Rule 89(5) which denies refund of unutilised ITC of input services is not ultra vires; SC set aside decision of Gujarat HC

Case details: Union of India v. VKC Footsteps India Pvt Ltd. - [2021] 130 taxmann.com 193 (SC)

Judiciary and Counsel Details

• • Dr. Dhananjaya Y. Chandrachud and M.R. Shah, JJ.

Facts of the Case

The petitioners filed writ petitions before the High Court of Gujarat and the High Court of Madras and challenged the validity of Rule 89(5) which denies refund of unutilised ITC on input services on the ground that it is ultra vires the provisions of Section 54. The Gujarat High Court directed to allow the claim for refund made by the petitioners before it, considering unutilised ITC on input services as part of “Net ITC” for the purpose of calculating refund in terms of Rule 89(5) but the Madras High Court came to a contrary conclusion and upheld validity of Rule 89(5). Therefore, appeal was filed before the Supreme Court due to divergence of views.

Supreme Court Held

The Honorable Supreme Court observed that the purpose of the formula in Rule 89(5) is to give effect to Section 54(3)(ii) which makes a distinction between input goods and input services for grant of refund. The Apex Court also observed that the formula under Rule 89(5) to create a legal bifurcation is a familiar terrain in fiscal legislation including delegated legislation and therefore, the decision of Gujarat High Court was liable to set aside which strike down the Rule 89(5) and upheld the decision of Madras High Court.

However, it was also noted that the practical effect of the formula might result in certain inequities but prescribing an order of utilisation would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Therefore, the Court would strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same.