Shabnam Petrofils PVT. LTD. vs. Union Of INDIA

Held

The Court held that the respondents do not have the power under Section 54(3) of the CGST Act to provide for the lapsing of accumulated unutilised input tax credit (ITC) on account of an inverted tax structure. The Court found that Section 54(3) of the CGST Act only empowers the Central Government to notify goods and services that are not eligible for a refund of ITC accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies. The Court noted that the CGST Act itself contains express provisions for the lapsing of ITC in Sections 17(4) and 18(4), implying that any such provision for lapsing must be explicitly stated in the Act. The Court concluded that the impugned Notification No. 20/2018-Central Tax (Rate) dated July 26, 2018, which inserted proviso (ii) into Notification No. 5/2017-Central Tax (Rate), exceeded the delegated power under Section 54(3)(ii) of the CGST Act by prescribing for the lapsing of ITC. Therefore, proviso (ii) of the opening paragraph of Notification No. 05/2017-C.T. (Rate) dated June 28, 2017, as inserted by Notification No. 20/2018-C.T. (Rate) dated July 26, 2018, was declared ex-facie invalid and liable to be struck down. The Court did not expressly leave any issue undecided.

Facts

Two petitions were filed before the Gujarat High Court challenging Notification No. 20/2018-Central Tax (Rate) dated July 26, 2018, and Circular No. 56/30/2018-GST dated August 24, 2018. The petitioners, Shabnam Petrofils Pvt. Ltd. and a federation of weavers, argued that these provisions illegally caused accumulated input tax credit (ITC) on inward supplies received up to July 31, 2018, to lapse. This ITC was accumulated due to an inverted tax structure where the tax rate on inputs was higher than on output supplies. The petitioners sought to quash these notifications and circulars, contending they were contrary to Section 54(3) of the Central Goods and Service Tax Act, 2017, and violative of constitutional provisions.

Key Issues

1. Whether the respondents have the power under Section 54(3) of the CGST Act to provide for the lapsing of accumulated unutilised ITC on account of an inverted tax structure, as done by Notification No. 20/2018-Central Tax (Rate) dated July 26, 2018. 2. Whether the power conferred under Section 54(3) of the CGST Act is limited to notifying goods and services not eligible for refund of ITC accumulated due to an inverted tax structure, and does not extend to causing such ITC to lapse. Petitioner's arguments: The petitioners contended that Section 54(3) of the CGST Act only empowers the government to notify goods and services not eligible for refund of ITC accumulated due to an inverted tax structure. They argued that the Act itself provides for lapsing of ITC in specific sections (Sections 17(4) and 18(4)), indicating that if the legislature intended ITC to lapse in other circumstances, it would have been expressly provided. They relied on Supreme Court decisions in Collector of Central Excise, Pune v. Dai Ichi Karnataka Ltd. and Eicher Motors Ltd. v. Union of India, and a Gujarat High Court decision in Baroda Rayon Corporation Limited, for the proposition that validly taken credit is indefeasible and a vested right. They asserted that delegated legislation (the notification) cannot exceed the power delegated by the parent statute. Revenue's arguments: The judgment does not record specific arguments made by the revenue or state.