Gujarat HC rejects Notification/Circular denying accumulated ITC refund up to July 2018 to Textile Industry

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The Gujarat High Court quashes the Notification No. 20/2018 dated July 26, 2018 (“Notification No. 20/2018”) and Circular No. 56/2018 dated August 24, 2018 to the extent it provides that the input tax credit (“ITC”) lying unutilized in balance, after payment of tax for and up to the month of July 2018, on the inward supplies received up to July 31, 2018, shall lapse, are hereby quashed and set aside and are hereby declared as ultra vires and beyond the scope of Section 54(3)(ii) of the CGST Act, 2017 (“CGST Act”), as Section 54(3)(ii) of the CGST Act does not empower to issue such notifications and consequently, it is held that the petitioners and members of the petitioners are entitled to the credit and it be granted to them.

Facts:

M/s Shabnam Petrofils Pvt. Ltd. (“the Petitioner”) is engaged in manufacturing polyester texturized yarn falling under HSN Code: 5402 and also manufactures polyester woven fabrics and polyester knitted fabrics from polyester partially oriented yarn/polyester texturized yarn falling under HSN Code: 5402.

The Petitioner had challenged the legal validity of Notification No. 20/2018 by which it was  resolved that, the accumulated ITC lying unutilized in balance in respect of the goods being textile and textile articles specified at Sr. Nos. 1, 2, 3, 4, 5, 6, 6A, 6B, 6C, and 7 of the table given in Notification No. 5/2017-Central Tax (Rate) dated June 28, 2017 (“Notification No. 5/2017”), after payment of tax for and up to the month of July 2018, on the inward supplies received up to July 31, 2018, shall lapse. In short, by way of the aforesaid Government Resolution, the inverted tax structure refund of excess duty is not granted.

Petitioner’s Contentions:

  • According to the petitioners, Notification No. 20/2018 was issued to extends the restriction on the utilization of unutilized ITC for and up to the month of July 2018 and further states that on the inward supplies received up to July 31, 2018, shall lapse.
  • Further, there is no statutory provision under the CGST Act empowering the respondents to issue notifications providing for lapsing of ITC.
  • Further, the power under Section 54(3)(ii) of the CGST Act is limited to notify the supplies not entitled to refund of ITC accumulated on account of the inverted rate structure. The impugned notifications have exceeded powers delegated under Section 54(3)(ii) of the CGST Act.
  • It was further, contended that the impugned notification to the extend providing for the lapsing of ITC is discriminatory and the impugned notification is without application of mind inasmuch as the petitioner are losing huge amount of money paid towards ITC.

Held:

The Hon’ble High Court, Gujarat vide R/Special Civil Application No. 16213 of 2018 dated July 17, 2019, held as under:

  • The Revenue have no power under Section 54(3) of the CGST Act to lapse the accumulated ITC lying unutilised in balance on July 31, 2018. The only power conferred upon the Revenue under Section 54(3) of the CGST Act is to notify the goods and services not entitled for refund of ITC accumulated on account of the inverted rate structure.
  • No inherent power can be inferred from the provision of Section 54(3) of the CGST Act empowering the Central Government to provide for the lapsing of the unutilized ITC accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies i.e. Inverted rate structure.
  • Strong reliance has been placed upon the decision of the Supreme Court in the case of Collector of Central Excise, Pune v. Dai Ichi Karnataka Ltd, 1999 (112) E.L.T. 353 (S.C.), wherein it is held that when credit has been validly taken, its benefit is available to the manufacturer without any limitation in time. The credit is indefeasible.
  • It is a well-settled principle that the delegated legislation has to be in conformity with the provisions of the parent statute. By prescribing for lapsing of ITC, the Notification No.05/2017, as amended by Notification No.20/2018, has exceeded the power delegated under Section 54(3)(ii) of the CGST Act.
  • In view of the above, proviso (ii) of the opening paragraph of the Notification No.05/2017, inserted vide Notification No.20/2018, is ex-facie invalid and liable to be struck down as being without any authority of law.

Therefore, the Notification No. 20/2018 and Circular No. 56/2018 dated August 24, 2018 to the extent it provides that the ITC lying unutilized in balance, after payment of tax for and up to the month of July 2018, on the inward supplies received up to July 31, 2018, shall lapse, are hereby quashed and set aside and are hereby declared as ultra vires and beyond the scope of section 54(3)(ii) of the CGST Act, as Section 54(3)(ii) of the CGST Act does not empower to issue such notifications and consequently, it is held that the petitioners and members of the petitioners are entitled to the credit and it be granted to them.

Citation: [TS-575-HC-2019-NT]

Important Provisions:

Notification No. 20/2018-Central Tax (Rate) dated 26th July 2018

 “Provided that,

 [i] nothing contained in this notification shall apply to the ITC accumulated on supplies received on or after the 1M day of August 2018, in respect of goods mentioned at serial numbers 1, 2, 3, 4, 5, 6, 6A, 6B, 6C and 7 of the Table below; and

[ii] In respect of the said goods, the accumulated ITC lying unutilized in the balance after payment of tax for and up to the month of July 2018, on the inward supplies received up to the 31st day of July 2018 shall lapse.”

Section 54(3)(ii) of the CGST Act

 “(3) Subject to the provisions of sub-section (10), a registered person may claim a refund of any unutilized ITC at the end of any tax period: Provided that no refund of unutilized ITC shall be allowed in cases other than –

  • zero-rated supplies made without payment of tax;
  • (ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council: Provided further that no refund of unutilized ITC shall be allowed in cases where the goods exported out of India are subjected to export duty: Provided also that no refund of ITC shall be allowed. If the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.”
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