M/S. Sance Laboratories Private ... vs Union Of India on 10 October, 2024

Outcome
The 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 23-10-2017), to be ultra vires Section 16 of the Integrated Goods and Services Tax Act, 2017 (IGST Act) and "manifestly arbitrary." Consequently, all actions initiated or orders culminated against the petitioners based on this rule for the period between 23-10-2017 and 08-10-2024 were quashed. No proceedings shall be taken to recover IGST already refunded based on this rule for the specified period. Aggrieved parties were granted two weeks to file appeals on other issues not related to Rule 96(10). The court noted the prospective deletion of Rule 96(10) w.e.f. 08-10-2024 by Notification No. 20/2024-Central Tax but emphasized the need to rule on its validity for the prior period.

Core Issue
The core issue was the legal sustainability of Rule 96(10) of the CGST Rules, 2017, specifically:

• Whether it is ultra vires Section 16 of the IGST Act.
• Whether it violates Articles 14, 19(1)(g), and 265 of the Constitution of India.
• Whether it is "manifestly arbitrary."
• Whether it unlawfully takes away the vested right of exporters to claim a refund of Integrated Goods and Services Tax (IGST) paid on exports.

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.
• Prior to its amendment (w.e.f. 01-10-2023), Section 16 of the IGST Act offered two refund options for zero-rated supplies:
  1. Supply under bond/Letter of Undertaking (LUT) without IGST payment, claiming refund of unutilized Input Tax Credit (ITC) (governed by Rule 89 of CGST Rules).
  2. Supply 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 it stood) imposed a restriction: an exporter was denied the refund of IGST if they had received supplies on which the benefit of specific notifications (e.g., related to deemed exports, reduced tax rates, or customs duty exemptions) had been availed.
• The practical implication was that even if a small portion (e.g., 10%) of inputs benefited from these notifications, the entire IGST refund was denied.
• The rule also led to denials where benefits were availed for earlier consignments or by a different unit of the same entity (even with a separate GSTIN), despite the current export consignment not benefiting.
• Rule 96(10) was prospectively deleted by Notification No. 20/2024-Central Tax dated 08-10-2024. The period under challenge for the validity of the rule was 23-10-2017 to 08-10-2024.

Arguments

Taxpayer (Petitioners):
* Rule 96(10) takes away the substantive right to refund granted by Section 16 of the IGST Act, making it ultra vires the plenary legislation. Subordinate legislation cannot override the parent statute.
* An anomalous and discriminatory situation is created because Rule 89 (LUT/bond route) does not impose a similar restriction, allowing exporters under that route to claim ITC refunds even if inputs benefited from the specified notifications, while Rule 96 (IGST payment route) denies the entire refund. This is an unreasonable classification, violating Article 14.
* The phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16 of the IGST Act refers to procedural aspects to prevent revenue leakage, not to impose a complete restriction on the substantive right to refund.
* The rule leads to absurd and unjust results not intended by the legislature.

Revenue (Respondents):
* The right to refund under Section 16 of the IGST Act is not absolute and is subject to the conditions permitted by Section 54 of the CGST Act, which allows for the imposition of conditions for claiming refunds.
* The words "subject to such conditions, safeguards and procedures as may be prescribed" in Section 16 of the IGST Act (pre and post-amendment) and Section 54(6) of the CGST Act explicitly empower the government to impose such restrictions for fiscal objectives.
* The Supreme Court's decision in Union of India v. VKC Footsteps India Pvt. Ltd. supports the State's right to impose restrictions on refunds, given its fiscal objectives.
* Refund provisions, like exemption notifications, should be interpreted strictly, in favour of the Revenue in case of doubt.
* Differences between Rule 89 and Rule 96 (e.g., eligibility for capital goods credit under Rule 96) justify the distinct conditions, and exporters have the option to choose the more beneficial method.

Court’s Reasoning

• Ultra Vires: The Court held that Section 16 of the IGST Act (both pre and post-amendment) itself does not impose the kind of restriction found in Rule 96(10) on the right to refund. The phrase "subject to such conditions, safeguards and procedure as may be prescribed" in Section 16(3)(a)&(b) and Section 54 of the CGST Act does not authorize restrictions that completely extinguish the substantive right granted by the Act. It cited Zenith Spinners (affirmed by the Supreme Court) to emphasize that delegated legislation cannot exceed its jurisdiction by restricting or rendering redundant rights granted by the parent statute.
• Manifestly Arbitrary and Discriminatory: The Court found Rule 96(10) to be "manifestly arbitrary" based on the Shayara Bano test. It noted the hostile discrimination between exporters opting for the LUT/bond route (Rule 89) and those opting for the IGST payment route (Rule 96). While Rule 89 allowed ITC refunds even if inputs benefited from specified notifications, Rule 96(10) completely denied IGST refunds under similar circumstances, even if only a minor portion of inputs or unrelated consignments/units availed such benefits. This distinction was deemed unreasonable and unauthorized by the parent statute. The rule produced absurd results, not intended by the legislature, as per the principles in K.P. Varghese.
• Distinction from VKC Footsteps: The Court clarified that VKC Footsteps dealt with a restriction imposed by plenary legislation (Section 54(3) of CGST Act) regarding the scope of "inputs" for inverted duty structure refunds, whereas the present case concerned a restriction imposed by subordinate legislation (Rule 96(10)) that extended beyond the scope of the parent Act.
• Prospective Deletion: The Court acknowledged the prospective deletion of Rule 96(10) w.e.f. 08-10-2024 but asserted its duty to determine the rule's validity for the period it was in force.

Statutory References

• Acts:
  • Integrated Goods and Services Tax Act, 2017 (Sections 16, 20)
  • Central Goods and Services Tax Act, 2017 (Sections 2(59), 2(84), 17(5), 50, 54(1), (3), (4), (6), (7), (10), (11))
  • Constitution of India (Articles 14, 19(1)(g), 265)
  • Customs Act, 1962
  • Foreign Exchange Management Act, 1999
  • Finance Act, 2021
• Rules:
  • Central Goods and Services Tax Rules, 2017 (Rules 89, 90, 92(2), 96, 96(10) [as inserted and deleted], 96A)
  • Integrated Goods and Services Tax Rules, 2017 (Rule 2)
• Notifications:
  • Notification No. 53/2018-Central Tax dated 09-10-2018 (inserted Rule 96(10))
  • 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. 27/2023-C.T. dated 31-07-2023 (for amendment to Section 16 IGST Act)
  • Notification No. 1/2023 - Integrated Tax dated 31-07-2023
  • Notification No. 5/2023 - Integrated Tax dated 26-10-2023
  • Notification No. 20/2024-Central Tax dated 08-10-2024 (deleted Rule 96(10))

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 Supreme Court in 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 (cited in Shayara Bano)