Coco-Latex Exports Private Limited vs The Director General Of Gst ... on 10 October, 2024

Here's a summary of the judgment:

1. Outcome
The High Court of Kerala declared Rule 96(10) of the Central Goods and Services Tax Rules, 2017, 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, and unenforceable due to being manifestly arbitrary.

As a consequence:
* Any action (show cause notices, orders, etc.) initiated or culminated against the petitioners based on Rule 96(10) for the period between 23-10-2017 and 08-10-2024 stands quashed.
* No proceedings shall be taken to recover any Integrated Goods and Services Tax (IGST) already refunded to the petitioners by applying Rule 96(10) for the specified period.
* For orders issued on issues other than Rule 96(10), aggrieved parties may file appeals within two weeks from the judgment date (deemed to be on time).
* For show cause notices on issues other than Rule 96(10), petitioners must file replies within two weeks from the judgment date for proper adjudication.

2. Core Issue
The core issue was the legal validity and sustainability of Rule 96(10) of the CGST Rules, 2017, specifically:
* Whether it is ultra vires the provisions of Section 16 of the IGST Act.
* Whether it takes away the vested right of exporters to claim a refund of IGST paid on export of goods.
* Whether it violates 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 a refund of taxes paid on input services and goods or IGST paid on exports under Section 16 of the IGST Act.
* Section 16 of the IGST Act (both prior to and after its amendment w.e.f. 01-10-2023) offered two options for zero-rated supplies:
* (a) Export under bond or Letter of Undertaking (LUT) without IGST, claiming refund of unutilized Input Tax Credit (ITC) (governed by Rule 89 of CGST Rules).
* (b) 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 imposed restrictions, denying IGST refund to exporters if they had received supplies by availing benefits of certain notifications (e.g., 48/2017-CT, 40/2017-CT(Rate), 41/2017-IT(Rate), 78/2017-Customs, 79/2017-Customs), with an exception for capital goods under the Export Promotion Capital Goods (EPCG) Scheme.
* The Rule's application led to a complete denial of refund even if only a small percentage of inputs benefited from these notifications or if the benefit was availed for prior consignments not related to the specific export under claim.
* The Court noted an instance where a unit in Tamil Nadu availing such benefits led to questioning a refund claim for a different unit in Kerala with a separate registration.
* Significantly, Rule 96(10) has been prospectively deleted by notification No.20/2024-Central Tax, dated 08-10-2024.

4. Arguments (Taxpayer vs Revenue)
Taxpayer Arguments:
* Rule 96(10) is ultra vires Section 16 of the IGST Act because it takes away a substantive right to refund granted by the parent Act.
* It creates an anomalous and discriminatory situation by denying refunds under the "payment of IGST and claim refund" route (Rule 96) while allowing them under the "LUT/bond and ITC refund" route (Rule 89), despite both being under the same Section 16. This constitutes an unreasonable classification not authorized by the statute.
* The phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 only allows for procedural regulation, not for extinguishing a statutory right.
* Subordinate legislation cannot override or contradict plenary legislation.
* The rule is 'manifestly arbitrary' and leads to absurd and unjust results, which the legislature could not have intended.

Revenue Arguments:
* The right to refund under Section 16 of the IGST Act is not absolute and is subject to Section 54 of the CGST Act, which allows for the imposition of conditions for claiming refunds (Section 54(3)).
* Parliament consciously granted the rule-making authority the power to impose conditions, limitations, and safeguards in line with fiscal objectives.
* The Supreme Court's decision in VKC Footsteps (supra) supports the State's right to impose restrictions on refunds, recognizing fiscal policy discretion.
* Refunds can only be granted according to rules, not in their absence.
* The Rule should be interpreted strictly like an exemption notification, with any doubt favoring the Revenue.
* Differences in benefits (e.g., ITC on capital goods under Rule 96 vs. not under Rule 89) justify different conditions, and exporters have the option to choose the more beneficial method.

5. Court’s Reasoning
* The Court agreed with the petitioners, finding that Section 16 of the IGST Act, in its essence, does not impose restrictions on the right to refund.
* While recognizing that plenary legislation can impose restrictions (as in VKC Footsteps regarding an inverted duty structure), the Court distinguished the present case where the restriction originated from subordinate legislation (Rule 96(10)) that exceeded the scope of the parent Act.
* The phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 of the IGST Act does not empower the rule-making authority to completely negate a statutory right. The Court cited Zenith Spinners (Gujarat High Court, affirmed by SC), which held that conditions cannot restrict or render redundant rights granted by the parent Rule/Act.
* The comparative analysis (provided in a detailed table in the judgment) clearly demonstrated a hostile discrimination and unreasonable classification between exporters opting for Rule 89 vs. Rule 96, which was not authorized by the statute.
* The Court concluded that Rule 96(10) creates a restriction not contemplated by Section 16 of the IGST Act.
* Applying the principles from Shayara Bano v. Union of India and K.P Varghese v. Income Tax officer, the Court held Rule 96(10) to be "manifestly arbitrary" as it was capricious, irrational, lacked an adequate determining principle, and led to absurd results not intended by the legislature.
* The prospective deletion of Rule 96(10) by the GST Council further underscored the issues with the rule for the prior period.

6. Statutory References
* Integrated Goods and Services Tax Act, 2017 (IGST Act): Section 16 (including pre and post 01-10-2023 amendments), Section 16(1), Section 16(3)(a), Section 16(3)(b), Section 16(4), Section 20.
* Central Goods and Services Tax Act, 2017 (CGST Act): Section 54, Section 54(3), Section 54(4), Section 54(6), Section 54(7), Section 54(10), Section 54(11), Section 2(59), Section 2(84), Section 17(5), Section 50.
* Central Goods and Services Tax Rules, 2017 (CGST Rules): Rule 89, Rule 96, Rule 96(10), Rule 96(4A), Rule 96(4B), Rule 96A, Rule 90, Rule 92.
* Constitution of India: Article 14, Article 19(1)(g), Article 265.
* Other Acts/Rules: Customs Act, 1962; Foreign Exchange Management Act, 1999; Finance Act, 2021; Finance (No.2) Act, 2024.
* Notifications: Notification No. 53/2018-CT dated 09-10-2018 (inserting Rule 96(10)); Notification No. 20/2024-CT dated 08-10-2024 (deleting Rule 96(10)); Notifications referred to in Rule 96(10) (e.g., 48/2017-CT, 40/2017-CT(Rate), 41/2017-IT(Rate), 78/2017-Customs, 79/2017-Customs).

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
* 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
* Zenith Spinners v. Union of India, 2005 SCC OnLine Guj 601 (affirmed by Supreme Court in Union of India & Ors v. Zenith Spinners, (2020) 14 SCC 520)
* Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India (cited in Shayara Bano)