Af Cashews vs Union Of India on 10 October, 2024

Here's a summary of the judgment from the perspective of a Senior GST Legal Analyst:

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 (with retrospective effect from 23.10.2017), to be ultra vires Section 16 of the Integrated Goods and Services Tax Act, 2017, and manifestly arbitrary.

As a consequence:
* Any action, show cause notice, or order initiated or culminated against the petitioners based on the said 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 the provisions of Rule 96(10) for this period.
* Appeals or replies for issues other than those arising from Rule 96(10) are permitted to be filed within specified timeframes.

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 the provisions of Section 16 of the IGST Act, 2017.
* Whether it took away the vested right of exporters to claim a refund of IGST paid on export of goods.
* Whether it violated Articles 14, 19(1)(g), and 265 of the Constitution of India and/or was "manifestly arbitrary."

3. Key Facts

• Petitioners are exporters entitled to claim a refund of taxes paid on input services/goods or IGST paid on exports, under Section 16 of the IGST Act.
• Section 16 of the IGST Act (prior to its amendment w.e.f. 01.10.2023) provided two options for zero-rated supplies:
  • Export under bond/Letter of Undertaking (LUT) without IGST payment, claiming refund of unutilised Input Tax Credit (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 (as amended from time to time) restricted the refund of IGST if the exporter had availed benefits under certain specified notifications (e.g., deemed exports under Notification No. 48/2017-Central Tax, reduced rate of tax for merchant exporters under Notification Nos. 40/2017-Central Tax (Rate) and 41/2017-Integrated Tax (Rate), or customs duty exemptions under Notification Nos. 78/2017-Customs and 79/2017-Customs, except for capital goods under EPCG scheme).
• The Rule's application led to complete denial of refund even if a small percentage (e.g., 10%) of inputs had availed such benefits, or even for unrelated consignments/different units of the same entity.
• Rule 96(10) was prospectively deleted by Notification No. 20/2024-Central Tax dated 08.10.2024, but the present challenge related to the period prior to this deletion (23.10.2017 to 08.10.2024).

4. Arguments

Taxpayer (Petitioners):
* Rule 96(10) fundamentally contradicts the right to refund granted by the substantive provisions of Section 16 of the IGST Act and Section 54 of the CGST Act.
* The phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 IGST Act permits only procedural and safeguard conditions, not conditions that completely extinguish a statutory right.
* It creates an unconstitutional and unreasonable classification, leading to hostile discrimination between exporters opting for the LUT/bond route (Rule 89) and those opting for the IGST payment route (Rule 96), despite both being zero-rated suppliers. An exporter qualifying for refund under Rule 89 might be denied under Rule 96, which is anomalous.
* The rule is "manifestly arbitrary" as per Shayara Bano v. Union of India, and leads to absurd consequences not intended by the Legislature, warranting judicial intervention as per K.P Varghese v. Income Tax Officer.
* Delegated legislation cannot transcend or be contrary to the parent statute (Kerala State Electricity Board and others v. Thomas Joseph and others).

Revenue (Respondents):
* The right to refund under Section 16 of the IGST Act is not absolute and is always subject to the conditions, limitations, and safeguards prescribed under Section 54 of the CGST Act and the rules made thereunder.
* The Supreme Court in Union of India v. VKC Footsteps India Pvt. Ltd. acknowledged the State's right to impose restrictions on refunds based on fiscal objectives and cautioned against judicial interference with fiscal policy.
* Parliament consciously empowered the rule-making authority to impose such conditions.
* Different refund mechanisms (Rule 89 vs. Rule 96) have distinct benefits (e.g., Rule 96 allows ITC on capital goods, unlike Rule 89), and exporters choose the option most beneficial to them.
* An exemption/restriction should be interpreted in favour of the Revenue in case of doubt (Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and others).
* Refunds can only be granted in accordance with the rules (Union of India and others v. Willowood Chemicals Pvt. Ltd. and another).

5. Court’s Reasoning

• The Court found that Section 16 of the IGST Act (both pre and post-amendment) does not itself impose the kind of restrictions on the right to refund that Rule 96(10) sought to implement.
• While acknowledging the principle from VKC Footsteps regarding fiscal policy, the Court distinguished it by noting that VKC Footsteps dealt with restrictions imposed by plenary legislation (Section 54(3) of CGST Act), whereas the present case involved subordinate legislation (Rule 96(10)) which travelled beyond the scope of the plenary legislation.
• The phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 IGST Act does not empower the rule-making authority to completely take away a right granted by the Act. This was supported by the Supreme Court's affirmation of the Gujarat High Court's decision in Zenith Spinners v. Union of India.
• The comparison between Rule 89 and Rule 96 revealed hostile discrimination: an exporter opting for the LUT/bond route (Rule 89) could claim refund of unutilised ITC even if inputs availed benefits of specified notifications, whereas an exporter paying IGST and seeking refund (Rule 96) would be entirely denied for the same reason. This disparate treatment, unauthorized by the parent statute, rendered Rule 96(10) "manifestly arbitrary."
• The Court concluded that Rule 96(10) produced absurd and unjust results, not intended by the Legislature.
• The subsequent prospective deletion of Rule 96(10) by the government itself, while not directly impacting the period under challenge, implicitly supported the finding that the rule was problematic.

6. Statutory References

• Central Goods and Services Tax Rules, 2017: Rule 89, Rule 96, Rule 96(10), Rule 96A, Rule 90, Rule 92.
• Integrated Goods and Services Tax Act, 2017: Section 16, Section 16(3)(a), Section 16(3)(b), Section 16(4), Section 20.
• Central Goods and Services Tax Act, 2017: Section 2(59), Section 2(84), Section 17(5), Section 50, Section 54, Section 54(3), Section 54(4), Section 54(6), Section 54(7), Section 54(10), Section 54(11).
• Customs Act, 1962.
• Foreign Exchange Management Act, 1999.
• Constitution of India: Articles 14, 19(1)(g), 265.
• Finance Act, 2021.
• Notifications: Notification No. 48/2017-Central Tax, Notification No. 40/2017-Central Tax (Rate), Notification No. 41/2017-Integrated Tax (Rate), Notification No. 78/2017-Customs, Notification No. 79/2017-Customs, Notification No. 53/2018-CT, Notification No. 20/2024-Central Tax (dated 08.10.2024).

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
• Union of India & Ors v. Zenith Spinners, (2020) 14 SCC 520 (affirming Zenith Spinners)
• Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India
• 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