Breif Issue :

Facts & Issue of The Case:

Since these petitions are arising out of the common issue, the same were heard analogously and are being disposed of by this common Judgment. The following petitions were clubbed into the said decisions;

1. Gyscoal Alloys Ltd.
2. The Quarry Owners Association.
3. Adani Wilmar Limited.
4. South Gujarat Textile Processors Association.
5. Hasankha Rehmankha Belim through His Brother.
6. ADI Tradelink.
7. ADI Enterprises.
8. M/S Topland Engines Private Limited.

The petitioner VKC Footsteps India Pvt is engaged in the business of manufacture and supply of footwear which attracts GST @5%. The Petitioner procures input services such as job work service, goods transport agency service etc. and inputs such as synthetic leather, PU Polyol, etc., on payment of applicable GST for use in the course of business and avails input tax credit of the GST paid thereon. The inputs and input services attract GST at the rate of 12% or 18%.

Thus, GST rate paid by the Petitioner on procurement of input is higher than the rate of tax payable on their outward supply of footwear. Hence, it results in accumulation of unutilized credit in electronic credit ledger of the Petitioners.

Section 54(3) (ii) of the CGST Act lays down the eligibility criteria for the grant of refund on account of inverted duty structure allows refund of any unutilized input tax credit at the end of any tax period due to an inverted tax structure. Here, there is no specific mention of goods (inputs) or services (input services) alone. Hence, it is evident that the provision covers both services and goods.

However, Rule 89(5) of the CGST Rules defines a formula for calculating the amount of ITC refund due to the inverted tax structure. The maximum refund amount is equal to {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} – tax payable on such an inverted rated supply of goods and services.

Circular No. 79/53/2018- GST dated 31.12.2018 provides example at para 4(b) which is informative,

1. if, the rate of GST on some inputs is higher than the rate of GST applicable on the output supply, while rate of GST on some other inputs is lower than the rate of GST applicable on the said output supply, then that is a situation of inverted duty structure governed by Section 54(3) of the CGST Act
2. if, assessee supplies goods and none of which involve inverted duty structure, it is not entitled for any refund of unutilized input tax credit,
3. if, assessee supplies goods involving only inverted duty structure, then entire unutilized credit is refundable to it and (iv)if, an assessee is engaged in making two supplies, one involving inverted duty structure and other not involving inverted duty structure, then it is not entitled for refund for second category of supplies and eligible for refund only for first category of supplies.

The provision of Rule 89(5) of the CGST Rules, 2017 as originally introduced was substituted vide Notification No. 21 /2018-CT dated 18.4.2018 prescribing a revised formula for determining the refund on account of inverted duty structure which was given retrospective effect from 1.7.2017 vide Notification No. 26/2018-CT dated 13.6.2018.

The revised formula inter alia excluded input services from the scope of ‘net input tax credit’ for computation of the refund amount.

Hence, respondents are allowing refund of accumulated input tax credit of tax paid on inputs However, refund of accumulated credit of tax paid on procurement of input services is being denied.

Petitioners have therefore challenged validity of amended Rule 89(5) of the CGST Rule,2017 to the extent it denied refund of input tax credit relatable to input services.