Union Of INDIA & Ors. vs. Vkc Footsteps INDIA PVT LTD.

Held

The Supreme Court held that Clause (ii) of the first proviso to Section 54(3) of the CGST Act, 2017, is a substantive restriction, not merely an eligibility condition. It mandates that a refund of unutilized ITC is admissible only when the accumulation is due to an inverted duty structure, meaning the tax rate on input goods is higher than that on output supplies. Therefore, there is no disharmony between Rule 89(5) and Section 54(3). The Court affirmed the Madras High Court's decision, stating that Parliament acted within its legislative authority in confining the refund of unutilized ITC to input goods in such cases. The Court found that the formula prescribed in Rule 89(5) is not ambiguous or unworkable, though it may lead to inequities. While upholding the validity of the rule, the Court strongly urged the GST Council to reconsider the formula and take a policy decision. Consequently, the appeals against the Gujarat High Court's judgment were allowed, and the appeals against the Madras High Court's judgment were dismissed.

Facts

This case involves appeals before the Supreme Court concerning the validity of Rule 89(5) of the Central Goods and Services Tax Rules, 2017, in relation to Section 54(3) of the Central Goods and Services Tax Act, 2017. The Gujarat High Court had previously held Rule 89(5) to be ultra vires Section 54(3), finding it discriminatory by restricting refunds of unutilized Input Tax Credit (ITC) only to input goods and not input services, despite the definition of ITC encompassing both. Conversely, the Madras High Court had upheld the validity of Rule 89(5). The Supreme Court was tasked with resolving this divergence in judicial opinion regarding the refund of unutilized ITC, particularly in the context of an inverted duty structure.

Key Issues

1. Whether Rule 89(5) of the CGST Rules, 2017, which prescribes a formula for refund of unutilized ITC, is ultra vires Section 54(3) of the CGST Act, 2017, by restricting the refund to input goods and excluding input services, thereby creating a disharmony between the Act and the Rules? (Question of law) Petitioner's Argument (implied from Gujarat High Court's reasoning): Rule 89(5) is ultra vires Section 54(3) because Section 2(62) defines ITC to include both input goods and input services, and therefore, the rule-making authority exceeded its power by restricting refunds only to input goods, contrary to the legislative intent of Section 54(3). Revenue's Argument (implied from Madras High Court's reasoning and Supreme Court's decision): Clause (ii) of the first proviso to Section 54(3) specifically refers to the 'rate of tax on inputs being higher than the rate of tax on output supplies' as the reason for accumulation of unutilized ITC. This proviso acts as a substantive restriction, confining the refund to situations arising from an inverted duty structure related to input goods, and Rule 89(5) is a valid implementation of this restriction. The refund is a statutory prescription, not a constitutional right, and Parliament has the legislative authority to define the scope of such refunds.