• Dated 1st October, 2020


The taxability dispute on ocean freight has been finally decided by the Gujarat High Court, which held that taxing ocean freight is ultra vires and leads to double-taxation

Madras High Court denies refund of input services under inverted duty structure

The latest judgment by Madras High Court1on refund of input tax credit on account of inverted rate structure is contradictory to the judgment of Gujarat High Court2 on the same issue.

Gujarat High Court, in a similar case held that since the provisions of section 50(3) of the CGST Act, 2017 provides for the refund of input tax credit in case the rate of GST on input is more that the rate of GST on outward supply of goods, the refund cannot exclude the credit on input services by way of rule [89(5)]. In other words, the court held that the rule cannot go beyond the provisions in the Act.

Submission on behalf of the Petitioner

It was submitted that if GST paid on inward supply is higher than the GST payable on output supplies, i.e. for supplies falling under inverted duty structure, Government decided to grant refund as per the provision of Section 54(3) read with proviso (ii) thereto. Although the formula contained in Rule 89(5) for considering turnover of Inverted Duty Structure is understandable,the above said formula has restricted the refund to input tax credit on inputs only and not on input services

Rule 89(5) of the CGST Rules of the CGST Rules defines a formula for calculating the amount of ITC refund due to the inverted duty structure. The provision of Rule 89(5) of the CGST Rules, 2017 as originally introduced was substituted vide Notification3 prescribing a revised formula for determining the refund on account of inverted duty structure which was given retrospective effect from 1.7.2017 vide another Notification4

Amended Rule 89(5) is reproduced below:-

In case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the 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 purpose of the above stated sub-rule, the expressions-

  1. Net ITC shall mean input tax credit availed on inputs during relevant period other than the input tax credit availed for which refund is claimed under sub rules (4A) or (4B) or both; and
  2. “Adjusted Total Turnover” and “relevant period” shall have the same meaning as specified them in sub-rule 4 ”

It is to be noted that, the net ITC in this formula is defined as input tax credit availed on inputs during relevant tax period. Although input services are not mentioned in the above definition, on observing the rest of the components of the above formula, turnover and output taxrefer to services as well.

Submission on behalf of the Respondent

It was submitted by the respondent that if a definition of a term is contained in the statute, the court would first consider and apply such definition and only in the absence of a statutory definition the court would consider the common parlance meaning of the term. It is to be noted that here the contention of the respondent was in regard to the interpretation of the expression ‘inputs’. The respondent has also relied on the judgment of Supreme Court5 for the above principle.

He further contended that refund is not a vested right. It is a statutory right and therefore such right cannot be exercised unless the statute grants such right. With regard to the distinction between goods and services, he pointed out that it is not merely a historical distinction and that the distinction has been carried forward into the CGST Act for the reason that the nature and character of goods and services are distinct and inherently different. To prove this, he relied on the judgment of Supreme Court6.

He also submitted that, persons who avail input goods and those who avail input services, there is no discrimination and all persons within each of the said classes are treated equally. For this, he has relied on the judgment of Supreme Court7.

Judgment of Honorable Madras High Court

The subject matter is the entitlement to refund of unutilized input tax credit and not the availing of the input tax credit. Under Section 54(3)(ii), Parliament has provided the right of refund only in respect of unutilized credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies. There has been a legislative trend towards a more uniform treatment as between goods and services, the distinction has certainly not been obliterated as is evident on perusal of the CGST Act, including provisions such as Sections 12 & 13 etc., which are specifically targeted at goods and services.

Keeping in mind the matter of entitlement of refund of input tax credit accumulated from the procurement of input services, it was held by the court that refund is a statutory right and the extension of benefit of refund is available only to the unutilized credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilized input tax credit that accumulated on account of input services.

It is also to be noted that Section 54(3)(ii) states that a refund claim to the unutilized credit that accumulates only on account of the rate of tax on input goods being higher than the rate of tax on output supplies. Further, Rule 89(5) of the CGST Rules, as amended, is in conformity with Section 54(3)(ii). Consequently, it is not necessary to interpret Rule 89(5) and, in particular, the definition of Net ITC therein so as to include the words input services.

Our view

In the light of above backdrop, two different high courts have given different view on the same matter. The same will lead to confusion and litigation and can be finally settled at Supreme Court. We would like to re-iterate our earlier view, when we had explained Gujarat High Court decision that that provisions contained in Rule 89(5)(a) of the CGST Rules are contrary to the provisions of Section 54(3) of the CGST Act and accordingly, refund of input services under inverted duty structure is allowed. In the light of above, it is advisable to claim refund only under a situation wherein there is no utilization of input tax credit arising on account of input services, else, as a tax planning measure, refund of input under inverted structure and utilization of input services towards payment of domestic output liability may always be adopted

1TranstonnelstroyAfcons JV Vs UOI [2020-TIOL-1599-HC-MAD-GST]

2VKC Footsteps India Pvt Ltd Vs UOI [2020-TIOL-1273-HC-AHM-GST]

3 Notification No 21/2018-CT dated 13.6.2018

4 Notification No.26/2018-CT Dated 13.6.2018

5Bakelite Hylam Ltd Vs Collector of Central Excise

6 West Bengal VsGirish Kumar Navalakha and Another

7 State of Gujarat VsAmbika Mills

  • 
The taxability dispute on ocean freight has been finally decided by the Gujarat High Court, which held that taxing ocean freight is ultra vires and leads to double-taxation
  • BT Associates is a premier indirect tax consultant in kolkata, delivering high quality services to client in the area of indirect taxation.GST idea is a unit of BT Associates formed to share knowledge on stakeholders. We cover entire gamut from technical papers to recent development including IT under GST

  •  
The taxability dispute on ocean freight has been finally decided by the Gujarat High Court, which held that taxing ocean freight is ultra vires and leads to double-taxation

  • 
The taxability dispute on ocean freight has been finally decided by the Gujarat High Court, which held that taxing ocean freight is ultra vires and leads to double-taxation
    1. Founder Member

    2. Bhaskar Thakkar
    3. Chief Executive officer
    4. BT Associates, India
    5. thakkar@btassociate.com
  • BT Associates is a premier indirect tax consultant in kolkata, delivering high quality services to client in the area of indirect taxation.GST idea is a unit of BT Associates formed to share knowledge on stakeholders. We cover entire gamut from technical papers to recent development including IT under GST