Bombay HC issues notice in writ challenging Rule 89(5) denying refund of 'input services' under inverted duty structure

Bimal Jain 
on 26 August 2019


Facts:

M/s Raymond UCO Denim Private Limited ('Raymond' or 'the Petitioner'), approached the Hon'ble Bombay High Court challenging the vires of Rule 89(5) of the CGST Rules, 2017('CGST Rules') on the ground that it runs contrary to the provisions of Section 54(3) of the CGST Act, 2017('CGST Act').

The cause of action to challenge the CGST Rules has arisen because the application of the Petitioner for refund of Rs.39,28,339/-being the amount of input tax credit ('ITC') on input services, has been rejected on the basis of the provisions of Rule 89(5) of the CGST Rules read with NotificationNo.5/2017 dated June 28, 2017.

Issue involved:

Whether Rule 89(5) of the CGST Rules denying refund of ITC on account of input services in case of inverted duty structure is contrary to Section 54(3) of the CGST Act?

Held:

The Hon'ble Bombay HC issued notice in Writ Petition No.5676 of 2019 dated August 13, 2019, having observed as under:

• The provisions of Section 54(3) of the CGST Act entitles the Petitioner to claim refund of unutilized ITC which is defined under Section 2(63) and the input tax is defined under Section 2(62) of the CGST Act to mean the tax charged on any supply of goods or services or both made to him.

• Rule 89(5) of the CGST Rules gives the formula for computation of refund of ITC and explanation (a) therein excludes ITC on input services from the definition of 'Net ITC', though it is shown under the turnover of inverted rated supply of goods and services therein.

The matter is now listed on October 9, 2019.

Our Comments:

Notice have also been issued to the Revenue in similar challenge to Rule 89(5) of CGST Rules in following cases:

• Gujarat HC in case of Shree Rama Newsprint Ltd. vs. Union of India [TS-486-HC-2018(GUJ)-NT];

• Gujarat HC in the case of Quarry Owners Association vs. Union of India [TS-588-HC-2019(GUJ)-NT];and

• Patna HC in case of AFCONS-SIBMOST Joint Venture vs. Union of India and Other [TS-596-HC-2019(PAT)-NT]

Also, Maharashtra AAR in case of Daewoo - TPL JV [TS-531-AAR-2019-NT]had denied refund of ITC on 'input services' in a transaction covered under inverted duty structure.

It is to be noted that in terms of Section 54(3) of the CGST Act, refund of any unutilized ITC may be claimed where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nitrated or fully exempt supplies).Further, Section 2(59) of the CGST Act defines inputs as any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. Thus, inputs do not include services or capital goods. Ideally, input services must also be included so that the cost burden can be reduced for the consumers & the industry can benefit.

Citation: TS-637-HC-2019(BOM)-NT

Relevant Provisions: Section 54(3) of CGST Act: Refund of unutilized ITC

Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilized input tax credit at the end of any tax period:

Provided that no refund of unutilized input tax credit shall be allowed in cases other than -

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilized input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.

Rule 89(5) of CGST Rules: Formula for computing refund of ITC in case of inverted duty structure

In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:-

Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} - tax payable on such inverted rated supply of goods and services.

Explanation:- For the purposes of this sub-rule, the expressions -

(a) Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and

(b) "Adjusted Total turnover' and 'relevant period" shall have the same meaning as assigned to them in sub-rule (4)


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