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Gujarat HC held that Explanation (a) to Rule 89(5) which denies the refund of “unutilised input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act. Thus the Net ITC should mean “input tax credit” availed on “inputs” and “input services” both for the purpose of calculation of the refund.

Section 54 of the CGST Act, 2017— Refund of Inverted Duty Structure—Input Service -– The Petitioner engaged in the business of manufacture and supply of footwear and procures input services. The GST rate paid by the Petitioner on procurement of input is higher than the rate of tax payable on their outward supply of footwear. In spite of utilization of credit for payment of GST on outward supply, there is accumulation of unutilized credit in electronic credit ledger of the Petitioners. The petitioner prayed to (a) hold that the amended Rule 8 is ultra vires Section 54(5) inasmuch as Section 54(3) provides for refund of ‘any unutilized input tax credit accumulated on account of inverted duty structure thereby covering credit of both ‘inputs’ and ‘input services’; (b) hold that the amended Rule 89 is violative of Article 14 of Constitution of India inasmuch as it treats dealers with accumulated credit on inputs and dealers with accumulated credit on input services differently; (c) hold that Section 164(3) is unconstitutional inasmuch as it suffers from the vice of excessive delegation; (d) hold that the amendment of Rule 89 cannot be given retrospective application; (e) quash the refund withholding orders dated 14.06.2018, and letter dated 11.06.2018 issued by Respondent (f) direct Respondents, pending the present petition, not to initiate any coercive action or recovery proceedings.
During the hearings, the Court observed that the “input” and “input service” are both part of the “input tax” and “input tax credit”. As per provision of sub-section 3 of Section 54, the legislature has provided that registered person may claim refund of “any unutilised input tax”, therefore, by way of Rule 89(5), such claim of the refund cannot be restricted only to “input” excluding the “input services” from the purview of “Input tax credit”. Moreover, clause (ii) of proviso to Sub-section 3 of Section 54 also refers to both supply of goods or services and not only supply of goods as per amended Rule 89(5).
Held that:- The Hon’ble High Court allowed the petition and held that Explanation (a) to Rule 89(5) which denied the refund of “unutilised input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the Act. The Net ITC should mean “input tax credit” availed on “inputs” and “input services” as defined under the Act. Further directed the respondents to allow the claim of the refund, considering the unutilised input tax credit of “input services” as part of the “net input tax credit”, as per Rule 89(5) of the rules for claiming refund under Sub-section 3 of Section 54 Act, 2017.—VKC Footsteps India Pvt. Ltd. Vs. Union of India & 2 Other (S) [2020] 26 TAXLOK.COM 060 (Gujarat)