business of the petitioner, it is not possible to have any "like goods" and "same or similar placed supplier" for the unique and customized products being manufactured by the petitioner, and the preciseness of definitions as found in the customs legislation is missing.

The department contended that the petitioner has not submitted proof that the export turnover mentioned in the claim is 1.5 times the value of goods domestically supplied by the same or similarly placed supplier. Hence, zero-rated turnover declared by the petitioner cannot be accepted for the purpose of calculating of eligible refund amount.

The court held that the offending words, "or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier" appearing in Rule 89(4C) of the Central Goods and Services Tax Rules, 2017 as amended vide Para 8 of the Notification No.16/2020-Central Tax(F.No.CBEC- 20/06/04/2020-GST) dated 23.03.2020 is declared ultra vires the provisions of the Central Goods and Services Tax Act, 2017 and the Integrated Goods and Services Tax Act, 2017 as also violative of Articles 14 and 19 of the Constitution of India.

Case Title: M/S Tonbo Imaging India Pvt Ltd Versus Union Of India

Case No: Writ Petition No. 13185 Of 2020 (T-Res)

Citation: 2023 LiveLaw (Kar) 134

Date: 16.02.2023

Counsel For Petitioner: V. Raghuraman

Counsel For Respondent: Vanitha.K.R

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