Rule Restricting The Value Of Exports Supply Upto 1.5 Times The Domestic Supply In Course Of Making A Zero-Rated Supply Is Ultra Vires: Karnataka High Court

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Name of the case – Tonbo Imaging India Pvt Ltd Vs Union Of India (Karnataka High Court [Writ Petition No. 13185 of 2020 (T-RES) dated 16th February, 2023]

Facts of the case:

  • M/s Tonbo Imaging India Pvt Ltd (‘Petitioner’), was engaged in exporting customized / unique products by designing, developing, building and deploying various types of advanced imaging and sensor systems to sense.
  • Petitioner claimed refund of unutilized input tax credit under Section 54(3)(i) of the Central Goods and Services Act, 2017 (‘CGST Act’) read with Rule 89 of the CGST Rules in the month of May 2018, July 2018, August 2018, November 2018, December 2018 and March 2019 on May 25, 2020, May 27, 2020, and  May 28, 2020.
  • The Central Board of Indirect Taxes and Customs (“CBIC”) vide Notification No. 16/2020 Central Tax dated March 23, 2020 amended Rule 89(4)(c) of the CGST Rules, which restricted the refund of exports made through LUT to a maximum of 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier.
  • The Deputy Commissioner of Central Tax, Bengaluru (‘Respondent’) issued deficiency memos on the ground that the petitioner had not given proof, which was required to be given in terms of the amended Rule 89(4)(C) of the CGST Rules.
  • The Petitioner stated that the amended rule would not be applicable for the period for which the refund claim was sought and the Petitioner would be governed by the unamended Rule 89(4)(c) CGST Rules and not by the amended Rule 89(4)(c) of the CGST Rules.
  • The Respondent rejected the claims filed by the Petitioner vide an order dated 30.06.2020 (“the Impugned Order”), rejecting the claim of refund filed by the Petitioner.
  • Aggrieved by the Impugned Order, the Petitioner filed a writ petition before the Karnataka High Court.

Relief Asked for in Writ Petition:

Declare Rule 89(4)(c) of the CGST Rules unconstitutional, being violative of Articles 19(1)(g) and 14 of the Constitution and ultravires to Section 16 of the IGST Act and Section 54 of the CGST Act, and the Impugned order is illegal, arbitrary and without jurisdiction or authority of law.

Held by Karnataka Court:

  • Rule 89(4)(C) of the CGST Rules is ultra vires Section 54 of the CGST Act read with Section 16 of the IGST Act; the very intention of the zero-rating it to make entire supply chain of “exports” tax free, i.e., to fully ‘zero-rate’ the exports by exempting them from both input tax and output tax; accordingly, Section 16(3) of the IGST Act allows refund of input taxes paid in the course of making a zero-rated supply, i.e., supplies which covers exports as well as supplies to SEZs. The rule in whittling down such refund is ultra vires in view of the well settled principle of law that Rules cannot override the parent legislation.
  • Rule 89(4)(C) of the CGST Rules is violative of Article 14 of the Constitution of India; the quantum of refund of unutilized input tax credit is restricted only in cases falling under Section 16(3)(a) of the IGST Act, i.e., in cases where export of goods is made without payment of duty under a Bond/Letter of Undertaking(LUT); however, no such restriction is imposed on cases falling under Section 16(3)(b) of the IGST Act, i.e., in cases where export of goods is made after payment of duty; by virtue of the above, there is a hostile discrimination between two class of persons.
  • Rule 89(4)(C) of the CGST Rules is violative of Article 19(1)(g) of the Constitution of India, In exports, availability of the rotation of funds is essential for the business to thrive; the entire concept of refund of unutilized input tax credit relating to zero-rated supply would be obliterated in case the respondents are permitted to put any limitation and condition that takes away petitioner’s right to claim refund of all the taxes paid on the domestic purchases used for the purpose of zero-rated supplies; the incentive given to the exporters would lose its meaning and this would cause grave hardship to the exporters who are earning valuable foreign exchange for the country; it follows there from that exporters would have factored in such incentives in the pricing mechanism when they quote and consequently, the restriction of the same by the impugned amended Rule 89(4)(C) would be highly unreasonable.
  • Rule 89(4)(c) of the CGST Rules contains words “like goods” and “similarly placed supplier,” which are not defined anywhere in the CGST Act or IGST Act or rules made thereunder.
  • The respondents-revenue contend that the impugned amendment was based on the minutes of the GST Council’s 39th meeting held on 14.03.2020, which discloses that only ground for amendment seems to be a possible misuse without any factual data supporting the same. Issue of misuse cannot be generalized. Every such misuse is required to be ascertained and verified before asserting that there has been misuse. It is also well settled that if the government perceives that there could be a possibility of abuse of a provision, it should adopt measures to keep a check on the same; however, the law cannot be amended on the premise of distrust.
  • Directed the Respondent to accept the refund claims of the Petitioner
  • Allowed the Writ petition.

Our Comments:

Karnataka High Court has correctly held Rule 89(4)(c) unconstitutional as the rule restricts the exporters from claiming refund of ITC in case such exporter is making export via LUT model as the rule restricts the refund claim of unutilized ITC on the export of goods under LUT to the lower of actual value or 1.5 times the value of the same goods domestically supplied by the assesse. Further, it is challenging to ascertain the value of similar supplies in the case of customized products or where the goods are only manufactured for export and do not have a domestic market. In such cases, the genuine exporters would have to face inconvenience due to malpractices by others.

Limitation: The purpose of this article is for knowledge sharing purpose. Views expressed in this note are personal views of the author. The same should not be construed as professional advise

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