Supreme Court Upholds Constitutional Validity of Section 54(3) of GST Act on No Refund of Unutilised Input Tax Credit on Services Credit& Rule 89(5) which allows Credit

   Gujarat High Court had Declared Rule 89(5) of CGST Rules Ultra Vires Sec 54(3) while Madras High Court had Affirmed its Validity

   Supreme Court has, however, also asked the GST Council to Revisit the Rule in the Wake of certain Anomalies Arising Out of Interpretation of Rule 89(5)

<Supreme Court Order 4810 of 2021 dated 13.09.2021>

The Supreme Court on Monday upheld the validity of Rule 89(5) of the Central Goods and Service Tax Rules, 2017 (CGST Rules) which prescribes a formula excluding the refund of ‘unutilised input tax’ paid on ‘input services’ as part of ‘input tax credit' (ITC) [Union of India v. VKC Footsteps India Private Ltd].

A Bench of Justices DY Chandrachud and MR Shah held that while the formula suffers from anomalies, it cannot be a ground to strike down a fiscal rule which has been framed in exercise of the power of delegated legislation.

"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 Court observed.

The Court, therefore, upheld the Rule and overturned a 2020 judgment of the Gujarat High Court which had held that Rule 89(5) was ultra vires Section 54 (3) of of the CGST Act, 2017.

The Court also affirmed the Madras High Court ruling in Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India in this regard.

"We have come to the conclusion that the judgment of the Madras High Court needs to be affirmed by dismissing the appeals challenging that verdict while the appeals against the judgment of the Gujarat High Court by the Union of India should be allowed," the Court held

Pertinently, the Court while upholding Rule 89(5) held that the anomalies in the Rule should be examined by the government,

"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.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," the judgment said.

In making such an assumption, the formula tilts the balance in favour of the Revenue by reducing the refund granted, the Court opined.

However, these inequities are to be ironed out by the Government in the course of the application of the formula.

"We are affirmatively of the view that this Court should not in the exercise of the power of judicial review allow itself to become a one-time arbiter of any and every anomaly of a fiscal regime despite its meeting the jurisdictional framework for the validity of the legislation, including delegated legislation," the Court ruled.