• The Petitioners are contractors engaged in different businesses. They claimed to face the situation of inverted duty structure i.e. rate of tax on input goods (‘IG’) and/or input services (‘IS’) exceeded the rate of tax on output supplies (‘OS’). As a result, the Petitioners were unable to adjust the available input tax credit (‘ITC’) fully against the output tax payable on OS which led to accumulation of unutilized ITC
• The case of the Petitioners was that they are entitled to a refund of entire unutilised ITC, irrespective of whether such credit accumulated on account of procurement of IG and/or IS
• The GST office as well the Central Government, contended that refund of unutilized ITC is permissible only in respect of the quantum of credit accumulated due to the procurement of IG and the credit accumulation on account of procuring IS to be disregarded for refund purposes
• The concerned legal provisions are summarized below:

ü  Section 54(3) of the CGST Act 2017 [‘Section 54(3)’] provides for a registered person to claim refund of any unutilised ITC at the end of any tax period, provided that no refund of unutilised ITC shall be allowed in cases other than-

§  zero rated supplies made without payment of tax [Section 54(3)(i)]

§  where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on OS (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 [‘Section 54(3)(ii)’]

ü  Rule 89(5) of CGST Rules 2017 [‘Rule 89(5)’] (amended w.e.f. 13 June 2018) provides formula for the computation of refund of ITC on account of IDS. The formula contains the term ‘Net ITC’ which is defined therein as ITC availed on inputs (and not input services) during the relevant period

ü  Under section 2 of GST Act, ‘Inputs’ and ‘Input Services’ are defined; definition of ‘Inputs’ cover only goods and not services

• Following are the contentions made by the Petitioners:

ü  Section 54(3) enables a registered person to claim a refund of any unutilised ITC i.e., full refund of all unutilised ITC. But, the provisions of Rule 89(5) are not consistent with the same

ü  The word ‘inputs’ in Section 54(3)(ii) should be construed as per common parlance and would mean both IG and IS so as to uphold constitutional validity of the provision

ü  Such classification between IG and IS discriminates between persons and is arbitrary and invidious

• Constitutional validity of Section 54(3)(ii) as well as Rule 89(5) was challenged by the Petitioners

1. Whether Section 54(3)(ii) infringes Article 14 of the Constitution? Whether it is necessary to read the word ‘inputs’ in Section 54(3)(ii) as encompassing both goods and services so as to ensure that the said provision is not struck down?
2. Whether 54(3)(ii) merely stipulates the eligibility conditions for claiming a refund of the unutilised ITC or whether it also curtails the entitlement to refund of unutilised ITC from a particular source, namely, IG and excludes IS?
3. Whether Rule 89(5), as amended, is ultra vires Section 54(3)?
4. Whether the definition of the term Net ITC, as contained in Rule 89(5), is liable to be read as encompassing both IG and IS?

• Section 54(3)(ii) does not infringe Article 14 on the basis of the following conclusions made:

ü  It is a settled proposition of law that in the matter of taxation, the legislature has greater latitude or power to give effect to its policy. Simple example is the policy of taxing some goods and leaving others outside the net of taxation cannot be criticized as violative of Article 14 of the Constitution

ü  Under the GST laws, goods and services are treated similarly in certain respects but differently in other respects. The distinction between the treatment of goods and services is not completely eliminated in all respects. There are inherent differences between goods and services. Parliament has wide latitude regarding taxes and economic legislations which is recognised and affirmed by the Supreme Court. Such latitude includes the subject matter of classification, nature and character of refund, etc.

ü  Extension of the benefit of refund only to the unutilised ITC that accumulates on account of the rate of tax on IG and not due to IS, is a valid exercise of legislative power

ü  There is no necessity to either read down or hold Section 54(3)(ii) and Rule 89(5) as unconstitutional

• Section 54(3)(ii) curtails a refund claim to the unutilised ITC that accumulates only on account of the rate of tax on IG being higher than the rate of tax on OS. In other words, it qualifies and curtails not only the class of registered persons who are entitled to refund but also the imposes a source-based restriction on refund entitlement and, consequently, the quantum thereof. That’s the legislature policy which court is not inclined to intervene with
• Amended Rule 89(5), is in conformity with Section 54(3)(ii). Consequently, it is not necessary to interpret Rule 89(5) and, in particular, the definition of Net ITC therein so as to include the words IS