Global Foods vs Union Of India on 10 October, 2024

1. Outcome
The High Court of Kerala allowed the writ petitions, declaring Rule 96(10) of the Central Goods and Services Tax Rules, 2017 (CGST Rules) as:
* Ultra vires Section 16 of the Integrated Goods and Services Tax Act, 2017 (IGST Act).
* Unenforceable due to being "manifestly arbitrary" for the period between 23-10-2017 and 08-10-2024.

Consequently:
* Any action (show cause notices, orders) against the petitioners based on the said Rule for the specified period is quashed.
* No proceedings shall be initiated to recover any IGST already refunded to the petitioners by applying Rule 96(10) for the said period.
* Aggrieved persons may file appeals on issues other than those arising from Rule 96(10) within two weeks.
* Petitioners shall file replies to show cause notices on issues other than those arising under Rule 96(10) within two weeks for adjudication.
* The court noted the prospective deletion of Rule 96(10) w.e.f. 08-10-2024 via Notification No.20/2024-Central Tax but found it necessary to rule on its validity for the prior period.

2. Core Issue
The central issue was the legal sustainability of Rule 96(10) of the CGST Rules, 2017, primarily on the grounds that it is:
* Ultra vires the provisions of Section 16 of the IGST Act.
* Takes away the vested right of exporters to claim refund of IGST paid on export of goods/services.
* Violative of Articles 14, 19(1)(g), and 265 of the Constitution of India, and/or "manifestly arbitrary."

3. Key Facts
* The petitioners are exporters entitled to claim refund of taxes (IGST paid on exports or unutilized Input Tax Credit (ITC) on input goods and services) by virtue of Section 16 of the IGST Act, which embodies the principle of zero-rated supply (no export of taxes).
* Prior to its amendment (w.e.f. 01-10-2023), Section 16 of the IGST Act offered two methods for claiming refund:
* Export under bond or Letter of Undertaking (LUT) without payment of IGST, claiming refund of unutilized ITC (governed by Rule 89 of CGST Rules).
* Export on payment of IGST, claiming refund of such tax paid (governed by Rule 96 of CGST Rules).
* Rule 96(10) of the CGST Rules imposes restrictions on claiming IGST refund, stipulating that if certain inputs were procured by availing benefits of specified notifications (e.g., concessional rate notifications for deemed exports or customs duty exemptions), the exporter is not entitled to the IGST refund.
* The practical application of Rule 96(10) led to scenarios where:
* Even minor availing of benefits (e.g., 10% of inputs) resulted in complete denial of the entire IGST refund.
* Refunds for current consignments were denied based on benefits availed for unrelated, earlier consignments.
* Refunds for a unit in one state (Kerala) were questioned/denied because a separate unit of the same petitioner in another state (Tamil Nadu) under a different registration number had availed such benefits.

4. Arguments

• Taxpayer (Petitioners):

  • Rule 96(10) is contrary to the substantive right to refund granted by Section 16 of the IGST Act. Subordinate legislation cannot be ultra vires plenary legislation.
  • The phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 only empowers procedural aspects, not the imposition of conditions that completely deny a statutory right to refund.
  • An anomalous situation exists where exporters using the LUT/bond route (Rule 89) can claim ITC refund even if input benefits are availed, but those paying IGST first (Rule 96) are completely denied refund due to Rule 96(10)'s restrictions. This constitutes hostile discrimination and is manifestly arbitrary.
  • The rule leads to absurd and unjust results not intended by the legislature.

• Revenue (Respondents):

  • The right to refund under Section 16 of the IGST Act is not absolute and is subject to conditions imposed by Section 54 of the CGST Act and rules made thereunder.
  • The words "subject to such conditions, safeguards and procedures as may be prescribed" in Section 16 and Section 54(6) explicitly grant the rule-making authority the power to impose restrictions for fiscal objectives.
  • The Supreme Court's decision in VKC Footsteps supports the State's power to impose restrictions on refund rights in fiscal legislation.
  • Differences between Rule 89 and Rule 96 (e.g., Rule 96 allowing credit on capital goods) mean exporters choose the more beneficial option, justifying different conditions.
  • The rule should be interpreted like an exemption notification, favoring Revenue in case of doubt. Refunds must be granted strictly in accordance with the rules.

5. Court’s Reasoning
The Court reasoned as follows:
* Subordinate vs. Plenary Legislation: Reaffirmed the fundamental principle that subordinate legislation must be subservient to plenary legislation. Section 16 of the IGST Act (both pre- and post-amendment) does not itself impose the restrictions found in Rule 96(10).
* Scope of "Conditions, Safeguards, and Procedures": Distinguished VKC Footsteps by pointing out that it dealt with restrictions imposed by plenary legislation (Section 54(3) of CGST Act), whereas here, Rule 96(10) is a restriction imposed by subordinate legislation that goes beyond the parent Act. Relying on Zenith Spinners (Gujarat High Court, affirmed by SC), the Court held that the phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 of the IGST Act does not authorize the imposition of restrictions that completely take away a right granted by the Act itself. Such conditions are meant to regulate, not extinguish, the right.
* Manifest Arbitrariness: Found Rule 96(10) to be "manifestly arbitrary" by applying the test laid down in Shayara Bano. A comparative analysis of Rule 89 and Rule 96 demonstrated a hostile discrimination: exporters under the LUT/bond route (Rule 89) could avail ITC refund without being subject to such restrictions, while those under the IGST payment route (Rule 96) were completely denied refund, even for minor availing of benefits. This created an unreasonable classification where similarly situated exporters were treated differently without a rational basis in the plenary law.
* Absurd Results: Concluded that the Rule, as it stood, produced "absurd results," as per the principle in K.P. Varghese, by denying the entire refund for minor benefits or those unrelated to the specific export consignment.
* Prospective Deletion: Acknowledged the prospective deletion of Rule 96(10) w.e.f. 08-10-2024 but affirmed the necessity of ruling on its validity for the prior period to address the petitioners' grievances.

6. Statutory References
* Constitution of India: Articles 14, 19(1)(g), 265
* Integrated Goods and Services Tax Act, 2017: Section 16 (including pre- and post-amendment versions), Section 16(3)(a), Section 16(3)(b), Section 16(4), Section 20
* Central Goods and Services Tax Act, 2017: Section 54 (including various sub-sections: 54(1), 54(3), 54(4), 54(5), 54(6), 54(7), 54(10), 54(11)), Section 17(5), Section 2(59) (definition of 'input'), Section 2(84) (definition of 'person'), Section 50
* Central Goods and Services Tax Rules, 2017: Rule 96(10), Rule 89, Rule 96, Rule 89(4), Rule 89(4A), Rule 89(4B), Rule 90, Rule 92, Rule 96A
* Other Acts: Foreign Exchange Management Act, 1999; Customs Act, 1962; Finance Act, 2021 (Act 13 of 2021); Finance (No.2) Act of 2024.
* Notifications:
* Notification No. 27/2023-C.T., dated 31-07-2023
* Notification No.1/2023 - Integrated Tax dated 31-07-2023
* Notification No.5/2023 - Integrated Tax dated 26-10-2023
* Notification No. 48/2017-Central Tax, dated 18th October, 2017
* Notification No. 40/2017-Central Tax (Rate), dated 23rd October, 2017
* Notification No. 41/2017-Integrated Tax (Rate), dated 23rd October, 2017
* Notification No. 78/2017-Customs, dated 13th October, 2017
* Notification No. 79/2017-Customs, dated 13th October, 2017
* Notification No.53/2018-CT dated 09-10-2018 (inserting Rule 96(10))
* Notification No.20/2024-Central Tax, dated 08-10-2024 (deleting Rule 96(10))

7. Precedents Cited
* Shayara Bano v. Union of India; (2017) 9 SCC 1
* Ispat Industries Ltd. v. Commissioner of Customs, Mumbai; (2006) 12 SCC 583
* Cellular Operators Association of India and Ors. v. TRAI and Ors., (2016) 7 SCC 703
* Union of India v. Intercontinental Consultants and Technocrats (P) Ltd.; (2018) 4 SCC 669
* Union of India v. VKC Footsteps India Pvt. Ltd.; (2022) 2 SCC 603
* Kerala State Electricity Board and others v. Thomas Joseph and others; (2023) 11 SCC 700
* K.P Varghese v. Income Tax officer; (1981) 4 SCC 173
* Zenith Spinners v. Union of India, 2005 SCC OnLine Guj 601 (Gujarat High Court)
* Union of India & Ors v. Zenith Spinners, (2020) 14 SCC 520 (Supreme Court, affirming Gujarat High Court)
* Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and others; (2018) 9 SCC 1
* Union of India and others v. Willowood Chemicals Pvt. Ltd. and another; (2022) 9 SCC 341
* Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India