Mini Jobson vs The Assistant Commissioner on 10 October, 2024

Here's a summary of the judgment:

1. Outcome
The High Court of Kerala allowed the writ petitions, declaring 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 23-10-2017), to be ultra vires Section 16 of the Integrated Goods and Services Tax Act, 2017 (IGST Act) and unenforceable due to being manifestly arbitrary.
As a consequence:
* Any action (show cause notices, orders) initiated or culminated against the petitioners based on the provisions of the impugned Rule 96(10) for the period between 23-10-2017 and 08-10-2024 stands quashed.
* No proceedings shall be taken to recover any IGST refunded to the petitioners by applying the provisions of the said Rule for the specified period.
* Petitioners are granted two weeks to file appeals or replies concerning other issues not related to Rule 96(10), with such filings deemed to be on time.

2. Core Issue
The core issue was the legal sustainability of Rule 96(10) of the CGST Rules, specifically whether it is:
* Ultra vires the provisions of Section 16 of the IGST Act.
* Takes away the vested right of exporters to claim a refund of IGST paid on export of goods.
* Violative of Articles 14, 19(1)(g), and 265 of the Constitution of India and/or is 'manifestly arbitrary'.

3. Key Facts
* Petitioners are exporters entitled to claim refunds of taxes (either input tax credit (ITC) on inputs/input services or IGST paid on exports) under Section 16 of the IGST Act, which deals with zero-rated supplies.
* Section 16 (prior to its amendment on 01-10-2023) offered two options for claiming refunds: (a) export under bond/Letter of Undertaking (LUT) without IGST payment and claim refund of unutilised ITC (governed by Rule 89 of CGST Rules); or (b) export on payment of IGST and claim refund of such tax (governed by Rule 96 of CGST Rules).
* Rule 96(10) of the CGST Rules, as it stood, imposed restrictions preventing exporters from claiming IGST refunds if they had received supplies by availing benefits of specific notifications related to concessional duty/tax rates or exemptions (e.g., deemed exports, merchant exporter schemes, or customs duty exemptions).
* The practical application of Rule 96(10) resulted in denial of the entire IGST refund, even if only a small percentage (e.g., 10%) of inputs had benefited from these notifications.
* Refunds were also denied or questioned based on benefits availed for earlier consignments or by different units of the same petitioner (e.g., a unit in Tamil Nadu impacting a unit in Kerala with a separate GSTIN).
* Rule 96(10) was deleted prospectively via Notification No. 20/2024-Central Tax dated 08-10-2024, but the present cases concern its validity for the prior period.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer's Arguments:

  • Rule 96(10) illegally takes away the right to IGST refund granted by the substantive provisions of Section 16 of the IGST Act.
  • It creates an anomalous and unreasonable classification between exporters choosing the Rule 89 (LUT/bond) route (who are not restricted by such conditions) and those choosing the Rule 96 (IGST payment) route (who are completely denied refund). This distinction is not authorized by the parent statute.
  • The phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 of the IGST Act only permits prescribing procedural conditions to prevent revenue leakage, not imposing substantive restrictions that negate the right to refund itself.
  • Sections 54(3) and 54(6) of the CGST Act do not empower the imposition of such a restriction.
  • Subordinate legislation must be subservient to plenary legislation, and restrictions on refund rights must be explicitly contemplated by the plenary law.
  • Even if a plenary provision leads to an absurd or unjust result, courts can interpret it reasonably. The impugned Rule leads to absurd results.

• Revenue's Arguments:

  • The right to refund under Section 16 of the IGST Act is always subject to Section 54 of the CGST Act.
  • Section 54(3) of the CGST Act expressly permits imposing conditions for claiming refunds, justifying the restrictions in Rule 96(10) as part of fiscal policy.
  • The Supreme Court's judgment in VKC Footsteps India Pvt. Ltd. supports the view that the right to refund is not absolute, and the State has latitude to impose restrictions for fiscal objectives.
  • Parliament consciously granted the rule-making authority the power to impose necessary conditions, limitations, and safeguards. Therefore, Rule 96(10) is in conformity with Section 16 of the IGST Act.
  • Refunds can only be granted in accordance with the rules.
  • The scheme of Rule 89 and Rule 96 differs (e.g., Rule 96 allows ITC on capital goods, while Rule 89 does not), giving exporters a choice as to which method is more beneficial.

5. Court’s Reasoning
The Court found in favor of the petitioners, holding that Rule 96(10) is ultra vires and manifestly arbitrary:
* Ultra Vires: The Court observed that Section 16 of the IGST Act (both before and after amendment) itself does not impose the type of restrictions found in Rule 96(10). It distinguished Union of India v. VKC Footsteps India Pvt. Ltd., noting that the Supreme Court in that case dealt with restrictions imposed by plenary legislation (Section 54(3) of CGST Act concerning definition of 'inputs'), whereas the present case involves subordinate legislation (Rule 96(10)) that has exceeded the scope of its parent statute. Relying on Zenith Spinners v. Union of India (affirmed by the Supreme Court), the Court held that the phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 of the IGST Act cannot be interpreted to empower the Government to impose a complete restriction that takes away the substantive right to refund granted by the Act. Such conditions are meant to regulate the process, not obliterate the right.
* Manifest Arbitrariness: The Court noted that Rule 96(10) creates hostile discrimination between exporters opting for the LUT/bond route (Rule 89) and those opting for IGST payment and refund (Rule 96), as the former is not subject to the same restrictions. Applying the "manifest arbitrariness" test from Shayara Bano v. Union of India, which applies to both plenary and subordinate legislation, the Court found the Rule to be capricious, irrational, and disproportionate, lacking an adequate determining principle. It also cited K.P. Varghese v. Income Tax Officer to emphasize that statutory provisions should not lead to absurd or unjust results. The comparative analysis demonstrated that the Rule produced absurd results not intended by the legislature.
* Prospective Deletion: The Court acknowledged the prospective deletion of Rule 96(10) by Notification No. 20/2024-Central Tax dated 08-10-2024 but stated that a declaration on its validity for the prior period was still necessary.

6. Statutory References
* Central Goods and Services Tax Rules, 2017 (CGST Rules): Rule 96(10), Rule 89, Rule 96, Rule 92(2), Rule 90, Rule 96A.
* Integrated Goods and Services Tax Act, 2017 (IGST Act): Section 16 (subsections 1, 2, 3, 4), Section 20.
* Central Goods and Services Tax Act, 2017 (CGST Act): Section 54 (subsections 1, 3, 4, 6, 7, 10, 11, 15), Section 2(59), Section 2(84), Section 17(5), Section 50.
* Constitution of India: Articles 14, 19(1)(g), 265.
* Customs Act, 1962
* Foreign Exchange Management Act, 1999
* Finance Act, 2021
* Finance (No.2) Act of 2024
* Notifications: No. 53/2018-CT, No. 48/2017-CT, No. 40/2017-CT (Rate), No. 41/2017-IT (Rate), No. 78/2017-Customs, No. 79/2017-Customs, No. 1/2023-IT, No. 5/2023-IT, No. 20/2024-CT.

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
* Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India
* 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
* 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