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16 September 2021

Refund of ITC on account of input services is not allowed under Inverted Duty Structure.

In the case of Union of India vs. VKC Footwear India Pvt. Ltd. cited in [2021] 130 taxmann.com 193 (SC), the Hon’ble Supreme Court of India has announced a landmark decision by upholding the decision of Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India [2020] 119 taxmann.com 324 / 43 GSTL 433 (Madras) and rejecting the decision of VKC Footsteps India (P.) Ltd. v. Union of India [2020] 118 taxmann.com 81 (Gujarat). The Hon’ble Supreme Court has held that explanation (a) to substituted rule 89(5) which denies refund of 'unutilised input tax' paid on 'input services' as part of 'input tax credit' accumulated on account of inverted duty structure is in conformity with section 54(3).

Section 54(3) of the CGST Act read with rule 89(5) of CGST Rules provides for refund of unutilized input tax credit on inputs, the rate of tax on which is higher than the arte of tax on outward supplies.

Earlier, the Division Bench of the Gujarat High Court in the case of VKC Footsteps India (P.) Ltd. v. Union of India has held that by prescribing a formula in Rule 89(5) of the CGST Rules to execute refund of unutilized ITC accumulated on account of input services, the delegate of the legislature had acted contrary to the provisions of section 54(3) of the CGST Act which provides for a claim of refund of any unutilized ITC. The Gujarat High Court noted the definition of ITC in Section 2(62) and held that rule 89(5) by restricting the refund only to input goods had acted ultra vires Section 54(3).

The Hon’ble Supreme Court has stated that provisos to Section 54(3) should be construed as restrictions which limits the refund of ITC other than attributable to input under inverted duty structure. On discussion of validity of formula for calculation of refund under inverted duty structure, it has been held that the anomalies in the formula cannot result in the invalidation of a fiscal rule which has been framed in exercise of the power of delegated legislation. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same.

The Hon’ble court has held that proviso which restricts the refund of input tax credit on capital goods and input services under inverted duty structure is not ultra vires, however, it has been recognised that the formula for calculating refund is prejudiced in favour of revenue and matter can be represented before Law committee or GST Council.