Union Of India VS  VKC Footsteps India Pvt Ltd

The Parliament, during the enactment of the Central Goods and Services Tax Act 2017, included provisions for tax refund in Section 54. Sub-Section (3) specifically addresses the refund of unutilized input tax credit, particularly in cases of zero-rated supplies made without tax payment or when there’s an accumulation of credit due to a situation where the tax rate on inputs exceeds that on output supplies.In recognizing that input tax credit accumulation could arise from various scenarios, Parliament particularly highlighted the situation of an inverted duty structure, where the credit accumulates because the tax rate on inputs surpasses that on output supplies. To address this, Section 54(3) includes provisions for refund.The Central Goods and Service Tax Rules 2017 were formulated to complement the CGST Act, empowered by the rule-making authority vested in Section 164. Rule 89(5) within these rules outlines a formula for refunding input tax credit in cases related to an inverted duty structure. The formula hinges on the concept of “Net ITC,” as defined within the rule. It encompasses the input tax credit availed on.inputs during the relevant period, minus the input tax credit reversed or ineligible during the same period.

Writ petitions under Article 226 of the Constitution were filed before the High Court of Gujarat and the High Court of Judicature at Madras. The petitioners argued several points:

1. Section 54(3) of the Central Goods and Services Tax Act 2017 allows for a refund of Input Tax Credit (ITC) in cases where the accumulation is due to an inverted duty structure.

2. ITC includes the credit of input tax charged on the supply of both goods and services.

3. Section 54(3) does not limit the entitlement of refund only to unutilized ITC accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies. It also allows for the refund of unutilized ITC when the rate of tax on input services is higher than the rate of tax on output supplies.

4. While Section 54(3) allows for a refund of ITC originating in both inputs and input services, Rule 89(5) is considered ultra vires (beyond legal authority) as it excludes tax on input services from the purview of the refund formula.

5. Interpreting Section 54(3) as a restriction against claiming a refund of accumulated ITC solely for tax on inputs would be unconstitutional, as it would result in discrimination between inputs and input services.

These arguments challenge the interpretation and implementation of Section 54(3) of the CGST Act and Rule 89(5) of the Central Goods and Service Tax Rules 2017.

he Gujarat High Court, in its judgment on July 24, 2020, in the case of VKC Footsteps India Pvt. Ltd. v. Union of India, declared that Explanation (a) to Rule 89(5), which denies the refund of unutilized input tax paid on input services as part of input tax credit accumulated due to an inverted duty structure, is ultra vires the provision of Section 54(3) of the CGST Act, 2017. Consequently, the court directed the Union Government to allow the claim for refund made by the petitioners before it, considering unutilized 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).However, the Madras High Court, in its judgment on September 21, 2020, in the case of Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India and connected cases, arrived at a different conclusion. Despite acknowledging the view of the Gujarat High Court, the Madras High Court declined to follow it. The court concluded that Section 54(3)(ii) does not violate Article 14 of the Constitution. It upheld that refund is a statutory right, and the extension of the benefit of refund solely to the unutilized 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 unutilized input tax credit that accumulated on account of input services, is a valid classification and a valid exercise of legislative power.

The divergence between the Gujarat High Court and the Madras High Court on the interpretation of Section 54(3)(ii) of the CGST Act, 2017, specifically concerning the eligibility for refund of unutilized input tax credit (ITC) accumulated due to an inverted duty structure, forms the basis of a batch of appeals.Section 54 of the CGST Act outlines provisions for tax refund. Sub-section (1) allows any person to claim a refund of tax and interest paid within two years from the relevant date. Sub-section (3) permits a registered person to claim a refund of any unutilized input tax credit at the end of any tax period. However, this refund is subject to specific conditions, including zero-rated supplies made without tax payment and instances where the credit has accumulated due to the tax rate on inputs being higher than the rate on output supplies.The contention arises from the interpretation of Section 54(3)(ii), particularly regarding the exclusion of unutilized input tax credit on input services from the eligibility for refund under an inverted duty structure. The Gujarat High Court, in VKC Footsteps India Pvt. Ltd. v. Union of India, deemed this exclusion ultra vires Section 54(3), directing the allowance of refund claims that include unutilized ITC on input services. Conversely, the Madras High Court, in Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India, disagreed with this interpretation. It upheld the exclusion, considering it a valid exercise of legislative power, not infringing upon constitutional principles.These conflicting interpretations have led to the present batch of appeals, seeking clarification and resolution regarding the eligibility for refund under Section 54(3)(ii) of the CGST Act.

Section 54(3)(ii) of the CGST Act, 2017, is at the center of a legal dispute between the Gujarat High Court and the Madras High Court. This provision deals with the eligibility for refund of unutilized input tax credit (ITC) accumulated due to an inverted duty structure, where the tax rate on inputs is higher than that on output supplies.The Gujarat High Court, in the case of VKC Footsteps India Pvt. Ltd. v. Union of India, ruled that the exclusion of unutilized input tax credit on input services from the refund eligibility under an inverted duty structure, as provided in Section 54(3)(ii), is ultra vires the provision. It directed the government to allow refund claims that include unutilized ITC on input services.However, the Madras High Court, in Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India, took a different stance. It upheld the exclusion, deeming it a valid exercise of legislative power and not a violation of constitutional principles.This discrepancy has led to a batch of appeals seeking clarification on the interpretation and application of Section 54(3)(ii). The appeals aim to resolve the conflicting views between the two high courts regarding the eligibility for refund under an inverted duty structure.

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