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Advocate Varun Gaba

Varun Gaba

Advocate
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Amendment To Rule 89 (4C) Of The CGST Rules Held Ultra vires & Invalid, And Consequently Quashed – Karnataka High Court

The Hon’ble High Court of Karnataka vide its order dated 16.02.2023 in the matter of M/s TONBO IMAGING INDIA PVT LTD Vs. UNION OF INDIA & OTHERS in Writ Petition – 13185 of 2020 (T-Res), declared the amendment dated 23.03.2020 in Rule 89 (4C), whereby the ‘Turnover of Zero Rated Supply’ has been assigned a meaning i.e., ‘value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier, as declared by the supplier’,  ultra vires & also violative of Articles 14 and 19 of the Constitution of India.

The Petitioner filed the writ petition before the Hon’ble High Court challenging and praying for declaring amendment at para 8 of Notification 16/2020 – CT dated 23.03.2020 in Rule 89(4) dated 23.03.2020 & explanation to Rule 93 of the CGST Rules, 2017, as unconstitutional.  Further, it was prayed to quash the impugned order dated 30.06.2020 passed by Respondent No. 3 in Form GST-RFD dated 30.06.2020 and directing the Respondent No. 3 to accept the six refund applications filed by the petitioner on 25.05.2020, 27.05.2020 and on 28.05.2020 for the tax periods May 2018, July 2018, August 2018, November 2018, December 2018 and March 2019, and grant refund of taxes in accordance with law along with interest.

Factual Matrix: –

  • The petitioner – M/s Tonbo Imaging India Pvt Ltd, is engaged in designing, developing, building and deploying various types of advanced imaging and sensor systems to sense, understand and control complex environments. The petitioner is engaged in developing innovative designs in micro-optics, lower power electronics and real-time vision processing to design imaging systems for real world applications in fields of military applications, critical infrastructures for modern day battlefields, unmanned reconnaissance, transport vehicles driving in the dark etc., wherein the customized products provide effective visualization in different and challenging environments.
  • Since exports made by the petitioner are “zero rated” under Section 16 of the Integrated Goods and Services Act, 2017, the petitioner filed refund applications with the respondents on 25.05.2020, 27.05.2020 and 28.05.2020 and claimed refund of unutilized input tax credit under Section 54(3)(i) of the Central Goods and Services Act, 2017.
  • In the Meanwhile, Rule 89(4)(C) of the CGST Rules was amended w.e.f. 23.03.2020. In pursuance of the same, the respondents proceeded to pass the impugned order dated 30.06.2020 rejecting the refund claim of the petitioner filed under Section 54 read with rule 89 of the CGST Rules. Being aggrieved, the petitioner has filed the present petitioner challenging the order dated 30.06.2020 as well as the validity of Rule 89 (4C) and explanation to Rule 93 of the CGST Rules.

Petitioner’s Submission: –

  • Without pressing on the challenge made to validity of Rule 93, it was submitted on the behalf of the petitioner that the amended Rule 89(4)(C) of the CGST Rules would not be applicable in the instant case, as the period for which refund was being claimed (i.e., May 2018 to March 2019) was much prior to the amendment of Rule 89(4)(C).
  • It was submitted that Rule 89(4)(C) of the CGST Rules is ultra vires Section 54 of the CGST Act read with Section 16 of the IGST Act; the very intention of the zero-rating is to make entire supply chain of “exports” tax free, i.e., to fully ‘zero-rate’ the exports by exempting them from both input tax and output tax.
  • Further, rule 89 (4C) is ultra vires Article 269 A read with Article 246A of the Constitution of India as Parliament has no legislative competence to levy GST on export of goods, and there is no reference to treatment of goods or services in both the articles.
  • That rule 89 (4C) is also violative of Article 14 and 19(1)(g) of the Constitution of India, as the quantum of refund of unutilized input tax credit is restricted only in the cases falling under Section 16(3)(b) of the IGST Act, where export is made under a ‘LUT’. however, no such restriction is imposed on cases falling under Section 16(3)(b) of the IGST Act, where the export is made with payment of duty.  Therefore, there is a hostile discrimination between two class of persons.
  • It was submitted the Article 14 of the Constitution forbids class legislation; however, Article 14 does not prohibit reasonable classification for the purpose of legislation provided it passes two tests i.e., that the classification must be founded on an intelligible differentia, which distinguishes persons or things that are grouped together from others left out of the group; and that the differentia must have a rational relation with the object sought to be achieved by the statute. Thus, it was submitted that the impugned Rule 89(4)(C) of the CGST Rules is arbitrary and unreasonable, in as much as it bears no rational nexus with the objective sought to be achieved by Section 16 of the IGST Act.  Therefore, including domestic turnover in definition of zero-rated supply which is meant to cover only exports is clearly arbitrary and unreasonable. 
  • With respect to violation of Article 19(1)(g), it was submitted that in exports, availability of the rotation of funds is essential for the business to thrive; the entire concept of refund of unutilized input tax credit relating to zero-rated supply would be obliterated, if the respondents are permitted to put any limitation and condition that takes away petitioner’s right to claim refund of all the taxes paid on the domestic purchases used for the purpose of zero-rated supplies, this would cause grave hardship to the exporters and the incentives given to the exporters would lose its meaning. Hence, the restriction of the same by the impugned amended Rule 89(4)(C) would be highly unreasonable.
  • That Rule 89(4C) also suffers from vice of vagueness for the reason n that the words “like goods” and “similarly placed supplier” in the impugned Rule 89(4)(C) are completely open-ended and are not defined anywhere in the CGST Act/Rules or the IGST Act/Rules; in this context, it was submitted that considering the business of the petitioner, it is not possible to have any “like goods” and “same or similar placed supplier” for the unique and customized products being manufactured by the petitioner and the preciseness of definitions as found in the customs legislation is missing herein.
  • The impugned rule fails to clarify about the consequences, if there are no goods supplied in the domestic market and value of like goods provided by other suppliers is not available or as to what would be the consequences in respect of a supplier who may have different pricing policy for different local customers nor what would be the consequences in respect of a supplier who would be pricing the local goods differently in different states for the same products being exported. Therefore, it is impossible for the exporters to provide such a proof.  Further, Rule 89(4C) of the CGST Rules is merely a machinery provision and thus, cannot impose a rigorous condition to take away the right to obtain refund, which the petitioner is otherwise entitled to in terms of Section 54 of the CGST Act read with Section 16 of the IGST Act.
  • That the impugned refund rejection has been passed mechanically without any application of mind, and also violative of principles of natural justice. Further, the refund claims of the petitioner pertain to periods prior to 23.03.2020, when Rule 89(4)(C) of the CGST Rules came into force and since the same cannot be given retrospective or retroactive effect, the impugned order deserves to be quashed.
  • To support its stand, reliance was placed on: – CIT vs. Taj Mahal Hotel – (1971) 3 SCC 550; Bimal Chandra Banerjee vs. State of Madhya Pradesh – 1970) 2 SCC 467; Sangram Singh vs. Election Tribunal – AIR 1955 SC 425; All India Federation of Tax Practioners vs. Union of India – 2007) 7 SCC 527; Shayarabano vs. Union of India – (2017) 9 SCC 1; Pitambra Books Pvt. Ltd., vs. Union of India (34) – GSTL 196 (DEL); Shreya Singal vs. Union of India – (2015) 5 SCC 1; Universal Drinks Pvt. Ltd., vs. Union of India – 1984 (18) ELT 207(BOM); Deepak Vegetable Oil Industries vs. Union of India – 1991(52) ELT 222 (GUJ); Hajee K Assiannar vs. CIT – (1971) 81 ITR 423 (KER); CIT vs. Vatika Township Pvt. Ltd., – (2014) 367 ITR 466 (SC); Verghese vs. DCIT – (1994) 210 ITR 511 (KAR); ACCT vs. Shukla & Brothers – 2010 (254) ELT 6 (SC); Moopil Nair vs. State of Kerala – AIR 1961 SC 552; Deputy Commissioner of Income Tax vs. Pepsi Foods Ltd., – (2021) 7 SCC 413; Reckitt Benckiser vs. Union of India – 2011 (269) ELT 194 (J & K); U.P. Power Corporation vs. Sant Steels & Alloys Pvt. Ltd., – (2008) 2 SCC 777.

Respondents’ contention: –

  • On the other hand, it was submitted on the behalf of the Respondents that the Petitioner has not submitted the proof that the export turnover mentioned in the instant claim is 1.5 times the value of like goods domestically supplied by the same or similarly placed supplier.
  • Further, zero-rated turnover declared by the petitioner cannot be accepted for the purpose of calculation of eligible refund. Thus, refuting various contentions raised on the behalf of the petitioner, it was submitted that there is no merit in the petition and the same is liable to be dismissed.

Analysis & Findings: –

  • The Hon’ble Court after considering the submissions made, facts of the case and the law applicable, took a brief overview of the GST scheme and found that the entire scheme of indirect taxes in India has undergone transformation upon introduction of GST with effect from 01.07.2017. This tax is being levied with concurrent jurisdiction of the Centre and the States on the supply of goods or services. For this purpose, the Constitution of India has been amended vide Constitution (101st Amendment) Act, 2016 with effect from 16th September 2016. The Constitutional Amendment Bill specifically mentions that the objective of introducing GST is to avoid cascading effect of taxes.
  • That Central Government enacted the CGST Act to provide for levy and collection of tax on supply of goods or service or both where the supply is intra-state supply; so also, the CGST Rules were also framed including the impugned Rule 89(4)(C). Further, IGST Act was also enacted by the Central Government for the purpose of levy and collection of GST on the supply of goods or services or both where the supply is inter-state supply.  The State of Karnataka enacted the KGST Act to levy and collect tax on intra-state supply of goods or services or both within the state of Karnataka.
  • The Hon’ble Court, giving an illustration, observed that GST is a multi-stage tax, as each point in a supply chain is taxed (unless specifically exempted by law) till the goods and services reach the final consumer.
  • Also, reference was made to the judgment of Hon’ble Supreme Court in the matter of All India Federation of Tax Practitioners Vs Union of India – (2007) 7 SCC 527, wherein it was held that ‘In the light of what is stated above, it is clear that service tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer and it would, logically, be leviable only on services provided within the country. Service tax is a value added tax’ as well as to the decision of Union of India Vs. VKC Footsteps (India) (P) Ltd. – (2022) 2 SCC 603, wherein it was held that ‘the idea which permeates GST legislation globally is to impose a multi-stage tax under which each point in a supply chain is potentially taxed. Suppliers are entitled to avail credit of tax paid at an anterior stage.’
  • Thereafter, the Hon’ble Court taking note of the provisions of Section 16 (Zero rated supply) of IGST Act, 2017, Section 54(3) (Refund of Tax) of CGST Act, Rule 89 (Application for refund of tax, interest, penalty, fee and other amount) of the CGST Rules 2017, found that there is no gainsaying the fact that one of the fundamental principles to make exports competitive in the international market is that taxes are not added to the cost of exports. Further, this intention cannot be carried out by merely exempting the output goods or services as the inputs and input services would have already suffered tax.  Moreover, when the output is exempt, tax laws do not allow availment/utilization of credit on the inputs and input services used for the supply of exempted output.  Thus, in a true sense, the entire supply is not zero-rated.  The effect of “zero-rating” is that the entire supply chain of a particular zero-rated supply (i.e., export) is tax free i.e., there is no burden of tax either on the input side or output side.
  • The Hon’ble Court referring to the detailed write-up on ‘zero-rated supplies’ issued by the Director General of Taxpayer Services, CBIC, wherein it has been clarified that ‘What is need for Zero Rating?’, ‘What is Zero Rating?’, found that from the perusal of the aforesaid detailed write-up on ‘refund of integrated tax paid on account of zero-rated supplies’ clarifies that: –
    • Under GST, Exports and supplies to SEZ are zero rated as per section 16 of the IGST Act, 2017. By zero rating it is meant that the entire supply chain of a particular zero-rated supply is tax free i.e., there is no burden of tax either on the input side or output side;
    • The essence of zero rating is to make Indian goods and services competitive in the international market by ensuring that taxes do not get added to the cost of exports;
    • The objective of zero rating of exports and supplies to SEZ is sought to be achieved through the provision contained in Section 16(3) of the IGST Act, 2017, which mandates that a registered person making a zero rated supply is eligible to claim refund in accordance with the provisions of Section 54 of the CGST Act, 2017, in case where he supply goods under ‘Letter of Undertaking’, without payment of integrated tax and claim refund of unutilised input tax credit of CGST, SGST/UTGST and IGST or supply good or services or both, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied.
    • In case of ‘Export of Goods’, normal refund application in GST RFD – 01 is not applicable in this case and as per rule 96 of the CGST Rules, 2017 the shipping bill filed by an exporter shall be deemed to be an application for refund of integrated tax paid on the goods exported out of India. Once the shipping bill and export general manifest (EGM) is filed and a valid return is filed, the application for refund shall be considered to have been filed and refund shall be processed by the department
    • In case of ‘Service Exporters and Persons making supplies to SEZ’ the supplier may choose to first pay IGST and then claim refund of the IGST so paid. In these cases, the suppliers will have to file refund claim in FORM GST RFD-01 on the common portal, a per Rule 89 of the CGST Rules, 2017 with statement containing the number, date of invoices and the relevant Bank realisation Certificate.
    • Further, in case of supplies made to SEZ, the DTA supplier will have to file the refund claim in such cases. The second proviso to Rule 89 provides for requirements, conditions and the documents to be filed with, or for filing the application of refund.
    • The person making the zero-rated supplies will be entitled to provisional refund of 90% of the claim in terms of the Section 54(6) of the CGST Act. That rule 91 of CGST Rules, 2017 provide that the provisional refund is to be granted within 7 days from the date of acknowledgement of the refund claim.
  • The Hon’ble Court found that the principle emerging from the aforesaid discussion is: –
    • The entire supply chain in an export transaction would be tax free and exempt from GST, i.e., GST would be exempt both at input stage as well as output stage.
    • It is seen that the above intention is effectuated vide Section 16 of the IGST Act; Section 16(1)(a) of the IGST Act says that “zero-rated supply” means export of goods and services and Section 16(2) of the IGST Act says that “credit of input tax” may be availed for making zero-rated supplies;
    • Section 16(3) of the IGST Act says that a registered person making zero rated supply shall be eligible to claim refund such taxes paid in accordance with Section 54 of the CGST Act by exercising either of the following options.
    • He may supply goods or services or both under bond or LUT without payment of IGST and claim refund of unutilized input tax credit or on payment of IGST and claim refund of such tax paid on goods or services or both so supplied.
    • Section 54 of the CGST Act deals with refund of tax; Section 54(3) provides that a registered person may claim refund of any unutilized input tax credit at the end of any tax period. Further, Rule 89 of the CGST Rules contains the machinery provisions to operationalize Section 54 of the CGST Act where exports are done without payment of output tax under bond or LUT.
    • By the impugned amendment to Rule 89(4)(C), the phrase “turnover of zero-rated supply of goods” came to be defined; accordingly, refund will be the lesser of: (a) value of zero-rated supply of goods; or (b) value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier.
    • refund of unutilized input tax credit on account of making zero rated supply of goods would now be restricted to a maximum of 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier.
  • The Hon’ble Court thereafter, demonstrating the effect of the impugned amendment to Rule 89 (4)(C), was of the opinion that the impugned amendment to Rule 89(4)(C) of the CGST Rules is illegal, arbitrary, unreasonable, irrational, unfair, unjust and ultra vires Section 16 of the IGST Act and Section 54 of the CGST Act for the following reasons: –
    • Rule 89(4)(C) of the CGST Rules is ultra vires Section 54 of the CGST Act read with Section 16 of the IGST Act; the very intention of the zero-rating it to make entire supply chain of “exports” tax free, i.e., to fully ‘zero-rate’ the exports by exempting them from both input tax and output tax;
    • Rule 89(4)(C) of the CGST Rules is violative of Article 14 and 19(1)(g) of the Constitution of India; the quantum of refund of unutilized input tax credit is restricted only in cases falling under Section 16(3)(a) of the IGST Act, i.e., in cases where export of goods is made without payment of duty under a Bond/Letter of Undertaking (LUT), however no such restriction is imposed in case of export with payment of duty;
    • There is a hostile discrimination between two class of persons i.e., (i) the exporters who are making export without payment of duty under LUT and opting for obtaining refund of unutilized input tax credit, (ii) the exporters who are making export with payment of duty and then opt to obtain refund in terms of Section 16(3)(b). If the same class of property or persons similarly situated is subjected to an incidence of taxation, which results in inequality, the law may be struck down as creating an inequality amongst holders of the same kind of property or persons;
    • It is trite law that Article 14 of the Constitution forbids class legislation; however, Article 14 does not prohibit reasonable classification for the purpose of legislation provided it passes two tests, viz., that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group; and that the differentia must have a rational relation with the object sought to be achieved by the statute;
    • It is significant to note that in exports, availability of the rotation of funds is essential for the business to thrive; the entire concept of refund of unutilized input tax credit relating to zero-rated supply would be obliterated in case the respondents are permitted to put any limitation and condition that takes away petitioner’s right to claim refund of all the taxes paid on the domestic purchases used for the purpose of zero-rated supplies
    • Rule 89(4)(C) of the CGST Rules also suffers from the vice of vagueness for the reason that the words “like goods” and “similarly placed supplier” in the impugned Rule 89(4)(C) are completely open-ended and are not defined anywhere in the CGST Act/Rules or the IGST Act/Rules; in this context, it is relevant to state that considering the business of the petitioner, it is not possible to have any “like goods” and “same or similar placed supplier.
    • The impugned Rule also fails to clarify, as to what would be the consequence if there are no goods supplied in the domestic market and value of like goods provided by other suppliers is not available or as to what would be the consequences in respect of a supplier who may have different pricing policy for different local customers nor what would be the consequences in respect of a supplier who would be pricing the local goods differently in different states for the same products being exported.
    • When it is impossible for any exporter to show proof of value of “like goods” domestically supplied by the “same or, similarly placed, supplier”, the refund itself cannot be denied to such exporter and consequently, Rule 89(4)(C) of the CGST Rules merely being a machinery provision cannot impose a rigorous condition to take away right to obtain refund which the petitioner is otherwise entitled to in terms of Section 54 of CGST Act read with Section 16 of the IGST Act.
    • The impugned amendment is also unreasonable and arbitrary as adequate reasoning is not present; this would make such amendment unreasonable for the reason that it bears no rational nexus with the objective sought to be achieved by Section 16 of the IGST Act (supra). While Section 16 of the IGST Act seeks to make exports tax-free by “zero-rating” them, the impugned Rule 89(4) (C) of the CGST Rules, as amended on 23.03.2020 aims to do just the opposite by restricting the quantum of refund of tax available in making such exports.
  • With the above observations, the Hon’ble Court was also of the view that that terminology used in the impugned Rule i.e., ‘like goods and same or similarly placed supplier’ does not have any precise meaning in the said Rules and no guideline is present in that respect.
  • Thereafter, the Hon’ble Court took reference of the decisions of the Apex Court in Kartar Singh Vs. State of Punjab (1994) 3 SCC 569, wherein it was held that ‘It is the basic principle of legal jurisprudence that an enactment is void for vagueness if its prohibitions are not clearly defined’, and it was found that as the petitioner has rightly contended that in exports, availability of the rotation of funds is essential for the business to thrive. The entire concept of refund of unutilized input tax credit relating to zero-rated supply would be obliterated in case the respondents are permitted to put any limitation and condition that takes away petitioner’s right to claim refund of all the taxes paid on the domestic purchases used for the purpose of zero-rated supplies. The incentive given to the exporters would lose its meaning and this would cause grave hardship to the exporters, who are earning valuable foreign exchange for the country.
  • Further, as contended by the revenue that the impugned amendment was based on minutes of the GST council’s 39th meeting held on 14.03.2020, the reasons for such amendments based on possible misuse without adequate defining data cannot be allowed as having a reasonable basis in law. Issue of misuse cannot be generalized. Every such misuse is required to be ascertained and verified before asserting that there has been misuse. It is also well settled that if the government perceives that there could be a possibility of abuse of a provision, it should adopt measures to keep a check on the same; however, the law cannot be amended on the premise of distrust. Reference was made to the decision of Jammu and Kashmir in the matter of Reckitt Benckiser – 2011 (269) ELT 194 (J & K), wherein it was held that ‘The issue of misuse cannot be generalized. It has to be case specific covering an individual or group of individuals. Every such misuse is required to be ascertained and verified before asserting that there has been misuse of exemption. By a general survey conducted, it cannot be said that exemption benefit is being misused by the present petitioners’, as well as the reference was made to the decision of Hon’ble Supreme Court in ‘Sant Steel’, wherein the similar proposition of law was laid down.
  • It was found by the Hon’ble Court that in the aforesaid GST Council Meeting, it was also stated that the FOB value of exports will not be changed, which would mean that there is no doubt about the valuation of the goods; therefore, if there is no doubt about the value of the goods, the artificial restriction of refunds by taking the value of domestic supplies seems irrational. Further, the policy of the Government itself will have to satisfy the test of rationality and must be free from arbitrariness and discrimination. Reference was made to the decision of the Supreme Court in ‘Pepsi Foods’, wherein it was held that ‘We have already seen how unequals have been treated equally so far as assessees who are responsible for delaying appellate proceedings and those who are not so responsible, resulting in a violation of Article 14 of the Constitution of India. Also, the expression “permissible” policy of taxation would refer to a policy that is constitutionally permissible. If the policy is itself arbitrary and discriminatory, such policy will have to be struck down.’
  • It has been rightly contended on the behalf of the petitioner that the impugned Rule 89(4)(C) is arbitrary and unreasonable, in as much as the possibility of taking undue benefit by inflating the value of the zero-rated supply of goods, cannot be a ground to amend the Rule, which deserves to be declared invalid on this ground also. Further, the contentions and objections raised on the behalf of the respondents are not relevant to the adjudication of the petition.
  • The Hon’ble Court with aforesaid discussions & observations, was of the view that the impugned Rule 89(4)(C) of the CGST Rules, 2017 as amended vide Para 8 of the Notification No.16/2020-Central Tax dated 23.03.2020 deserves to be declared ultra vires and invalid and consequently deserves to be quashed, and also the impugned order dated 30.06.2020 which is based on the impugned amended Rule deserves to be quashed. Consequently, the respondents are to be directed to accept the refund applications of the petitioner and grant refund in favour of the petitioner together with applicable interest within a stipulated time frame.

The Hon’ble Court with the above findings, allowed the writ petition by declaring the impugned offending words, “or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier” appearing in Rule 89(4C) of the Central Goods and Services Tax Rules, 2017 as amended vide Para 8 of the Notification No.16/2020-Central Tax (F.No.CBEC- 20/06/04/2020-GST) dated 23.03.2020, ultra vires the provisions of the Central Goods and Services Tax Act, 2017 and the Integrated Goods and Services Tax Act, 2017 as also violative of Articles 14 and 19 of the Constitution of India and resultantly, the same are hereby quashed.  The impugned order dated 30.06.2020 is also quashed and the respondents are directed to accept the refund claims/applications of the petitioner and grant refund along with interest within a period of 3 months from the date of receipt of the copy of this order.

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