M/S. Floor Gardens vs Superintendent on 10 October, 2024

M/S. Floor Gardens vs Superintendent on 10 October, 2024

1. Outcome

The High Court of Kerala 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. Consequently, all actions initiated or orders culminated against the petitioners based on this Rule for the period between 23-10-2017 and 08-10-2024 were quashed, and no recovery of IGST refunds already granted is permissible for this period. Directions were issued for appeals against orders on other issues and for replies to show cause notices on other issues. The court noted the prospective deletion of Rule 96(10) w.e.f. 08-10-2024 by Notification No. 20/2024-Central Tax but found it necessary to rule on its validity for the prior period.

2. Core Issue

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

3. Key Facts

• The petitioners are exporters who claimed refunds of Integrated Goods and Services Tax (IGST) paid on zero-rated supplies (exports) as per Section 16 of the IGST Act, read with Rule 96 of the CGST Rules.
• Section 16 of the IGST Act (both prior to and after its amendment w.e.f. 01-10-2023) provided two options for claiming refunds for zero-rated supplies:
  • Supply under bond/Letter of Undertaking (LUT) without IGST payment, claiming refund of unutilized Input Tax Credit (ITC) (governed by Rule 89 of CGST Rules).
  • 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 a restriction: if an exporter received supplies on which benefits of certain notifications (e.g., nil/reduced GST rates on deemed exports or customs duty exemptions like Advance Authorisation/EPCG) were availed, they were completely disentitled to claim refund of IGST paid on exports.
• The practical application of Rule 96(10) led to situations where even minor availment of such benefits (e.g., 10% of inputs) resulted in a complete denial of the entire IGST refund. It also impacted refunds for current consignments if past consignments or even units with different registrations in other states had availed such benefits.
• Rule 96(10) of the CGST Rules has been prospectively deleted by Notification No. 20/2024-Central Tax, dated 08-10-2024, but its validity for the prior period (23-10-2017 to 08-10-2024) remained in question for pending/settled cases.

4. Arguments

Taxpayer (Petitioners):
* Rule 96(10) effectively takes away the substantive right to claim IGST refund on exports, a right explicitly granted by Section 16 of the IGST Act. Subordinate legislation cannot override plenary legislation.
* The phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 IGST Act and Section 54 CGST Act only allows for procedural regulation, not for extinguishing the statutory right to refund.
* The Rule creates an anomalous and hostile discriminatory situation: an exporter using the LUT/bond route (Rule 89) can claim ITC refund even if inputs were procured with notification benefits, but an exporter paying IGST and seeking refund (Rule 96) is completely denied, leading to an unreasonable classification.
* The Rule is 'manifestly arbitrary' and produces absurd and unjust results, not intended by the Legislature, violating Articles 14, 19(1)(g), and 265 of the Constitution of India (citing Shayara Bano and K.P. Varghese).

Revenue (Respondents):
* The right to refund under Section 16 of the IGST Act is not absolute and is always subject to the conditions laid down in Section 54 of the CGST Act and the rules made thereunder. Section 54(3) permits imposing conditions for claiming refunds.
* The Supreme Court's judgment in Union of India v. VKC Footsteps India Pvt. Ltd. supports the State's right to impose restrictions on refunds for fiscal objectives.
* Parliament consciously granted the rule-making authority the power to impose necessary conditions, limitations, and safeguards.
* There are different benefits associated with Rule 89 (no ITC on capital goods) and Rule 96 (ITC on capital goods available), justifying different conditions. Exporters can choose the more beneficial method.
* Exemption notifications should be interpreted in favour of the Revenue in case of doubt (citing Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company).
* Refunds can only be granted in accordance with the rules, not outside them (citing Union of India and others v. Willowood Chemicals Pvt. Ltd. and another).

5. Court’s Reasoning

• The Court observed that Section 16 of the IGST Act itself (both before and after amendment) does not impose any restriction on the right to claim a refund of either ITC on inputs/services or IGST paid on exports.
• While acknowledging the principle from VKC Footsteps that Parliament can impose restrictions on refunds, the Court distinguished it by noting that VKC Footsteps dealt with restrictions imposed by plenary legislation, whereas here, the issue was subordinate legislation (Rule 96(10)) exceeding the scope of the plenary law.
• The Court emphasized that the phrase "subject to such conditions, safeguards and procedure as may be prescribed" in the IGST Act and CGST Act cannot be interpreted to empower the Government to impose a complete restriction that takes away the substantive right granted by the Act. It cited Zenith Spinners v. Union of India (Gujarat High Court, affirmed by SC), which held that notifications cannot restrict or make redundant rights granted by the parent Rule.
• A detailed comparison of Rule 89 and Rule 96 (as presented in the judgment) clearly demonstrated a hostile discrimination and an unreasonable classification between exporters choosing different refund mechanisms. This disparity, not authorized by the statute, renders Rule 96(10) manifestly arbitrary.
• Applying the test of "manifest arbitrariness" as laid down in Shayara Bano v. Union of India, the Court found that Rule 96(10) was capricious, irrational, and without adequate determining principle, leading to excessive and disproportionate results.
• Furthermore, the Court invoked the principle from K.P. Varghese v. Income Tax Officer that where a statutory provision (even plenary legislation) produces a manifestly absurd and unjust result not intended by the Legislature, the Court may interpret or modify the language to achieve a rational construction. The current working of Rule 96(10) produced such absurd results.
• The Court noted the prospective deletion of Rule 96(10) by a recent notification but asserted its duty to determine the Rule's validity for the period it was in force.

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) and (b)
  • Section 16(4) (post amendment)
  • Section 20 (Applicability of CGST Act to IGST Act)
• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Section 2(59) (Definition of 'input')
  • Section 2(84) (Definition of 'person')
  • Section 17(5)
  • Section 50
  • Section 54 (Refund of tax), including sub-sections (3), (6), (10), (11)
• Central Goods and Services Tax Rules, 2017 (CGST Rules):
  • Rule 2
  • Rule 89 (Refund of unutilised input tax credit)
  • Rule 89(4), (4A), (4B)
  • Rule 90
  • Rule 92
  • Rule 96 (Refund of Integrated tax paid on goods or services exported out of India)
  • Rule 96(1), (3), (4), (5-A), (5-B), (5-C), (8), (9), (10)
  • Rule 96A
• Notifications:
  • Notification No. 48/2017-Central Tax, dated 18-10-2017
  • Notification No. 40/2017-Central Tax (Rate), dated 23-10-2017
  • Notification No. 41/2017-Integrated Tax (Rate), dated 23-10-2017
  • Notification No. 78/2017-Customs, dated 13-10-2017
  • Notification No. 79/2017-Customs, dated 13-10-2017
  • Notification No. 53/2018-Central Tax, dated 09-10-2018 (inserting Rule 96(10))
  • Notification No. 27/2023-C.T., dated 31-07-2023 (implementing Section 16 amendment)
  • Notification No. 1/2023 - Integrated Tax, dated 31-07-2023
  • Notification No. 5/2023 - Integrated Tax, dated 26-10-2023
  • Notification No. 20/2024-Central Tax, dated 08-10-2024 (deleting Rule 96(10))
• Constitution of India:
  • Article 14
  • Article 19(1)(g)
  • Article 265
• Other Acts:
  • Customs Act, 1962
  • Foreign Exchange Management Act, 1999

7. Precedents Cited

• 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
• Shayara Bano v. Union of India; (2017) 9 SCC 1
• 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 (affirmed by SC in Union of India & Ors v. Zenith Spinners; (2020) 14 SCC 520)
• Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and others; (2018) 9 SCC 1 (Cited by Revenue)
• Union of India and others v. Willowood Chemicals Pvt. Ltd. and another; (2022) 9 SCC 341 (Cited by Revenue)
• Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India (Referenced in Shayara Bano)