Prasanthi Cashew Company Private ... vs Union Of India on 10 October, 2024

1. Outcome

The Kerala 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 retrospectively 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:
* Any action (show cause notices, orders, etc.) initiated against the petitioners based on Rule 96(10) for the period between 23-10-2017 and 08-10-2024 is quashed.
* No proceedings shall be taken to recover any Integrated Goods and Services Tax (IGST) that has been refunded to the petitioners by applying the provisions of Rule 96(10) for the specified period.
* Petitioners are granted two weeks to file appeals or replies to show cause notices on other issues not related to Rule 96(10), with such filings deemed to be on time.

2. Core Issue

The core issue was the constitutional and statutory validity of Rule 96(10) of the CGST Rules, 2017, particularly whether it:
* Was ultra vires the provisions of Section 16 of the IGST Act.
* Took away the vested right of exporters to claim a refund of IGST paid on the export of goods.
* Violated Articles 14, 19(1)(g), and 265 of the Constitution of India, or was "manifestly arbitrary."

3. Key Facts

• Petitioners are exporters engaged in zero-rated supplies, entitled to claim refunds of Integrated Goods and Services Tax (IGST) paid on exports or unutilized Input Tax Credit (ITC) as per Section 16 of the IGST Act.
• Section 16 of the IGST Act (both before and after its amendment w.e.f. 01-10-2023) provided two options for claiming refunds on zero-rated supplies:
  • (a) Supplying goods/services under bond or Letter of Undertaking (LUT) without paying IGST, and claiming refund of unutilized ITC (governed by Rule 89 of CGST Rules).
  • (b) Supplying goods/services on payment of IGST, and claiming a refund of such tax paid (governed by Rule 96 of CGST Rules).
• Rule 96(10) of the CGST Rules imposed a restriction: persons claiming refund of IGST paid on exports of goods or services should not have received supplies (inputs/services) where the benefit of certain specified notifications (e.g., concessional Basic Customs Duty, nil/reduced GST rates for deemed exports/merchant exporters) was availed.
• The application of Rule 96(10) led to situations where the entirety of the refund was denied, even if only a small percentage of inputs (e.g., 10%) had availed the specified benefits, or if such benefits were availed for earlier consignments or by a different unit of the petitioner (though with a different registration number).
• The impugned Rule 96(10) was inserted by Notification No. 53/2018-CT dated 09-10-2018, with retrospective effect from 23-10-2017.
• The Union of India, during the proceedings, informed the Court that Rule 96(10) of the CGST Rules has been prospectively deleted w.e.f. 08-10-2024 via Notification No. 20/2024-Central Tax, but this deletion does not cover the past period in question.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer (Petitioners):
  • Rule 96(10) is contrary to Section 16 of the IGST Act, which grants the substantive right to refund without such restrictions. 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 the extinguishment of a substantive right.
  • The Rule creates an arbitrary and discriminatory classification between exporters opting for the LUT/bond route (Rule 89, where ITC refund is permitted even with benefit availment) and those opting for the IGST payment route (Rule 96, where refund is completely denied).
  • The Rule leads to absurd and unjust consequences (e.g., blanket denial for minimal benefit availment or benefit availment unrelated to the specific export consignment), making it manifestly arbitrary and violative of constitutional principles (Articles 14, 19(1)(g), 265).
• Revenue (Respondents):
  • The right to refund under Section 16 IGST Act is not absolute and is subject to conditions imposed under Section 54 of the CGST Act. Section 54(3) explicitly permits such conditions.
  • The Supreme Court's decision in Union of India v. VKC Footsteps India Pvt. Ltd. affirmed the State's latitude to impose restrictions on refunds to achieve fiscal objectives, as fiscal policy should not be dictated by courts.
  • The legislative intent of "subject to such conditions, limitations and safeguards as may be prescribed" allows for the restrictions in Rule 96(10).
  • The difference in benefits (e.g., availability of capital goods ITC for Rule 96 users) justifies different conditions, and exporters have the option to choose the more beneficial route.
  • Exemption notifications should be interpreted strictly in favour of the Revenue, and refunds must align strictly with the rules.

5. Court’s Reasoning

• The Court found that Section 16 of the IGST Act itself (both before and after amendment for the relevant period) does not impose any restriction on the right to claim a refund of IGST or ITC.
• While acknowledging the principle from VKC Footsteps that Parliament can impose restrictions on refunds for fiscal objectives, the Court distinguished it by noting that VKC Footsteps dealt with restrictions imposed by plenary legislation, whereas here, the restriction was imposed by subordinate legislation (Rule 96(10)).
• The Court held that the phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Sections 16 of IGST Act and 54 of CGST Act does not authorize the complete taking away of a substantive right granted by the Act, but only allows for the prescription of procedural conditions and safeguards. It cited the Supreme Court-affirmed decision in Zenith Spinners for this proposition.
• A comparative analysis of Rule 89 and Rule 96 procedures (provided in a tabular format in the judgment) clearly demonstrated a hostile discrimination and manifest arbitrariness. Exporters under the bond/LUT route (Rule 89) were allowed ITC refunds even if inputs availed specified benefits, whereas exporters paying IGST (Rule 96) faced a complete denial of refund if any such benefit was availed, irrespective of proportionality or specific consignment. This disparity was not justified by the parent statute.
• Applying the principles from Shayara Bano and K.P. Varghese, the Court concluded that Rule 96(10), as worded, produced "absurd results, not intended by the Legislature" and was "manifestly arbitrary" because it was capricious, irrational, and disproportionate.
• The prospective deletion of Rule 96(10) by a recent notification did not negate the need for the Court to rule on its validity for the prior period, where its operation affected the petitioners.

6. Statutory References

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

7. Precedents Cited

• Shayara Bano v. Union of India; (2017) 9 SCC 1 (on manifest arbitrariness)
• K.P Varghese v. Income Tax officer; (1981) 4 SCC 173 (on interpreting statutory provisions to avoid absurd results)
• Zenith Spinners v. Union of India, 2005 SCC OnLine Guj 601 (Gujarat High Court)
• Union of India & Ors v. Zenith Spinners, (2020) 14 SCC 520 (Supreme Court, affirming Gujarat HC in Zenith Spinners)
• 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 (distinguished by the Court)
• 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
• Kerala State Electricity Board and others v. Thomas Joseph and others; (2023) 11 SCC 700
• 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 (cited within Shayara Bano)