Prasanthi Cashew Company vs Union Of India on 10 October, 2024
AI Legal Insights
This GST case law from the Kerala High Court addresses the validity of Rule 96(10) of the CGST Rules, 2017, in relation to Section 16 of the IGST Act. The core issue revolves around the denial of IGST refunds to exporters. The court examined whether Rule 96(10) unfairly restricted IGST refund claims and violated constitutional principles. The decision provides clarity on the rights of exporters regarding IGST refunds and the retrospective application of the rule. The court found the rule to be ultra vires and unenforceable.
This GST case law provides relief to exporters facing IGST refund denials under Rule 96(10). Taxpayers can now reclaim refunds previously denied, while the department is barred from pursuing recoveries based on the invalidated rule for the specified period.
- Rule 96(10) is invalid retrospectively from 23-10-2017 to 08-10-2024.
- Exporters can claim IGST refunds even with partial input tax credit availment.
- Rule 96(10) violated Article 14 due to its arbitrary denial of refunds.
- Actions against exporters under Rule 96(10) are quashed for the relevant period.
- The ruling prevents recovery of IGST refunds already processed.
QIs Rule 96(10) of CGST Rules valid?
The Kerala High Court declared Rule 96(10) of the CGST Rules, 2017, invalid, specifically holding it ultra vires Section 16 of the IGST Act and unenforceable as manifestly arbitrary.
QWhat is the impact of the Prasanthi Cashew Company case?
The Prasanthi Cashew Company case protects exporters from refund denials under the invalidated Rule 96(10) for the period between October 23, 2017, and October 8, 2024, and prevents the tax department from recovering refunds already issued under that rule.
Ruling Summary
Outcome**
The High Court of Kerala allowed the writ petitions. It 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 (w.e.f. 23-10-2017), to be:
* Ultra vires the provisions of Section 16 of the Integrated Goods and Services Tax Act, 2017 (IGST Act).
* Unenforceable on account of being manifestly arbitrary.
As a consequence, any action initiated or orders passed against the petitioners based on the impugned Rule for the period between 23-10-2017 and 08-10-2024 were quashed. No proceedings shall be taken to recover any IGST refunded to the petitioners during this period based on Rule 96(10). For other issues, petitioners were granted leave to file appeals or replies to show cause notices within two weeks.
2. Core Issue
The core issue was the legal validity of Rule 96(10) of the CGST Rules, 2017, specifically whether it was ultra vires Section 16 of the IGST Act, whether it curtailed the petitioners' vested right to claim IGST refund on exports, and if 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 entitled to claim a refund of taxes paid on input services/goods or IGST paid on exports under Section 16 of the IGST Act (zero-rated supplies).
* Section 16 of the IGST Act (prior to its amendment on 01-10-2023) offered two methods for refund: (a) export under bond/LUT without IGST payment, claiming refund of unutilized Input Tax Credit (ITC) (Rule 89 route), or (b) export on payment of IGST, claiming refund of such tax paid (Rule 96 route).
* Rule 96(10) of the CGST Rules imposed a restriction: if an exporter received supplies where the benefit of certain specified notifications (e.g., deemed exports, reduced tax rates for merchant exporters, or nil rate of Customs duty) was availed, they would be ineligible to claim refund of IGST paid on exports.
* The application of Rule 96(10) led to complete denial of refund even if only a small percentage (e.g., 10%) of inputs had availed such benefits. It also caused denial based on benefits availed for earlier consignments or by different units (with different GST registrations) of the same entity.
* The provisions of Rule 89 (for the bond/LUT route) did not contain similar restrictions regarding availing benefits of these notifications, creating an anomalous situation.
* Subsequent to the arguments, Rule 96(10) was deleted vide Notification No.20/2024-Central Tax dated 08-10-2024, but this deletion was prospective, necessitating a ruling on its validity for the prior period.
4. Arguments
* Taxpayer (Petitioners):
* Rule 96(10) is ultra vires Section 16 of the IGST Act, as Section 16 grants a substantive right to refund without such restrictions.
* The phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 only authorizes procedural conditions, not substantive restrictions that take away the right to refund.
* The Rule creates an unreasonable classification between exporters choosing the Rule 89 route (who can claim refund despite input benefit) and those choosing the Rule 96 route (who cannot).
* It violates Articles 14 (equality), 19(1)(g) (right to practice profession), and 265 (no tax save by authority of law) of the Constitution and is "manifestly arbitrary" (citing Shayara Bano).
* The Rule leads to absurd consequences not intended by the legislature (citing K.P. Varghese).
* Revenue (Respondents):
* 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 permits the imposition of conditions for claiming refund.
* The Supreme Court's decision in VKC Footsteps supports the view that the State has latitude to impose restrictions to achieve fiscal objectives.
* The words "subject to such conditions, safeguards and procedures as may be prescribed" in Section 16 and Section 54 authorize the nature of restrictions imposed by Rule 96(10).
* The Rule is a matter of fiscal policy and should not be interfered with by courts.
* Refund provisions, similar to exemption notifications, should be interpreted in favour of the Revenue in case of doubt (citing Dilip Kumar).
* Refunds must be granted strictly in accordance with rules (citing Willowood Chemicals).
* Exporters have a choice between Rule 89 and Rule 96, each with different benefits (e.g., Rule 96 allows ITC on capital goods, unlike Rule 89), implying that the conditions are part of the trade-off.
5. Court’s Reasoning
* The Court found that Section 16 of the IGST Act, in its substantive provisions, did not impose the kind of restrictions found in Rule 96(10).
* It distinguished VKC Footsteps, noting that the Supreme Court in that case was dealing with a restriction imposed by plenary legislation (Section 54(3) CGST Act), whereas the present case concerned a restriction imposed by subordinate legislation (Rule 96(10) CGST Rules) which had exceeded the scope of the parent Act.
* The Court held that the phrase "subject to such conditions, safeguards and procedures as may be prescribed" in Section 16 and Section 54 does not empower the rule-making authority to completely take away a right granted by the Act. It cited Zenith Spinners (Gujarat High Court decision affirmed by Supreme Court) which held that such phrases cannot be interpreted to restrict rights granted or make the Rule redundant.
* By comparing Rule 89 and Rule 96, the Court highlighted the "hostile discrimination" and anomalous situation created by Rule 96(10), where exporters choosing the IGST payment route were completely denied refund for even partial availing of input benefits, unlike those opting for the bond/LUT route.
* Applying the "manifestly arbitrary" test from Shayara Bano, the Court concluded that Rule 96(10) was capricious, irrational, and disproportionate, thereby violating Article 14.
* It also applied the principle from K.P. Varghese, stating that the Rule produced an absurd and unjust result not intended by the Legislature.
* The Court acknowledged the subsequent prospective deletion of Rule 96(10) but found it necessary to rule on its retrospective validity for the benefit of the petitioners.
6. Statutory References
* Acts:
* Integrated Goods and Services Tax Act, 2017 (Sections 16, 20, 16(3)(a), 16(3)(b), 16(4))
* Central Goods and Services Tax Act, 2017 (Sections 54, 54(3), 54(4), 54(5), 54(6), 54(7), 54(10), 54(11), 17(5), 2(59), 2(84), 16(1), 50)
* Constitution of India (Articles 14, 19(1)(g), 265)
* Customs Act, 1962
* Foreign Exchange Management Act, 1999
* Finance Act, 2021
* Central Excise Rules, 2002 (Rules 18, 19)
* Rules:
* Central Goods and Services Tax Rules, 2017 (Rules 96, 96(1), 96(3), 96(4), 96(5-A), 96(5-B), 96(5-C), 96(8), 96(9), 96(10), 89, 89(1), 89(2), 89(4), 89(4A), 89(4B), 90, 92(2), 96A)
* Integrated Goods and Services Tax Rules, 2017 (Rule 2)
* Notifications & Circulars:
* 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 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-CT, dated 09-10-2018
* Notification No.20/2024-Central Tax, dated 08-10-2024
* Circular No. 37/11/2018-GST dated 15-03-2018
* Circular No. 45/19/2018-GST dated 30-05-2018
* Circular No. 125/44/2019-GST dated 18-11-2019
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 (affirmed by 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
* 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 (for principles on subordinate legislation)
Key Legal Principles
- By comparing Rule 89 and Rule 96, the Court highlighted the "hostile discrimination" and anomalous situation created by Rule 96(10), where exporters choosing the IGST payment route were completely denied refund for even partial availing of input benefits, unlike those opting for the bond/LUT route.
- Applying the "manifestly arbitrary" test from *Shayara Bano*, the Court concluded that Rule 96(10) was capricious, irrational, and disproportionate, thereby violating Article 14.
- It also applied the principle from *K.P. Varghese*, stating that the Rule produced an absurd and unjust result not intended by the Legislature.
- The Court acknowledged the subsequent prospective deletion of Rule 96(10) but found it necessary to rule on its retrospective validity for the benefit of the petitioners.