Rule 89(5) which denies refund of unutilised ITC of input services is not ultra vires; SC set aside the decision of Gujarat HC
Case Details: Union of India v. VKC Footsteps India Pvt Ltd.
Few writ petitions were filed before the High Court of Gujarat and the High Court of Madras challenging the validity of Rule 89(5) that denies the refund of un-utilised ITC on input services on the ground that it is ultra vires the provisions of Section 54. The Gujarat High Court allowed the claim for the 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). However, the Madras High Court came to a contrary conclusion and it upheld the validity of Rule 89(5). Therefore, the appeal was filed before the Supreme Court due to divergent views.
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. It set aside the decision of the Gujarat High Court and upheld the decision of the Madras High Court.
The Supreme Court also noted that the practical effect of the formula might result in certain inequities but it restrained providing any formula saying that it’s the field of the legislature. The Court strongly urged the GST Council to reconsider the formula and take a policy decision regarding the same.
