Kerala High Court Declares Rule 96(10) Of CGST Rules As Ultra Vires Section 16 Of IGST Act

The Kerala High Court has declared the Rule 96(10) Of CGST Rules As Ultra Vires Section 16 Of IGST Act.

The bench of Justice Gopinath P. has observed that Rule 96(10) of the CGST Rules, as inserted by notification No.53/2018-CT dated 09-10-2018 w.e.f. 23-10-2017 is declared ultra vires the provisions of Section 16 of the IGST Act and unenforceable on account of being manifestly arbitrary.

Background – Rule 96(10) Of CGST Rules

The petitioner/assessee has challenged the validity of Rule 96(10) of the Central Goods and Services Tax Rules, 2017 primarily on the ground that the Rule is ultra vires the provisions of Section 16 of the Integrated Goods and Services Tax Act, 2017. 

The issue raised was whether Rule 96(10) of the CGST Rules as it presently stands is legally sustainable or is liable to be struck down.

The petitioners/assesses are exporters who are entitled to claim a refund of taxes paid on input services and input goods or the Integrated Goods and Services Tax (IGST) paid on exports by virtue of the provisions contained in Section 16 of the IGST Act. 

The concept of zero-rated supply in the provisions of Section 16 of the IGST Act, 2017, read with the provisions of Section 54 of the Central Goods and Services Tax Act, 2017 indicate that there is to be no export of taxes and on the goods being exported the exporter is entitled to a refund of the IGST paid on the export of goods or to the refund of taxes paid on input goods and input services used in the manufacture of goods or provision of services that are ultimately exported. 

Section 16 of the IGST Act (as it stood till amendment by Act 13 of 2021 (Brought into force w.e.f. 01-10-2023 vide Notification No. 27/2023-C.T., dated 31-07-2023)) contemplated two methods to enable the exporter to claim a refund of taxes on input goods and input services used in the manufacture of goods exported or services exported. 

Both these methods were subject to the provisions of Section 54 of the CGST Act. The first method contemplated a consideration of the claim under Rule 89 of the CGST Rules while the second method contemplated a consideration of the claim in terms of Rule 96 of the CGST Rules. 

The provisions of Rule 96(10) of the CGST Rules have undergone a series of amendments, and the Rule as it presently stands imposes certain restrictions in the matter of refund of IGST and provides that if certain inputs have been availed after aking the benefit of certain notifications referred to therein, the exporter is not entitled to claim refund of IGST. 

The working of the Rule as it is presently worded results in a situation where even if, for example, only 10% of the inputs have been procured after availing the benefit of any of the notifications mentioned in Rule 96(10) of the CGST Rules, the entirety of the refund is denied to exporters on the ground that they have availed the benefit of the notifications in respect of 10% of the inputs. 

There are cases where the refund has been questioned or denied where it has been found that the exporter has, in respect of some earlier consignment availed the benefit of the notifications referred to in Rule 96(10) of the CGST Rules and has not availed such benefit in respect of the consignment in question. 

Where some inputs have been procured after availing the benefit of the notifications mentioned in Rule 96(10) of the CGST Rules in respect of a unit of the petitioner situated in the State of Tamil Nadu, the right to claim refund of IGST in respect of exports effected from the unit of the petitioner situated in the State of Kerala with a different registration number has been questioned on the premise that the unit in Tamil Nadu has procured inputs after availing the benefit of the notifications mentioned in Rule 96(10) of the CGST Rules.

Arguments – Rule 96(10) Of CGST Rules

The assessee while referring extensively to the provisions of Section 16 of the IGST Act, Section 54 of the CGST Act and the provisions contained in Rule 89 and Rule 96 of the CGST Rules it is contended that the provisions of Rule 96(10) of the CGST Rules as presently worded effectively takes away the right of an exporter to claim refund of IGST which is a right which granted by the substantive provisions of the IGST Act. 

The assessee pointed out that of the IGST Act, Section 54 of the CGST Act and the provisions contained in Rule 89 and Rule 96 of the CGST Rules it is contended that the provisions of Rule 96(10) of the CGST Rules as presently worded effectively takes away the right of an exporter to claim refund of IGST which is a right which granted by the substantive provisions of the IGST Act. 

The assessee contended that Rule 89 of the CGST Rules contemplates the conditions upon which an exporter opting to export goods by filing a letter of undertaking/bond and opting to seek a refund of tax paid on unutilized input tax credit on inputs (both goods and services) used in providing export goods/export services while the provisions of Rule 96 of the CGST Rules deals with a methodology for claiming refund after paying full IGST on the exported goods/services after utilizing the available credit.

The assessee contended that Rule 89 of the CGST Rules contemplates the conditions upon which an exporter opting to export goods by filing a letter of undertaking/bond and opting to seek a refund of tax paid on unutilized input tax credit on inputs (both goods and services) used in providing export goods/export services while the provisions of Rule 96 of the CGST Rules deals with a methodology for claiming refund after paying full IGST on the exported goods/services after utilizing the available credit.

The assessee stated that while the provisions of Rule 89 of the CGST Rules do not restrict the right of an exporter to claim a refund even if certain inputs have been procured after availing the benefits of the notifications referred to in Rule 96(10) of the CGST Rules, whereas the provisions of Rule 96(10) of the CGST Rules seeks to deny the benefit of refund completely if certain inputs have been procured after availing the benefits of the notifications referred to in Rule 96(10) of the CGST Rules, leading to an anomalous situation where an exporter who is otherwise on the same footing even will get the benefit of refund of taxes paid if he opts for the letter of undertaking/bond route but will not get such refund when he opts to pay the IGST and seek a refund of the IGST on account of the restrictions placed by the provisions of Rule 96(10) of the CGST Rules.

Court’s Observation – Rule 96(10) Of CGST Rules

Though the issues arising in all these writ petitions relate to a period prior to the amendment of Section 16 of the IGST Act w.e.f. 01-10-2023, it may be noted that in substance the provisions of Section 16 IGST Act (both before amendment and after amendment) do not restrict the right of an exporter to claim a refund of either IGST paid on exports or tax paid on input services or input goods used in the export of goods or services subject to the provisions of Section 54 of the CGST Act and the Rules made thereunder. 

However, it may be noted that after the amendment w.e.f. 01-10-2023, Section 16 of the IGST Act empowers the Government, on the recommendation of the GST Council, and subject to such conditions, safeguards and procedures as may be prescribed, by notification, specify a class of persons who may make zero-rated supply on payment of integrated tax and claim refund of the tax so paid or a class of goods or services which may be exported on payment of integrated tax and the supplier of such goods or services may claim refund of the tax so paid. 

In other words, after the amendment w.e.f 01-10-2023, a person who may opt for the method contemplated by the provisions of Section 16(3)(b) of the IGST Act (as it originally stood) will now be governed by the provisions of Section 16(4) of the IGST Act which was introduced by way of the amendment and the Government may specify a class of persons who may make a zero-rated supply on payment of IGST or a class of goods or services which may be exported on payment of IGST, which provision was not available prior to amendment w.e.f. 01-10-2023. 

Conclusion – Rule 96(10) Of CGST Rules

The court held that the working of Rule 96(10) of the CGST Rules as presently worded creates a restriction not contemplated by Section 16 of the IGST Act, on the right to refund. Therefore, I am constrained to hold that Rule 96(10) of the CGST Rules as presently worded is ultra vires the provisions of Section 16 of the IGST Act, it is ‘manifestly arbitrary’.

The court held that as a consequence of the declaration, any action that has been initiated by the issuance of a show cause notice or otherwise or has culminated in an order against the petitioners in these writ petitions on the basis of the provisions contained in Rule 96(10) of the CGST Rules, as inserted by w.e.f. 23-10-2017, will stand quashed.

The court directed no proceedings shall be taken to recover any IGST that has been refunded to the petitioners in these writ petitions by applying the provisions of Rule 96(10) of the CGST Rules for the period between 23-10-2017 and 08-10-2024.

The court clarified that in cases where orders have been issued by the Adjudicating Authority including on issues other than those arising out of the application of Rule 96(10) of the CGST Rules, the person aggrieved may file appeals against such orders and on such issues other than those arising out of the application of Rule 96(10) of the CGST Rules within a period of two weeks from the date of receipt of a certified copy of this judgment. Since the Writ Petitions have been pending before the Court along with interim orders of protection such appeals shall be deemed to have been filed on time provided they are filed within the time permitted.

The court clarified that in cases where a show cause notice has been issued, on issues other than those arising under Rule 96(10) of the CGST Rules, the petitioners shall file their replies in response to such notices within a period of two weeks from the date of receipt of a certified copy of this judgment and all issues other than those arising out of the application of Rule 96(10) of the CGST Rules shall be adjudicated by the proper officer.

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Case Details

Case Title: M/S. SANCE LABORATORIES PRIVATE LIMITED Versus UOI

Case No.: WP(C) NO. 17447 OF 2023

Date: 10/10/2024

Counsel For Petitioner: G. SHIVADAS

Counsel For Respondent: SREELAL N. WARRIER

Click Here To Read Order