M/S Tonbo Imaging India Pvt Ltd vs Union Of India on 16 February, 2023

Outcome**
The Karnataka High Court allowed the writ petition.
* It declared the words "or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier" in Rule 89(4C) of the Central Goods and Services Tax Rules, 2017 (CGST Rules), as amended by Notification No. 16/2020-Central Tax dated 23.03.2020, to be ultra vires the CGST Act, 2017 and the Integrated Goods and Services Tax Act, 2017 (IGST Act, 2017), and violative of Articles 14 and 19 of the Constitution of India. Consequently, these words were quashed.
* The impugned refund rejection order dated 30.06.2020 passed by the Deputy Commissioner of Central Tax was quashed.
* The respondents-revenue were directed to accept the petitioner's refund claims/applications and grant the refund, along with applicable interest, within three months from the date of the order.
* The challenge to the Explanation to Rule 93 of the CGST Rules was kept open for consideration in an appropriate future case.

2. Core Issue
The core issue was the constitutional validity of Rule 89(4C) of the CGST Rules, as amended by Notification No. 16/2020-Central Tax dated 23.03.2020, which restricted the "turnover of zero-rated supply of goods" for calculating Input Tax Credit (ITC) refund to the lesser of the actual value of zero-rated supply or 1.5 times the value of like goods domestically supplied by the same or similarly placed supplier. A secondary issue was the retrospective application of this amended rule to refund claims pertaining to periods prior to its amendment.

3. Key Facts
* The petitioner, M/s Tonbo Imaging India Pvt Ltd, is engaged in designing, developing, and deploying advanced imaging and sensor systems, manufacturing unique and customized products.
* The petitioner exported these customized/unique products during May 2018 to March 2019, which are classified as "zero-rated supplies" under Section 16 of the IGST Act.
* The petitioner filed six refund applications for unutilized ITC under Section 54(3)(i) of the CGST Act read with Rule 89 of the CGST Rules on various dates in May 2020, covering the tax periods from May 2018 to March 2019.
* Prior to these refund applications, Rule 89(4C) of the CGST Rules was amended with effect from 23.03.2020. The amended rule introduced a restriction on the "turnover of zero-rated supply of goods" for refund calculations.
* The respondents issued show cause notices, and subsequently, an order dated 30.06.2020, rejecting the petitioner's refund claims. The rejection was based on the petitioner's failure to provide proof as required by the amended Rule 89(4C), even though the refund period was prior to the amendment.
* The petitioner challenged the rejection order and the constitutional validity of the amended Rule 89(4C) itself.

4. Arguments (Taxpayer vs Revenue)

Taxpayer (M/S Tonbo Imaging India Pvt Ltd) Arguments:
* Ultra Vires to Parent Acts: Rule 89(4C) is ultra vires Section 54 of the CGST Act and Section 16 of the IGST Act. The intent of "zero-rating" is to make the entire export supply chain tax-free, including refund of input taxes. Rules cannot override the parent legislation.
* Lack of Legislative Competence: Rule 89(4C) is ultra vires Articles 269A and 246A of the Constitution, as Parliament lacks legislative competence to levy GST on export of goods.
* Violation of Constitutional Rights:
* Article 14 (Equality): The restriction on refund applies only to exports made without payment of tax under Bond/LUT (Section 16(3)(a) IGST Act), but not to exports made on payment of tax (Section 16(3)(b) IGST Act), creating hostile discrimination between two classes of exporters. The rule is arbitrary and unreasonable, lacking a rational nexus with the objective of Section 16 of the IGST Act (zero-rating exports).
* Article 19(1)(g) (Freedom of Trade): Restricting refund affects fund rotation, a crucial aspect for export businesses. It obliterates the right to claim full refund of taxes paid on domestic purchases used for zero-rated supplies, causing hardship and undermining export incentives.
* Vagueness and Impracticality: The terms "like goods" and "similarly placed supplier" are undefined in the GST laws, making it impossible for the petitioner (dealing in unique/customized products) to comply. A machinery provision cannot impose rigorous conditions that take away a substantive right to refund.
* Arbitrary Basis for Amendment: The possibility of "undue benefit by inflating the value of zero-rated supply" cannot be a valid ground for such a restrictive amendment without factual data.
* Retrospective Application: The amended Rule 89(4C) cannot be applied retrospectively to refund claims pertaining to periods prior to its effective date (23.03.2020).
* The impugned rejection order was mechanical and violative of natural justice.

Revenue (Union Of India) Arguments:
* The petition was not maintainable.
* The petitioner failed to submit proof that the export turnover mentioned in the refund claim was 1.5 times the value of like goods domestically supplied by the same or similarly placed supplier, as required by the amended Rule 89(4C).
* Therefore, the zero-rated turnover declared by the petitioner could not be accepted for the purpose of calculating the eligible refund amount.
* The amendment was based on the minutes of the GST Council's 39th meeting held on 14.03.2020, indicating a concern over possible misuse of refund provisions.

5. Court’s Reasoning
The Court provided a detailed analysis, emphasizing the foundational principles of GST and "zero-rating" for exports:
* Principle of Zero-Rating: The Court reiterated that GST aims to avoid cascading taxes and make exports globally competitive by fully "zero-rating" them, meaning the entire supply chain is tax-free (no tax burden on inputs or outputs). This is achieved by allowing and refunding ITC on inputs used for exports.
* Ultra Vires: The Court held that the impugned amendment to Rule 89(4C) directly contravenes the legislative intent of "zero-rating" enshrined in Section 16 of the IGST Act and Section 54 of the CGST Act. A rule, being subordinate legislation, cannot override or contradict the parent legislation. By restricting the refund amount, the rule effectively whittles down the statutory right to refund of unutilized ITC for zero-rated supplies.
* Violation of Article 14 (Equality and Arbitrariness):
* Hostile Discrimination: The Court found the rule discriminatory as it restricts refunds only for exporters choosing to supply under Bond/LUT (Section 16(3)(a) of IGST Act) but not for those paying IGST and claiming refund (Section 16(3)(b) of IGST Act). Both classes of exporters are similarly situated with respect to the "zero-rating" principle, and differential treatment without an intelligible differentia and rational nexus to the object of the Act is arbitrary.
* Arbitrariness and Unreasonableness: The rule is arbitrary because it restricts refunds, which directly contradicts the objective of Section 16 of the IGST Act to make exports tax-free. Including domestic turnover in the definition of zero-rated supply (which is meant to cover only exports) is illogical and unreasonable.
* Violation of Article 19(1)(g) (Freedom of Trade): The restriction on refunds impacts the liquidity and fund rotation essential for export businesses. It takes away the exporter's right to claim refund of all taxes paid on domestic purchases used for zero-rated supplies, undermining export incentives and causing severe hardship, thereby impeding their right to carry on trade.
* Vagueness: The terms "like goods" and "similarly placed supplier" are vague and undefined, making compliance impossible, especially for manufacturers of unique and customized products. This vagueness leads to arbitrary application and denies legitimate refund claims, despite Rule 89(4C) being a machinery provision, which cannot extinguish substantive rights.
* Lack of Justification for Amendment: The Court rejected the revenue's argument of "possible misuse" as a basis for the amendment, stating that a law cannot be amended based on distrust without specific data or identified instances of misuse. Generalizing misuse to deny benefits to genuine exporters is arbitrary.
* Non-Retrospective Application: The Court implicitly agreed that the amended Rule 89(4C) could not be applied retrospectively to refund claims pertaining to periods prior to its effective date of 23.03.2020.
* The Court concluded that the impugned words in Rule 89(4C) are manifestly arbitrary, unreasonable, and beyond the scope of the parent acts, thus unconstitutional.

6. Statutory References
* Constitution of India: Articles 14, 19(1)(g), 246A, 269A, 286.
* Constitution (101st Amendment) Act, 2016
* Central Goods and Services Tax Act, 2017 (CGST Act):
* Section 54 (Refund of tax), specifically Sub-sections (3), (3)(i), (6), (8).
* Section 17(5)
* Section 2(47)
* Integrated Goods and Services Tax Act, 2017 (IGST Act):
* Section 16 (Zero-rated supply), specifically Sub-sections (1), (1)(a), (2), (3), (3)(a), (3)(b).
* Central Goods and Services Tax Rules, 2017 (CGST Rules):
* Rule 89 (Application for refund of tax, interest, penalty, fees or any other amount), specifically Sub-rules (4) and (4C) (both pre and post-amendment).
* Rule 91 (Grant of provisional refund).
* Rule 93 (Explanation to Rule 93, whose validity was kept open).
* Rule 96 (Refund of integrated tax paid on goods exported out of India).
* Rule 96A
* Notification No. 16/2020-Central Tax (F.No.CBEC-20/06/04/2020-GST) dated 23.03.2020 (amending Rule 89(4C)).
* Special Economic Zone Act, 2005

7. Precedents Cited

Cited by Petitioner (and/or relied upon by the Court):
1. CIT vs. Taj Mahal Hotel - (1971) 3 SCC 550
2. Bimal Chandra Banerjee vs. State of Madhya Pradesh - 1970) 2 SCC 467
3. Sangram Singh vs. Election Tribunal - AIR 1955 SC 425
4. All India Federation of Tax Practioners vs. Union of India - (2007) 7 SCC 527
5. Shayarabano vs. Union of India - (2017) 9 SCC 1
6. Pitambra Books Pvt. Ltd., vs. Union of India - (34) GSTL 196 (DEL)
7. Shreya Singhal vs. Union of India - (2015) 5 SCC 1
8. Universal Drinks Pvt. Ltd., vs. Union of India - 1984 (18) ELT 207 (BOM)
9. Deepak Vegetable Oil Industries vs. Union of India - 1991 (52) ELT 222 (GUJ)
10. Hajee K Assiannar vs. CIT - (1971) 81 ITR 423 (KER)
11. CIT vs. Vatika Township Pvt. Ltd. - (2014) 367 ITR 466 (SC)
12. Verghese vs. DCIT - (1994) 210 ITR 511 (KAR)
13. ACCT vs. Shukla & Brothers - 2010 (254) ELT 6 (SC)
14. Moopil Nair vs. State of Kerala - AIR 1961 SC 552
15. Deputy Commissioner of Income Tax vs. Pepsi Foods Ltd. - (2021) 7 SCC 413
16. Reckitt Benckiser vs. Union of India - 2011 (269) ELT 194 (J & K)
17. U.P. Power Corporation vs. Sant Steels & Alloys Pvt. Ltd. - (2008) 2 SCC 777

Cited/Relied upon by the Court in its reasoning:
1. All India Federation of Tax Practitioners Vs Union of India - (2007) 7 SCC 527
2. Union of India v. VKC Footsteps (India) (P) Ltd. - (2022) 2 SCC 603
3. Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India - (1985) 1 SCC 641 (referenced in Shayara Bano)
4. Shayara Bano vs. Union of India - (2017) 9 SCC 1
5. Shreya Singhal vs. Union of India - (2015) 5 SCC 1
6. Kartar Singh v. State of Punjab - (1994) 3 SCC 569 (referenced in Shreya Singhal)
7. Reckitt Benckiser vs. Union of India - 2011 (269) ELT 194 (J & K)
8. U.P. Power Corporation vs. Sant Steels & Alloys Pvt. Ltd. - (2008) 2 SCC 777
9. Deputy Commissioner of Income Tax vs. Pepsi Foods Ltd. - (2021) 7 SCC 413