Souparnika Export Enterprises vs Union Of India on 10 October, 2024

Judgment Summary: Souparnika Export Enterprises vs Union Of India

1. Outcome

The High Court declared Rule 96(10) of the Central Goods and Services Tax Rules, 2017 (CGST Rules), as inserted by Notification No. 53/2018-CT dated 09-10-2018 (effective from 23-10-2017), to be ultra vires Section 16 of the Integrated Goods and Services Tax Act, 2017 (IGST Act) and unenforceable on account of being manifestly arbitrary.

As a consequence:
* Any action (show cause notice or order) initiated against the petitioners based on the provisions of Rule 96(10) for the period between 23-10-2017 and 08-10-2024 stands quashed.
* No proceedings shall be taken to recover any IGST already refunded to petitioners by applying Rule 96(10) for the said period.
* Petitioners are granted two weeks to file appeals against orders on issues other than Rule 96(10) or to submit replies to show cause notices on other issues, which shall be adjudicated by the proper officer.

2. Core Issue

The core issue was the legal sustainability of Rule 96(10) of the CGST Rules, 2017, specifically whether:
* It is ultra vires Section 16 of the IGST Act, 2017.
* It takes away the vested right of exporters to claim refund of IGST paid on export of goods.
* It is violative of Articles 14, 19(1)(g), and 265 of the Constitution of India and/or is 'manifestly arbitrary'.

3. Key Facts

• The petitioners are exporters entitled to claim refunds of taxes paid on input services and input goods or Integrated Goods and Services Tax (IGST) paid on exports under Section 16 of the IGST Act.
• Prior to its amendment (w.e.f. 01-10-2023), Section 16 of the IGST Act offered two methods for exporters to claim refunds for zero-rated supplies:
  • (a) Supply under bond or Letter of Undertaking (LUT) without payment of IGST, claiming refund of unutilised input tax credit (ITC) (governed by Rule 89 of CGST Rules).
  • (b) Supply on payment of IGST, claiming refund of such tax paid (governed by Rule 96 of CGST Rules).
• Rule 96(10) of the CGST Rules, as it stood, imposed restrictions denying the refund of IGST if the exporter had availed benefits under specific notifications (e.g., Notification No. 48/2017-Central Tax, 40/2017-Central Tax (Rate), 41/2017-Integrated Tax (Rate), 78/2017-Customs, 79/2017-Customs) for procuring inputs, even if for a small percentage of inputs, or for previous consignments, or even for a different unit under the same entity.
• The issues in these petitions pertained to the period prior to the amendment of Section 16 of the IGST Act w.e.f. 01-10-2023.
• During the pendency of the writ petitions, Rule 96(10) of the CGST Rules was deleted by Notification No. 20/2024-Central Tax, dated 08-10-2024, but this deletion was prospective.

4. Arguments

Taxpayer (Petitioners):
* Ultra Vires: Rule 96(10) takes away the statutory right to IGST refund granted by Section 16 of the IGST Act, which is a substantive provision. Subordinate legislation (rules) cannot override or restrict plenary legislation (Act).
* Discrimination/Arbitrariness: The Rule creates an anomalous and hostile discrimination between exporters. Those opting for the LUT/bond route (Rule 89) are not subject to these restrictions and can claim ITC refund, while those paying IGST and seeking refund (Rule 96) are completely denied, despite being on the same footing as exporters. This distinction is not authorized by the statute.
* Scope of "Conditions, Safeguards, and Procedures": The phrase in Section 16 and Section 54 of the CGST Act empowering the prescription of "conditions, safeguards, and procedures" refers only to procedural aspects to prevent revenue leakage, not to substantive restrictions that negate the right to refund.
* Absurd Results: The application of Rule 96(10) leads to absurd consequences, such as denial of the entire refund even if a minuscule portion (e.g., 10%) of inputs had benefited from the specified notifications, or if benefits were availed for past consignments or by a different unit of the same entity.
* Precedents: Cited cases like Ispat Industries Ltd., Cellular Operators Association of India, Shayara Bano, Intercontinental Consultants and Technocrats (P) Ltd., VKC Footsteps India Pvt. Ltd. (to argue for statutory basis of restriction), Kerala State Electricity Board, and K.P Varghese (to argue against absurd interpretation). Zenith Spinners (Gujarat HC, affirmed by SC) was specifically cited to argue that conditions cannot take away a statutory right.

Revenue (Respondents):
* Statutory Basis: The right to refund under Section 16 of the IGST Act is not absolute and is always subject to the provisions of Section 54 of the CGST Act. Section 54(3) and 54(6) of the CGST Act specifically permit the imposition of conditions, limitations, and safeguards for claiming refunds, including those for zero-rated supplies.
* Fiscal Policy: The Parliament consciously granted rule-making authority the power to impose such conditions for fiscal objectives, and courts should not interfere with fiscal policy.
* VKC Footsteps: Relied on Union of India v. VKC Footsteps India Pvt. Ltd. to argue that the right to refund is not absolute and the State has latitude to impose restrictions to achieve fiscal objectives.
* Interpretation of Rules: The impugned rule should be interpreted similar to an exemption notification, where any doubt should be resolved in favor of the Revenue (Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and others).
* No Dehors Rules: Refunds must be granted in accordance with the rules, not outside them (Union of India and others v. Willowood Chemicals Pvt. Ltd. and another).
* Choice of Method: Exporters have a choice between Rule 89 and Rule 96. Rule 96 offers the benefit of ITC on capital goods, which Rule 89 does not, so it is up to the exporter to choose the more beneficial method.

5. Court’s Reasoning

• The Court found the petitioners' arguments compelling, concluding that Rule 96(10) appears ultra vires Section 16 of the IGST Act.
• Scope of Plenary vs. Subordinate Legislation: Section 16 of the IGST Act (both before and after amendment) does not itself impose restrictions on the fundamental right to claim IGST or ITC refund for exports. While Parliament can impose restrictions on the right to refund (as noted in VKC Footsteps), such restrictions must be by plenary legislation, not subordinate legislation that travels beyond the scope of the parent Act. The Court distinguished VKC Footsteps by pointing out that it dealt with a restriction directly from plenary legislation (Section 54(3) CGST Act).
• Meaning of "Conditions, Safeguards, and Procedures": The phrases "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 IGST Act and "conditions, limitations and safeguards" in Section 54 CGST Act do not empower the government to impose restrictions that completely take away the right granted by the Act. This interpretation was supported by the Supreme Court's affirmation of the Gujarat High Court's decision in Zenith Spinners, which held that such powers cannot be used to restrict statutory rights or make the Rule redundant.
• Manifest Arbitrariness: The Court conducted a comparative analysis of Rule 89 and Rule 96. This revealed that Rule 96(10) creates hostile discrimination: an exporter using the LUT/bond route (Rule 89) could claim refund of unutilised ITC even if inputs received benefits, whereas an exporter opting to pay IGST and claim refund (Rule 96) would be fully denied if any inputs received benefits. This disparity, not authorized by the parent statute, makes Rule 96(10) "manifestly arbitrary" in the sense defined by Shayara Bano v. Union of India.
• Absurd Results: The Rule as worded produced absurd results, such as denying the entire IGST refund even for a minor availment of benefits on inputs, or if benefits were availed for unrelated consignments or by different units of the same legal entity. This contradicts the legislative intent and warrants judicial intervention as per K.P Varghese v. Income Tax officer.
• Prospective Deletion: Although Rule 96(10) was prospectively deleted from 08-10-2024, the Court found it necessary to rule on its validity for the prior period due to its retrospective application from 23-10-2017.

6. Statutory References

• Integrated Goods and Services Tax Act, 2017 (IGST Act):
  • Section 16 (Zero-rated supply) - both pre and post 01-10-2023 amendment
  • Section 16(3)(a)
  • Section 16(3)(b)
  • Section 16(4) (post-amendment)
  • Section 20 (Applicability of provisions of Central Goods and Services Tax Act)
  • Rule 2 (Integrated Goods and Services Tax Rules, 2017)
• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Section 2(59) (Definition of 'input')
  • Section 2(84) (Definition of 'person')
  • Section 17(5) (Apportionment of credit and blocked credits)
  • Section 50 (Interest on delayed payment of tax)
  • Section 54 (Refund of tax)
  • Section 54(3)
  • Section 54(4)
  • Section 54(6)
  • Section 54(7)
  • Section 54(10)
  • Section 54(11)
• Central Goods and Services Tax Rules, 2017 (CGST Rules):
  • Rule 89 (Application for refund of tax, interest, penalty, fees or any other amount)
  • Rule 89(1)
  • Rule 89(2)
  • Rule 89(4)
  • Rule 89(4A)
  • Rule 89(4B)
  • Rule 90 (Grant of provisional refund)
  • Rule 92 (Order sanctioning refund)
  • Rule 96 (Refund of Integrated tax paid on goods or services exported out of India)
  • Rule 96(1)
  • Rule 96(3)
  • Rule 96(4)
  • Rule 96(5-A)
  • Rule 96(5-B)
  • Rule 96(5-C)
  • Rule 96(8)
  • Rule 96(9)
  • Rule 96(10) (as inserted by Notification No. 53/2018-CT dated 09-10-2018)
  • Rule 96A (Export of goods or services under bond or Letter of Undertaking)
• Notifications (referenced in Rule 96(10)):
  • 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))
  • Notification No. 1/2023 - Integrated Tax dated 31-07-2023
  • Notification No. 5/2023 - Integrated Tax dated 26-10-2023
• Constitution of India:
  • Article 14
  • Article 19(1)(g)
  • Article 265
• Other Acts:
  • Customs Act, 1962
  • Foreign Exchange Management Act, 1999 (42 of 1999)

7. Precedents Cited

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