DR DHANANJAYA Y.CHANDRACHUD, J. - (1.) Parliament while enacting the Central Goods and Services Tax Act 2017,("CGST Act") has incorporated a provision for refund of tax in Section 54. Sub-Section (3) embodies a provision for refund of unutilised input tax credit("ITC") in cases involving: (i) zero rated supplies made without payment of tax; and (ii) credit accumulation "on account of rate of tax on inputs being higher than rate of tax on output supplies".
(2.) While envisaging a refund in the latter of the above two situations, Parliament was cognizant of the fact that ITC may accumulate due to a variety of reasons. However, Parliament envisaged a specific situation where the credit has accumulated due to an inverted duty structure, that is where the accumulation of ITC is because the rate of tax on inputs is higher than the rate of tax on output supplies. Taking legislative note of this situation, a provision for refund has been provided for in Section 54(3). The Central Goods and Service Tax Rules 2017 ("CGST Rules") have been formulated in pursuance of the rule making power conferred by Section 164 of the CGST Act. Rule 89(5) provides a formula for the refund of ITC, in "a case of refund on account of inverted duty structure". The said formula uses the term "Net ITC". In defining the expression "Net ITC", Rule 89(5) speaks of "input tax credit availed on inputs". B Factual Backdrop
(3.) Writ petitions under Article 226 of the Constitution were instituted before the High Court of Gujarat and the High Court of Judicature at Madras. The petitioners before the High Court submitted inter alia that (i) Section 54(3) allows for a refund of ITC where the accumulation is due to an inverted duty structure; (ii) ITC includes the credit of input tax charged on the supply of goods as well as services; (iii) Section 54(3) does not restrict the entitlement of refund only to unutilised ITC which is accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies. It also allows for refund of unutilised ITC when the rate of tax on input services is higher than the rate of tax on output supplies; (iv) While Section 54(3) allows for a refund of ITC originating in inputs as well as input services, Rule 89(5) is ultra vires in so far as it excludes tax on input services from the purview of the formula; and (v) In the event that Section 54(3) is interpreted as a restriction against a claim for refund of accumulated ITC by confining it only to tax on inputs, it would be unconstitutional as it would lead to discrimination between inputs and input services.;