Supreme Court Judgement on Input Services Under Inverted Duty Structure

Petitioner: Union of India & Others

Respondents: VKC Footsteps India Pvt Ltd.

Authority: Supreme Court

Date: 13th September 2021

Case: The Gujarat High Court in the case of VKC Footsteps India Pvt Ltd v Union of India dated 24th July 2020 directed the Government to consider ITC on input services as part of Net ITC for the purpose of calculating refund under Inverted Duty Structure. Whereas, the Madras High Court in the case of Tvl. Transtonnelstroy Afcons Joint Venture v Union of India dated 21st September 2020 gave a contrary judgement.

Core Issue: Divergent judgement of both the High Courts formed the subject matter of appeal.

Court’s Observation:

1. The Gujarat High Court having examined the provisions of Section 54(3) and Rule 89(5) held that the latter was ultra vires. It also held that by prescribing a formula in Rule 89 (5) 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) 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).

2. The Madras High Court, on the other hand, declined to follow the view of the Gujarat High Court noting that the proviso to Section 54(3) and, more significantly, its implications do not appear to have been taken into consideration except for a brief reference.

3. Section 54(3) with its proviso is a complete code which allows refund only on inputs where Input rate is higher than rate on output supplies.

4. Rule 89(5) which provides for availing ITC on inputs does not transgress the statutory restriction in proviso (ii) to Section 54(3).

5. The Hon'ble Supreme Court affirm the view of the Madras High Court and disapprove the view of the Gujarat High Court.

Judgement:

1. The appeals filed by the assessees against the judgment of the Madras High Court shall stand dismissed.

2. The formula prescribed in Rule 89(5) is not perfect as it seeks to deduct the total output tax from only one component of the ITC, namely ITC on input goods and not on input services. The formula tilts the balance in favour of the Revenue by reducing the refund granted. The practical effect of the formula might result in certain inequities.

3. The Court strongly urged the GST Council to reconsider the formula and take a policy decision regarding the same.