BRIEF FACTS OF THE CASE
- The Petitioner(s) being exporters were eligible for refunds of
taxes paid on input goods or/and input services, or the IGST paid
on exported goods, as provided under section 16 of the IGST Act,
2017. Said provision enables the exporter to claim a refund by two
methods1:-
- Supply of goods/ services under bond or letter of undertaking [LUT] without payment of IGST to claim refund of unutilized input tax credit arising from the payment of tax on goods or services used in making the exports [subject to Rule 89 of the CGST Rules];
- Supply of goods/ services on payment of IGST [by utilizing the ITC on inward supplies of goods or services] and a resultant claim for refund of such IGST paid [Subject to Rule 96 of the CGST Rules]
- Rule 96(10) imposed various restrictions on refund of IGST paid
on export of goods. It provides that if certain inputs have been
availed after taking the benefit of notifications mentioned
therein2, the Exporter was restricted from claiming a
refund of IGST paid on the export of goods. Taking recourse to the
said rule, the refund of IGST was being denied to the exporters
under the below circumstances by the Revenue Authorities:
- Where benefit under the specified notifications has been taken only for the part of inputs
- Where the benefit under the specified notifications has been taken for some earlier consignment but not availed it for the consignment in question
- Where the unit that has claimed the benefit of the specified notification is different from the unit that undertakes the export and claims the refund
- Per contra, Rule 89 does not restrict the exporter to claim a refund of unutilized input tax credit even if the inputs have been subject to the benefit under the specified notifications. In fact, rule 89(4A) and (4B)3 were inserted to provide for claiming a refund of tax paid on inputs [including input services] attributable to the goods exported which are manufactured from the inputs imported availing the benefit of such specified notifications.
- The key issue before the Kerala High Court was whether the
restriction imposed by Rule 96(10) is authorized by the
'conditions, safeguards as may be prescribed' provided by
section 16 of the IGST Act and the writ petitions were filed with
the following questions of law:
- Is Rule 96(10) of the CGST Rules ultra vires section 16 of the IGST Act in as much as it deprives the Exporters from claiming refund of IGST paid one export of goods?
- Does Rule 96(10) of the CGST Rules violates Article 14, 19(1)(g), and 265 of the Constitution of India?
- Is Rule 96(10) of the CGST Rules, 'manifestly arbitrary' as the interpreted in the case of Shayara Bano4?
- Has the rule deprived the exporters their vested right to claim refunds on the IGST paid on exports?
KEY OBSERVATIONS OF THE HON'BLE HIGH COURT
- The Hon'ble High Court held that the words "Subject to conditions, safeguards and procedures as may be prescribed' in section 16(3)(a) and (b) of the IGST Act [and Section 20 of IGST Act and 54 of the CGST Act] do not authorize the imposition of restrictions in such a manner that it would completely take away the right granted to claim refund on 'Zero rated supplies' under section 16 of the IGST Act. In holding so, the Hon'ble Court, placed reliance on the case of Zenith Spinners vs. Union of India [Gujarat High Court]5 , wherein the validity of the Notification issued under the Central Excise era was examined to evaluate whether these Notifications were contrary to the Central Excise Rules 2002 [Rule 18 and 19] and it was held that 'It is settled position that by virtue of exercise of powers of issuing a notification which is for the purpose of imposing conditions, safeguards and procedure the authority cannot exceed the jurisdiction by providing for a situation which either restricts the rights granted under the Rule itself or make the Rule itself redundant'.
- Upon a comprehensive comparison of the right to refund under Section 16(3)(a) [refund of unutilized input tax credit per Rule 89] and Section 16(3)(b) of the IGST Act [refund of IGST paid on exports per Rule 96], as they existed prior to 1 October 2023, it was observed that Rule 96(10) has resulted in unjust discrimination between exporters who apply for refunds under Section 16(3)(a) read with Rule 89 and those who apply under Section 16(3)(b). Citing the Shayara Bano case [supra], the Court held that Rule 96(10) imposes a restriction not envisioned by Section 16 of the IGST Act, leading to absurd outcomes. Consequently, the Court declared Rule 96(10) ultra vires to Section 16 of the IGST Act as it is manifestly arbitrary.
- Rule 96(10) has been omitted with effect from 8 October 2024 and the Hon'ble Court has taken note of the omission and observed that the said rule has been omitted prospectively and for the past period till the time it existed in its amended form will be declared as ultra vires section 16 of the IGST Act.
- The Hon'ble Court further directed that any action which has been already initiated by way of show cause notice or culminated in an order against the Petitioners based on Rule 96(10) of the CGST Rules will stand quashed and no proceedings shall taken to recover any IGST that has been refunded to the Petitioners for the period between 23 October 2017 to 8 October 2024.
AURTUS COMMENTS
- It is a well-established principle that taxes should not be exported along with goods or services, while countries have the power to [locally] tax the entry or import of goods. To align with this principle, Section 16 of the IGST Act enables exporters to claim refunds on exports. The restriction created by Rule 96(10) of the CGST Rules was with the intent to limit refund in instances where the inputs used in the manufacture of exported goods had not suffered any tax/ duties. The Revenue Authorities have given a very strict interpretation to this provision and denied refund of tax paid in all instances where there is even smallest utilization of these inputs procured under the specified Notifications, without exercising an intelligible differentia.
- The Court has observed that Rule 96(10) is discriminatory in as much as it denies the refund of IGST paid on export of goods, whereas Rule 89(4A)/89(4B) allowed the refund of ITC attributable to exported goods without hampering on the right of claiming the refund. Though said rules now have been omitted with effect from 8 October 2024 and taxpayers will be entitled to the refund in terms of Rule 89(4).
- By declaring Rule 96(10) of the CGST Rules as ultra vires Section 16 of the IGST Act [for the period 23 October 2017 to 8 October 2024], the ruling has now enabled the exporters to pursue the refund claims filed for the IGST paid under all circumstances. However, for exporters, exporting under the LUT route, and facing accumulation of input tax credit [ITC] [especially those availed on capital goods], there is no relief. Whether the Government will introduce these restrictions to curb the liquidation of ITC availed on inputs not related to the exported goods or on capital goods, by making any amendments to the plenary legislations, is something to deliberate upon.
Footnotes
1 Until the amendment in section 16 of the IGST Act [i.e. uptil 1 October 2023]
2 Notification No. 48/2017-Central Tax dated 18 October 2017 [Deemed exports], Notification No. 40/2017 Central Tax dated 23 October 2017, Notification No. 41/2017 Integrated Tax (Rate) dated 23 October 2017, Notification No. 78/2017 Customs dated 13 October 2017, Notification No. 79/2017 Customs dated 13 October 2017
3 Rule 89(4A) and (4B) have been omitted with effect from 8 October 2024 vide Notification No. 20/2024 Central Tax dated 8 October 2024. Post omission of the said Rules, the taxpayer will be entitled to claim refund in accordance with formula provided under Rule 89(4).
4 [2017] 9 SCC 1
5 2005 SCCOnline Guj 601
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