# UNION OF INDIA & ORS v. VKC FOOTSTEPS INDIA PVT LTD

- **Citation:** [2021] 15 S.C.R. 169
- **Court:** Supreme Court of India
- **Decided:** 2021-09-13
- **Case number:** Civil Appeal No. 4810 of 2021
- **Bench:** Dr Dhananjaya Y. Chandrachud, M. R. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-ors-v-vkc-footsteps-india-pvt-ltd-35375
- **Pages:** 114

## Headnote

Central Goods and Services Tax Act, 2017 - ss. 54(3) and
s.164 - Central Goods and Services Tax Rules, 2017 - r.89(5) -
Writ petitions were filed in the High Court of Gujarat and High
Court of Madras, challenging the validity of r.89(5) on the ground
that it is ultra vires s.54(3) - The High Court of Gujarat in VKC
Footsteps India Pvt. Ltd. v. Union of India (R/Special Civil
Application No.2792 of 2019) having examined the provisions of
s.54(3) and r.89(5) held that latter was ultra vires - However, the
Madras High Court in Tvl. Transtonnelstroy Afcons Joint Venture v.
Union of India (Writ Petition Nos. 8596-97, 8602 etc. of 2019) came
to a contrary conclusion - On appeal, held: Clause (ii) of the first
proviso to s.54(3) 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 - Therefore,
there is no disharmony between r.89(5) on one hand and s.54(3)
particularly clause (ii) of its first proviso on the other hand - The
decision passed by the Madras High Court is affirmed.
Central Goods and Services Tax Act, 2017 - s.54(3) - Central
Goods and Services Tax Rules, 2017 - r.89(5) - Claim of refund -
Constitutional right or not - Held: Refund is a matter of a statutory
prescription - Parliament was within its legislative authority in
determining whether refunds should be allowed of unutilised ITC
tracing its origin both to input goods and input services or, as it has
legislated, input goods alone - By its clear stipulation that a refund
would be admissible only where the unutilised ITC has accumulated
on account of the rate of tax on inputs being higher than the rate of
tax on output supplies, Parliament has confined the refund - While
[2021] 15 S.C.R. 169
169
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[2021] 15 S.C.R.
recognising an entitlement to refund, it is open to the legislature to
define the circumstances in which a refund can be claimed - The
proviso to s.54(3) is not a condition of eligibility but a restriction
which must govern the grant of refund u/s. 54(3).
Central Goods and Services Tax Rules, 2017 - r.89(5) -
Validity of formula prescribed in r.89(5) - Held: The formula is not
ambiguous in nature or unworkable, nor it is 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 - Given the anomalies
pointed out by the assesses, GST Council to reconsider the formula
and take policy decision regarding the same.
Disposing of the appeals, the Court
HELD: Construing the Proviso
1. Sub-Section (3) of Section 54 begins, in its main part,
with the stipulation that a registered person may claim refund of
any 'unutilised ITC at the end of any tax period'. Whether we
construe the first proviso as an exception or in the nature of a
fresh enactment, 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 unutilised input tax credit shall be allowed in cases other
than". What follows is clauses (i) and (ii). 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". In other words, a refund is contemplated in the
situations provided in clauses (i) and (ii) and no other. To put it
differently, the first proviso can be recast, without altering its
meaning to read that a refund of unutilised ITC shall be allowed
only in the cases governed by clauses (i) and (ii). Clause (i) dea

## Text

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UNION OF INDIA & ORS.
v.
VKC FOOTSTEPS INDIA PVT LTD.
(Civil Appeal No. 4810 of 2021)
SEPTEMBER 13, 2021
[DR DHANANJAYA Y. CHANDRACHUD AND
M. R. SHAH, JJ.]
Central Goods and Services Tax Act, 2017 - ss. 54(3) and
s.164 - Central Goods and Services Tax Rules, 2017 - r.89(5) -
Writ petitions were filed in the High Court of Gujarat and High
Court of Madras, challenging the validity of r.89(5) on the ground
that it is ultra vires s.54(3) - The High Court of Gujarat in VKC
Footsteps India Pvt. Ltd. v. Union of India (R/Special Civil
Application No.2792 of 2019) having examined the provisions of
s.54(3) and r.89(5) held that latter was ultra vires - However, the
Madras High Court in Tvl. Transtonnelstroy Afcons Joint Venture v.
Union of India (Writ Petition Nos. 8596-97, 8602 etc. of 2019) came
to a contrary conclusion - On appeal, held: Clause (ii) of the first
proviso to s.54(3) 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 - Therefore,
there is no disharmony between r.89(5) on one hand and s.54(3)
particularly clause (ii) of its first proviso on the other hand - The
decision passed by the Madras High Court is affirmed.
Central Goods and Services Tax Act, 2017 - s.54(3) - Central
Goods and Services Tax Rules, 2017 - r.89(5) - Claim of refund -
Constitutional right or not - Held: Refund is a matter of a statutory
prescription - Parliament was within its legislative authority in
determining whether refunds should be allowed of unutilised ITC
tracing its origin both to input goods and input services or, as it has
legislated, input goods alone - By its clear stipulation that a refund
would be admissible only where the unutilised ITC has accumulated
on account of the rate of tax on inputs being higher than the rate of
tax on output supplies, Parliament has confined the refund - While
[2021] 15 S.C.R. 169
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recognising an entitlement to refund, it is open to the legislature to
define the circumstances in which a refund can be claimed - The
proviso to s.54(3) is not a condition of eligibility but a restriction
which must govern the grant of refund u/s. 54(3).
Central Goods and Services Tax Rules, 2017 - r.89(5) -
Validity of formula prescribed in r.89(5) - Held: The formula is not
ambiguous in nature or unworkable, nor it is 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 - Given the anomalies
pointed out by the assesses, GST Council to reconsider the formula
and take policy decision regarding the same.
Disposing of the appeals, the Court
HELD: Construing the Proviso
1. Sub-Section (3) of Section 54 begins, in its main part,
with the stipulation that a registered person may claim refund of
any 'unutilised ITC at the end of any tax period'. Whether we
construe the first proviso as an exception or in the nature of a
fresh enactment, 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 unutilised input tax credit shall be allowed in cases other
than". What follows is clauses (i) and (ii). 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". In other words, a refund is contemplated in the
situations provided in clauses (i) and (ii) and no other. To put it
differently, the first proviso can be recast, without altering its
meaning to read that a refund of unutilised ITC shall be allowed
only in the cases governed by clauses (i) and (ii). Clause (i) deals
with zero rated supplies without payment of tax. Explanation-1 to
Section 54 clarifies that the expression 'refund' includes refund
of tax paid on zero rated supplies on goods or services or both,
or on inputs or input services used in making such zero-rated
supplies. On the other hand, in the case of deemed exports,
Explanation-1 refers to a refund of tax on the supply of goods.
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Likewise in regard to domestic supplies, governed by clause (ii)
of the first proviso, the expression 'refund' means refund of
unutilised ITC as provided under sub-Section (3). 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.
Clause (ii) of the proviso, when it refers to "on account of" clearly
intends the meaning which can ordinarily be said to imply 'because
of or due to'. When proviso (ii) refers to "rate of tax", it indicates
a clear intent that a refund would be allowed where and only if the
inverted duty structure has arisen due to the rate of tax on input
being higher than the rate of tax on output supplies. Reading the
expression 'input' to cover input goods and input services would
lead to recognising an entitlement to refund, beyond what was
contemplated by Parliament. [Para 69][253-G-H; 254-A-F]
2. This Court must be cognizant of the fact that no
constitutional right is being asserted to claim a refund, as there
cannot be. Refund is a matter of a statutory prescription.
Parliament was within its legislative authority in determining
whether refunds should be allowed of unutilised ITC tracing its
origin both to input goods and input services or, as it has
legislated, input goods alone. By its clear stipulation that a refund
would be admissible only where the unutilised ITC has
accumulated on account of the rate of tax on inputs being higher
than the rate of tax on output supplies, Parliament has confined
the refund in the manner which we have described above. While
recognising 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 (as
the assessees' Counsel submitted) but a restriction which must
govern the grant of refund under Section 54(3). [Para 70][254-GH; 255-A-B]
Constitutional Validity of s.54(3)
2. Parliament while enacting the provisions of Section 54(3),
legislated within the fold of the GST regime to prescribe a refund.
While doing so, it has confined the grant of refund in terms of the
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first proviso to Section 54(3) to the two categories which are
governed by clauses (i) and (ii). A claim to refund is governed by
statute. There is no constitutional entitlement to seek a refund.
Parliament has in clause (i) of the first proviso allowed a refund
of the unutilized ITC in the case of zero-rated supplies made
without payment of tax. Under clause (ii) of the first proviso,
Parliament has envisaged a refund of unutilized ITC, where the
credit has accumulated on account of the rate of tax on inputs
being higher than the rate of tax on output supplies. 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. Many of the considerations which underlie these
choices are based on complex balances drawn between political,
economic and social needs and aspirations and are a result of
careful analysis of the data and information regarding the levy of
taxes and their collection. That is precisely the reason why courts
are averse to entering the area of policy matters on fiscal issues.
This Court is therefore unable to accept the challenge to the
constitutional validity of Section 54(3). [Para 81][261-E-H; 262A-B]
Validity of Rule 89(5) of CGST Rules in exercise of the
rule making power u/s.164 of the CGST Act
3. Under Section 164(1), confers an express power on the
Central Government to make rules for carrying out the provisions
of the CGST Act on the recommendations of the GST Council. 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. By its very nature, a statutory
provision may not visualize every eventuality which may arise in
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implementing the provisions of the Act. Hence it is open to the
rule making authority to frame rules, so long as they are consistent
with the provisions of the parent enactment. 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. The wide
powers given under Section 164 of the CGST Act are only limited
by the provisions of the Act itself, in furtherance of which a rule
maybe framed. 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, as assessee has
hypothesised, were to be acceptable, it would render the
provisions of Section 164 otiose. Thus, this Court finds that the
absence of the words "as may be prescribed" in Section 54(3)
does not deprive the rule making authority to make rules for
carrying out the provisions of the Act. [Para 85][263-F-H; 264A-C]
The Vires of Rule 89(5) vis-à-vis Section 54(3) of the CGST
Act
4. The grievance however is that Rule 89(5) goes beyond
the "provisions of the Act" when in the garb of fixing a formula, it
restricts the refund of ITC to input goods by denying ITC of
input services. This is done by defining 'Net ITC' to mean ITC
availed of inputs. The gravamen of the challenge is that this
consequently ignores ITC relatable to input services. In other
words, the submission is that Rule 89(5) cannot be construed to
be a rule for carrying out the "provisions of the Act". [Para
90][266-B-C]
5. The second limb of the line of challenge is that even
though the rules are required to be recommended by the GST
Council this will not elevate them to the status of a law enacted
by the legislature. The submission which has been urged by
assessee proceeds on an underlying assumption which is that
Rule 89(5) by restricting the definition of Net ITC to mean ITC
availed on input goods is an affront to Section 54(3). It is on this
foundation, that it has been urged that a rule which is contrary to
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the statute cannot be saved merely on the ground that either (i)
the rule has been laid before Parliament and is subject to its power
of modification annulment or amendment; or (ii) the rule was made
on the recommendations of the GST Council. The application of
the second layer of the argument does not arise in the present
case for the simple reason that Rule 89(5) in defining Net ITC to
mean "input tax credit availed on inputs" does not transgress
the statutory restriction which is contained in proviso (ii) of Section
54(3). The challenge to Rule 89(5) as a piece of delegated
legislation on the ground that it is ultra vires Clause (ii) of the
first proviso to Section 54(3) is therefore lacking in substance.
As reasoned in the earlier part of this judgment, 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. [Para 92][266-F-G; 267-A-B]
The Validity of the Formula prescribed in Rule 89(5)
6. In view of this Court, the justification of the formula under
Rule 89(5) given by the ASG to create a legal bifurcation is valid.
In this context, it would be material to advert to the provisions of
Rule 42. Rule 42(1) provides that the ITC in respect of input
goods or input services which attract the provisions of sub-Section
(1) or sub-Section (2) of Section 17 being partly used for the
purpose of business and partly for other purposes or partly used
for affecting taxable supplies including zero rated supplies and
partly for effecting exempts supplies shall be attributed for the
purposes of business or for effecting taxable supplies in the
manner which is indicated in the Rule. Sub-Section (1) of Section
17 provides that where the goods and services or both are used
by a registered person partly for the purposes of any business
and partly for any other purpose, the amount of credit shall be
restricted to so much of the input tax as is attributable to the
purpose of its business. Sub-Section (2) of Section 17 provides
that where the goods or services or both are used by a registered
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person partly for effecting taxable supplies including zero rated
supplies under the CGST Act or under the IGST Act and partly
for effecting exempt supplies the amount of credit shall be
restricted to so much of the input tax as is attributable to the
taxable supplies including zero rated supplies. Rule 42, in other
words, provides for the manner in which the attributions of ITC
in respect of the input or input services under sub-Sections (1)
or (2) of Section 17 shall be carried out. Rule 43 similarly provides
the manner in which ITC in respect of capital goods attracting
the provisions of sub-Section (1) of Section 17, used partly for
business and partly for other purposes or partly for effecting
taxable supplies including zero rated supplies and partly for
effecting exempt supplies would be attracted to the purpose of
business or for effecting taxable supplies. Both Rules 42 and 43
provide for a formula for attribution. Rule 86 provides for the
maintenance of an electronic credit ledger. Rule 89(5) provides
for a refund. In both sets of rule clusters, Rules 42 and 43 on the
one hand and Rule 89(5) on the other hand, a formula is used for
the purpose of attribution in a post assimilated scenario. 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. [Para 103][271-G; 272-A-F]
7. The aberrations which have been pointed out, certainly
indicate that the formula is not perfect. The formula makes a
presumption that the output tax payable on supplies has been
entirely discharged from the ITC accumulated on account of input
goods and there has been no utilisation of the ITC on input
services. While a similar formula is provided in Rule 89(4) with
regard to zero rated supplies, in that case, the 'Net ITC' includes
input goods and input services and thus, there is no imbalance
between the different components of the formula. The formula
prescribed in Rule 89(5) however, seeks to deduct the total output
tax from only one component of the ITC, namely ITC on input
goods. This in our view is at odds with reality, where the ITC on
both input goods and input services is accumulated in the
electronic ledger and is then utilised for the payment of output
tax. In making such an assumption, the formula tilts the balance
in favour of the Revenue by reducing the refund granted. We are
equally cognizant of the fact that the proposed solution, that is
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prescribing an order of utilisation of the ITC accumulated on input
services and input goods, may tilt the balance entirely in favour
of the assessee as that would make a contrary assumption that
the output tax is discharged by the ITC accumulated on account
of input services entirely. Another possible solution could be that
the Rule itself provides for a statutory assumption or a deeming
fiction of utilisation of a certain percentage of ITC on input
services towards the payment of output tax for the purpose of
calculation of refund. [Para 105][273-A-E]
8. The above judicial precedents indicate that in the field
of taxation, this Court has only intervened to read down or
interpret a formula if the formula leads to absurd results or is
unworkable. 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
unutilised ITC. It is merely the case that the practical effect of
the formula might result in certain inequities. The reading down
of the formula as proposed by prescribing an order of utilisation
would take this Court down the path of recrafting the formula
and walk into the shoes of the executive or the legislature, which
is impermissible. Accordingly, we shall refrain from replacing the
wisdom of the legislature or its delegate with our own in such a
case. However, given the anomalies pointed out by the assessees,
we strongly urge the GST Council to reconsider the formula and
take a policy decision regarding the same. [Para 111][280-D-F]
VKC Footsteps India Pvt. Ltd. v. Union of India
R/Special Civil Application No 2792 of 2019 -
disapproved.
Tvl. Transtonnelstroy Afcons Joint Venture v. Union of
India Writ Petition Nos 8596, 8597, 8602, 8603, 8605
and 8608 of 2019 - affirmed.
Assistant Commissioner of Urban Land Tax v.
Buckingham and Carnatic Co. Ltd. (1969) 2 SCC 55 :
[1970] 1 SCR 268; Federation of Hotel & Restaurant
Association of India v. Union of India (1989) 3 SCC
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634 : [1989] 2 SCR 918; RK Garg v. Union of India
(1981) 4 SCC 675 : [1982] 1 SCR 947 - followed.
S Sundaram Pillai v. V R Pattabiraman (1958) 1 SCC
591; Hiralal Rattanlal v. State of UP (1973) 1 SCC 216
: [1973] 2 SCR 502; Union of India v. NITDIP Textile
Processors Private Limited (2012) 1 SCC 226 : [2011]
13 SCR 26; Elel Hotels and Investments Limited and
Others v. Union of India (1989) 3 SCC 698 : [1989] 2
SCR 880; Spences Hotel Pvt Ltd. v. State of West Bengal
(1991) 2 SCC 154 : [1991] 1 SCR 429; Commissioner
of Income Tax v. HCL Technologies Limited (2018) 16
SCC 709 : [2018] 7 SCR 1079; Arun Kumar and Others
v. Union of India (2007) 1 SCC 732 : [2006] 6 Suppl.
SCR 290 - relied on.
Mafatlal Industries Limited v. Union of India (1997) 5
SCC 536 : [1996] 10 Suppl. SCR 585; All India
Federation of Tax Practitioners v. Union of India (2007)
7 SCC 527 : [2007] 9 SCR 147; Association of Leasing
and Financial Service Companies v. Union of India
(2011) 2 SCC 352 : [2010] 13 SCR 381; CIT v.
Bipinchandra Maganlal AIR 1961 SC 1040 : [1961]
SCR 493; State of Rajasthan v. Leela Jain AIR 1965
SC 1296 : [1965] SCR 276; Bihar Cooperative
Development Cane Marketing Union Ltd. v. Bank of
Bihar AIR 1967 SC 389 : [1967] SCR 848; State of
Jammu & Kashmir v. Triloki Nath Khosa (1974) 1 SCC
19 : [1974] 1 SCR 771; Re The Special Courts Bill 1978
(1979) 1 SCC 380 : [1979] 2 SCR 476; Assistant
Commissioner of Commercial Tax (Asst.) v. Dharmendra
Trading Company (1988) 3 SCC 570 : [1988] 3 SCR
946; Kerala State Electricity Board v. Indian Alluvium
Co. Ltd. (1976) 1 SCC 466 : [1976] 1 SCR 552; Bharat
Hari Singhania v. Commissioner of Wealth Tax (Central)
(1994) 3 Suppl. SCC 46 : [1994] 1 SCR 1033;
Commissioner of Income Tax, Coimbatore v. Lakshmi
Machine Works (2007) 11 SCC 126 : [2007] 5 SCR
622 - referred to.
UNION OF INDIA v. VKC FOOTSTEPS INDIA PVT LTD.
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Case Law Reference
[1996] 10 Suppl. SCR 585
referred to
Para 11 D.1.3.(iii)
[2007] 9 SCR 147
referred to
Para 14(ii) & 24
[2010] 13 SCR 381
referred to
Para 57
(1958) 1 SCC 591
referred to
Para 65
[1973] 2 SCR 502
relied on
Para 66
[1961] SCR 493
referred to
Para 66
[1965] SCR 276
referred to
Para 66
[1967] SCR 848
referred to
Para 66
[1974] 1 SCR 771
referred to
Para 72
[1979] 2 SCR 476
referred to
Para 72
[1970] 1 SCR 268
followed
Para 76(i)
[1989] 2 SCR 918
followed
Para 76(ii)
[2011] 13 SCR 26
relied on
Para 76(iv)
[1988] 3 SCR 946
referred to
Para 77
[1989] 2 SCR 880
relied on
Para 78
[1991] 1 SCR 429
relied on
Para 79
[1976] 1 SCR 552
referred to
Para 91
[1994] 1 SCR 1033
referred to
Para 91
[2007] 5 SCR 622
referred to
Para 99
[1982] 1 SCR 947
followed
Para 102
[2018] 7 SCR 1079
relied on
Para 110
[2006] 6 Suppl. SCR 290
relied on
Para 110
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4810
of 2021.
From the Judgment and Order dated 24.07.2020 of the High Court
of Gujarat at Ahmedabad in S.C.A. No.2792 of 2019.
With
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Civil Appeal Nos. 4809, 4811, 4807, 4767, 4804, 4806, 4802, 4783,
4775-4781, 4769-4744, 4805, 4808, 4764-4765 of 2021 and Writ Petition
(C) No. 489 of 2021.
N. Venkataraman, Balbir Singh, ASGs, Amit Anand Tiwari, AAG,
Arvind Datar, V. Sridharan, Sr. Advs., Mukesh Kumar Maroria, Shyam
Gopal, Ms. Binu Tamta, M. Yogesh Kanna, Joseph Pookkatt, Prashant
Kumar, Nilesh Sharma, Dhawesh Pahuja, M/s Ap & J Chambers,
Dr. Avinash Poddar, Anant Kumar Vatsaya, Devendra Singh, Naresh
Thacker, Kumar Visalaksh, Hardik Modh, Udit Jain, Amit Laddha,
Abhishek Vikas, Harish Bindhumadavan, Pawanshree Agrawal, Rahul
Unnikrishnan, Ashwini Chandrashekharan, Sharyashree Thyagarajan,
Manoharan Ellappan, G. Natarajan, Kartik Jindal, Anant Gautam, Nipun
Sharma, Madhur Tewatia, Rajesh Kumar Gautam, Mahesh Agarwal, P.
R. Renganath, Rohan Talwar, Shantanu Sharma, Chinmayee Chandra,
B. Krishna Prasad, B. V. Balaram Das, Sujit Gosh, Krishna Rao, Ajinka
Tiwari, Nikilesh Ramachandran, Ms. Charanya Lakshmikumaran, Ankit
Yadav, Ms. Veena Kamath, Ratnesh Sharma, Uchit Sheth, Santosh
Krishnan, Anand Nainavati, Aditya Bhattacharya, Ms. Apeksha Mehta,
Sriram Sridharan, Somesh Jain, Nalin Bajaj, E. C. Agrawala, Vinay Shraff,
Ravi Bharuka, Ankit Agarwal, Sandeep Goyal, Dr. Joseph Aristotle S.,
Saaketh Kasibhatla, Ms. Preeti Singh, Advs. for the appearing parties.
The Judgment of the Court was delivered by
DR DHANANJAYA Y CHANDRACHUD, J.
Index*
A
Introduction...................................................................... 5
B
Factual Backdrop ............................................................ 6
C
Statutory Provisions......................................................... 8
D
Submissions ................................................................... 12
D.1
Union of India .................................................... 12
D.1.1 Part I- Distinction between goods and services 12
D.1.2 Part II- Interpretation of Section 54(3).............. 13
D.1.3. Part III- Legal Propositions ............................... 19
D.2
Assessees .......................................................... 21
UNION OF INDIA v. VKC FOOTSTEPS INDIA PVT LTD.
*Ed. Note : The pagination in the Index is as per the original judgment.
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D.3 Rejoinder by Union of India ................................. 58
E
Constitutional Scheme of GST....................................... 60
F
CGST Act ...................................................................... 68
F.1 Definitions .............................................................. 68
F.2 Section 16 & Section 49 of the CGST Act ............ 71
F.3 Interpretation of Section 54(3) of the CGST Act... 75
F.4 Construing the proviso............................................ 93
F.5 Constitutional validity: The ultra vires doctrine ... 102
G
Rule 89(5) ..................................................................... 111
G.1 The validity of Rule 89(5) of CGST Rules in exercise
of the rule-making power under Section 164 of the
CGST Act .............................................................112
G.2 The vires of Rule 89(5) vis-à-vis Section 54(3) of the
CGST Act .............................................................114
G.3 The validity of the formula prescribed in Rule 89(5)118
H
Conclusion ................................................................... 134
A Introduction
1. Parliament while enacting the Central Goods and Services Tax
Act 2017,1 has incorporated a provision for refund of tax in Section 54.
Sub-Section (3) embodies a provision for refund of unutilised input tax
credit2 in cases involving:
(i)
zero rated supplies made without payment of tax; and
(ii) credit accumulation "on account of rate of tax on inputs being
higher than rate of tax on output supplies".
2. While envisaging a refund in the latter of the above two
situations, Parliament was cognizant of the fact that ITC may accumulate
due to a variety of reasons. However, Parliament envisaged a specific
situation where the credit has accumulated due to an inverted duty
structure, that is where the accumulation of ITC is because the rate of
tax on inputs is higher than the rate of tax on output supplies. Taking
1 "CGST Act"
2 "ITC"
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legislative note of this situation, a provision for refund has been provided
for in Section 54(3). The Central Goods and Service Tax Rules 20173
have been formulated in pursuance of the rule making power conferred
by Section 164 of the CGST Act. Rule 89(5) provides a formula for the
refund of ITC, in "a case of refund on account of inverted duty structure".
The said formula uses the term "Net ITC". In defining the expression
"Net ITC", Rule 89(5) speaks of "input tax credit availed on inputs".
B Factual Backdrop
3. Writ petitions under Article 226 of the Constitution were
instituted before the High Court of Gujarat and the High Court of
Judicature at Madras. The petitioners before the High Court submitted
inter alia that
(i)
Section 54(3) allows for a refund of ITC where the
accumulation is due to an inverted duty structure;
(iii) ITC includes the credit of input tax charged on the supply of
goods as well as services;
(iv) Section 54(3) does not restrict the entitlement of refund only
to unutilised ITC which is accumulated due to the rate of tax
on inputs being higher than the rate of tax on output supplies.
It also allows for refund of unutilised ITC when the rate of
tax on input services is higher than the rate of tax on output
supplies;
(v) While Section 54(3) allows for a refund of ITC originating in
inputs as well as input services, Rule 89(5) is ultra vires in so
far as it excludes tax on input services from the purview of
the formula; and
(vi) In the event that Section 54(3) is interpreted as a restriction
against a claim for refund of accumulated ITC by confining it
only to tax on inputs, it would be unconstitutional as it would
lead to discrimination between inputs and input services.
4. By its judgment dated 24 July 2020 in VKC Footsteps India
Pvt. Ltd. v. Union of India4, the Division Bench of the Gujarat High
Court, held that:
3 "CGST Rules"
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"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 High Court therefore directed the Union Government to allow
the claim for refund made by the petitioners before it, considering unutilised
ITC on input services as part of "Net ITC" for the purpose of calculating
refund in terms of Rule 89(5), in furtherance of Section 54(3).
5. By its judgment dated 21 September 2020, in Tvl.
Transtonnelstroy Afcons Joint Venture v. Union of India5 and
connected cases the Division Bench of the Madras High Court came to
a contrary conclusion, after having noticed the view of the Gujarat High
Court, which it has declined to follow. The Madras High Court has
concluded that
"63...
(1) Section 54(3)(ii) does not infringe Article 14.
(2) Refund is a statutory right and the extension of the benefit of
refund only to the unutilised credit that accumulates on account of
the rate of tax on input goods being higher than the rate of tax on
output supplies by excluding unutilised input tax credit that
accumulated on account of input services is a valid classification
and a valid exercise of legislative power."
6. The writ petitions challenging the validity of Rule 89(5) on the
ground that it is ultra vires Section 54(3)(ii) were dismissed. The
divergence between the views of the Gujarat High Court on the one
hand, and the Madras High Court on the other, forms the subject matter
of this batch of appeals.
C Statutory Provisions
7. Section 54 of the CGST Act provides for a refund of ax. Under
sub-Section (1) of Section 54, a person claiming a refund of "tax and
interest, if any, paid on such tax or any other amount paid" has to make
an application within two years of the relevant date. Section 54(3)
provides for a claim of refund of unutilised ITC. Sub-sections (1) and
(3) of Section 54 provide as follows:
5 Writ Petition Nos 8596, 8597, 8602, 8603, 8605 and 8608 of 2019
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"Section 54. Refund of tax
(1) Any person claiming refund of any tax and interest, if any, paid
on such tax or any other amount paid by him, may make an
application before the expiry of two years from the relevant date
in such form and manner as may be prescribed:
Provided that a registered person, claiming refund of any balance
in the electronic cash ledger in accordance with the provisions of
sub-section (6) of Section 49, may claim such refund in the return
furnished under section 39 in such manner as may be prescribed.
[...]
(3) Subject to the provisions of sub-section (10), a registered person
may claim refund of any unutilised input tax credit at the end of
any tax period:
Provided that no refund of unutilized 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 and services or both as may be notified by the
Government on the recommendations of the Council:
Provided further that no refund of unutilized input tax credit shall
be allowed in cases where the goods exported out of India are
subjected to export duty:
Provided also that no refund of input tax credit shall be allowed, if
the supplier of goods or services or both avails of drawback in
respect of central tax or claims refund of the integrated tax paid
on such supplies."
8. Rule 89 was originally inserted in the CGST Rules through the
Central Goods and Services Tax (Second Amendment) Rules 20176,
6 Notification No.10/2017- Central Tax by the Government of India, Ministry of Finance,
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which came into force on 1 July 2017. Rule 89(4) and Rule 89(5) were
in the following terms:
"(4) [...]
(B) "Net ITC" means input tax credit availed on inputs
and input services during the relevant period;
[...]
(E) "Adjusted Total turnover" means the turnover in a State or
a Union territory, as defined under sub-section (112) of section
2, excluding the value of exempt supplies other than zero-rated
supplies, during the relevant period;
(5) In the case of refund on account of inverted duty structure,
refund of input tax credit shall be granted as per the following
formula: -
Maximum Refund Amount= {(Turnover of inverted rated supply
of goods) x Net ITC ÷ Adjusted Total Turnover} ? tax payable on
such inverted rated supply of goods
Explanation:- For the purposes of this sub rule, the
expressions "Net ITC" and "Adjusted Total turnover" shall
have the same meanings as assigned to them in sub-rule
(4)."
(emphasis supplied)
9. On 18 April 2018, the Central Goods and Services Tax (Fourth
Amendment) Rules 20187 were notified. Rule 89(5) was amended in
the following terms
"(5). In the case of refund on account of inverted duty structure,
refund of 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 inverted rated supply of goods and services.
Explanation:- For the purposes of this sub-rule, the expressions7 Notification No.21/2018- Central Tax by the Government of India, Ministry of Finance,
Department of Revenue, Central Board Indirect tax and Customs
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(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 4(A)
or (4B) or both; and
(b) "Adjusted Total turnover" shall have the same meaning as
assigned to it in sub-rule (4)."
(emphasis supplied)
The amendment was with prospective effect. Rule 89(5), as it
stands at present, was substituted on 13 June 2018 by the Central Goods
and Services Tax (Fifth Amendment) Rules 20188. By the amendment,
Rule 89(5) was substituted with the retrospective effect from 1 July
2017 in the following terms:
"(iii) with effect from 01st July 2017, in rule 89, for sub-rule
(5), the following shall be substituted namely:-
"(5) In the case of refund on account of inverted duty structure,
refund of 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 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 4(A)
or (4B) or both; and
(b) Adjusted Total turnover shall have the same meaning as
assigned to it in sub-rule (4).""
(emphasis supplied)
The above sequence indicates that the definition of the expression
'Net ITC' in Rule 89(5) originally meant "input tax credit availed on
input and inputs services". By the amendment of 18 April 2018, the
definition of 'Net ITC' was substituted so as to mean ITC availed on
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inputs, with prospective effect. On 13 June 2018, this definition was
made applicable with retrospective effect from 1 July 2017.
10. Before we proceed to analyse the submissions and formulate
the points for consideration, it is necessary to emphasise at the outset
that one of the core issues in the present batch of cases would turn upon
the interpretation of the expression "inputs" in Section 54(3)(ii) of CGST
Act and the definition of "Net ITC" in the amended Rule 89(5). During
the course of the submissions, in the interest of maintaining clarity, Counsel
on both sides used the expression 'input goods' while dealing with goods
that are used as inputs and 'input services' while dealing with services
that are used as inputs. We propose to use the same formulation to
ensure conceptual clarity while distinguishing between goods which are
used as inputs and services which are used as inputs. With this preface,
we shall now proceed to deal with the submissions of the parties.
D Submissions
D.1 Union of India
D.1.1 Part I- Distinction between goods and services
11. Mr N Venkataraman, learned Additional Solicitor General9 led
the arguments on behalf of the Union Government in assailing the
correctness of the decision of the Gujarat High Court (and supporting
the decision of Madras High Court). Mr Venkataraman urged that:
(i)
Goods and services are distinct at a constitutional level. Article
366(12) of the Constitution defines goods, while Section
366(26A) defines services. Under the CGST Act, the
expression 'input' in Section 2(59) means tangible
commodities other than capital goods, while on the other hand
'input service' in Section 2(60) means any service used or
intended to be used by a supplier for business. Hence, 'goods'
and 'services' and 'inputs' and 'input services' have distinct
definitions;
(ii)
Article 366(12A) defines 'goods and services tax' to mean
any tax on the supply of goods or services or both except
taxes on the supply of alcoholic liquor for human consumption;
9 "ASG"
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(iii) Article 246A, which traces the source of power of taxation
and identifies the fields of taxation, empowers the Parliament,
the States and Union Territories to impose simultaneous tax
both on goods and services. Consequently, though goods and
services are brought to tax under a common code, both the
Constitution and the statute have maintained a distinction
between goods and services. They remain distinct for
prescription, treatment and interpretation;
(iv) Section 2(62) and Section 2(63) define 'input tax' and 'input
tax credit' which include taxes paid on goods (input goods)
and services (input services) either under CGST, State Goods
and Services Tax Act10 and Integrated Goods and Services
Tax Act 201711;
(v) Input tax means a tax charged both on goods and services.
These are taxes paid by a supplier on their outward supplies
as defined under Section 2(83) which become inward supply
for the recipient under Section 2(67); and
(vi) The need to integrate both taxes on input goods and input
services is to enable credit on a single pool for further cross
utilisation on both goods and services.
D.1.2 Part II- Interpretation of Section 54(3)
(i) The structure of Section 54(3) is as follows:
(a) The opening clause permits a registered person to claim refund
of any unutilised ITC at the end of any tax period.
(b) The main clause permits:
i. a claim;
ii. in the nature of refund;
iii. of any unutilized ITC; and
iv. at the end of the tax period.
(ii) Section 54(3) contains three provisos, out of which the first
proviso falls for interpretation in this case. The three provisos
share common features which indicate that these provisos
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are in the nature of restrictions and not conditions (or
qualifications);
(iii) The provisos to Section 54(3) should be construed as
restrictions for the following reasons:
(a) The expression employed in the main clause of Section
54(3) is 'claim' whereas the provisos restrict this ambit
by the use of the expression 'allowed'.