The Apex Court of India Held that No GST Refund of Input Services in cases where refund of unutilised Input tax credit arises on account of inverted duty structure.
Whether the term ‘net ITC’ defined in Rule 89(5) is ultra vires to law to the extent it excludes input tax credit on input services for the purpose of computation of refund of unutilized Input tax credit in case of inverted duty structure?
Section 54(3) of CGST Act provides for the refund of unutilized Input tax credit in cases involving:
I) Zero rated supplies made without payment of taxes
II) Credit accumulated on account of rate of tax on input being higher than rate of tax on output supplies.
Rule 89(5) of CGST Rules provides a formula for the refund of unutilized Input tax credit, in a case of refund on Account of inverted duty structure. The said formula uses the term ‘net ITC’ means input tax credit availed on inputs only NOT input tax credit availed on both input and input services.
“Explanation (a) to rule 89(5) which denies the refund of unutilized Input tax paid on input services as a part of ITC accumulated on Account of inverted duty structure is ultra vires the provision of Section-54(3) of CGST Act, 2017”
The crux of the dispute in the present case pertains to how sub-Section (3) to Section 54 and proviso to sub-Section (1) of Section 54 are to be understood and interpreted.
The first tier is the main provision of Section 54(3) which lays down four conditions:
The second tier is the first proviso. The first proviso begins with the expression “no refund of unutilized ITC shall be allowed in cases other than” which is followed by clauses (i) and (ii).
The third tier of sub-Section 54(3) consist of the two clauses of the first proviso which deal with two distinct cases:
Clause (i) deals with zero-rated supplies made without payment of tax, while
Clause (ii) deals with credit which has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies.
The accumulation for clause (ii) may be due to:
(a) an inverted duty structure when the GST on output supplies is less than the GST on inputs;
(b) stock accumulation;
(c) capital goods; and
(d) partial reverse mechanism for certain services.
There could be other reasons as well, such as excessive discounts or predatory pricing.
In view of the above, the intent of the legislature is to allow refund of unutilized ITC only in selected cases as mentioned in first proviso of Section-54(3) of CGST Act, while there may be many situations in which there may be accumulation of unutilized Input Tax Credit.
Similarly, the word ‘Inputs’ used in clause (ii) of first proviso of Section-54(3) of CGST Act and the same word used in defining the meaning of ‘Net ITC’ in clause (a) of sub rule 5 of Rule 89 of CGST Rules 2017 as against the meaning of ‘Net ITC’ in clause (B) of sub rule 4 of Rule 89 of CGST Rules 2017 where its meaning includes both ‘Inputs and Input Services’ as used for clause (i) of first proviso of Section-54(3) of CGST Act.
Therefore, the Apex Court accepted the decision of Madras HC on 21st September, 2020 in case of Tvi. Transtonnelstroy Adcons JV v Union of India and quashed the decision of Gujarat HC on 24th July, 2020 in VKC Footsteps India private limited v Union of India.
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