Delhi HC: Modification to GST Rule 89(4)(c) is Not Retroactive, Which Caps “Export Turnover” and Restricts Refunds

The Honorable Delhi High Court, in the matter of M/s. Indian Herbal Store Pvt. Ltd. vs. Union of India [W.P.(C) 9908/2021 and W.P.(C) 9912/2021 dated September 15, 2023], granted the writ petition and ruled that Rule 89(4)(C) of the Central Goods and Services Rules, 2017 (“the CGST Rules”) should not be applied retrospectively.

The Honorable High Court, drawing upon the judgment of the Honorable Karnataka High Court in the case of M/s. Tonbo Imaging India Pvt. Ltd. vs. Union of India and Others [W.P.(C) No. 13185/2020 dated February 16, 2023], observed that the Honorable Karnataka High Court had already declared the substitution made in Rule 89(4)(C) to be arbitrary and ultra vires, in conflict with the provisions of Section 54 of the CGST Act.

As a result, the Honorable High Court nullified the Refund Rejection Order and the Order-In-Appeal, instructing the Revenue Department to process the claim for the refund of unutilized Input Tax Credit (“ITC”).

Real Facts:

The applicant M/s. Indian Herbal Store Pvt. Ltd. is an exporter of herbal goods via an e-commerce platform supplying goods via courier service.

The applicant filed three refund applications (“the Application”) to claim unused Input Tax Credit (ITC) for the quarter from October 2018 to December 2018 of the Financial Year (“the FY”) 2018-2019 (“the Impugned Period 1”). Subsequently, a Show Cause Notice (“the SCN”) was issued for Impugned Period 1. But, the Revenue Department (“the Respondent”) rejected the aforementioned Application via a Refund Rejection Order (“the Order”) dated September 15, 2020, for Impugned Period 1, citing non-compliance with the conditions outlined in Rule 89(4)(C) and Rule 96B of the CGST Rules.

The Petitioner also filed three Applications to claim refunds of unutilized ITC for the quarters from January 2019 to March 2019, April 2019 to June 2019, and July 2019 to September 2019 of the FY 2018-2019 and FY 2019-2020 (“Impugned Period 2”). Subsequently, an SCN was issued for Impugned Period 2. However, the Application was rejected through Orders dated September 24, 2020, October 22, 2020, and November 5, 2020, for not providing the required Foreign Inward Remittance Certificates (“FIRCs”) and for failing to meet the terms and conditions necessary for calculating the eligible export turnover, as outlined in Rule 89(4)(C) of the CGST Rules.

Read Also: CGST Rule 89(4) Amendment Will Affect Future Cases, Not Those That Have Already Occurred

Dissatisfied with the Orders, the Petitioner initiated an appeal with the Respondent. However, the Petitioner’s appeal met with rejection in the Orders in Appeal dated June 18, 2021 (“the Appeal Orders”). The rejection was based on the conditions about export turnovers for the relevant tax period, as stipulated in Rule 89(4)(C) of the CGST Rules, had not been met.

In response to the Order and the Appeal Orders (collectively referred to as “the Impugned Orders”), the Petitioner filed a writ petition, W.P. (C) 9908/2021 for Impugned Period 1 and W.P. (C) 9912/2021 for Impugned Period 2, seeking the annulment of the Impugned Orders and the release of accrued unutilized Input Tax Credit (ITC) related to the export of goods before the Honorable High Court.

The Respondent argued that there was a potential for exporters to exploit the system by inflating the value of a zero-rated supply of goods. Consequently, a maximum valuation ceiling for the zero-rated supply of goods in exports was introduced through an amendment to the CGST Rules in Notification No. 16/2020, dated March 23, 2020, which substituted Rule 89(4)(C) of the CGST Rules. The Respondent further contended that since these rules were procedural, they should be applied retrospectively.

Advocate Bimal Jain, representing the Petitioner, contended that Rule 89(4)(C) should only have prospective application, as the Notification explicitly states its applicability from the date of publication in the official gazette.

The Petitioner’s legal counsel further argued that the amendment to Rule 89(4)(C) of the CGST Rules, which limits the value of zero-rated supply of goods to 1.5 times the value of domestically supplied goods, conflicts with Section 54(1) of the CGST Act. Section 54(1) does not allow the introduction of new conditions but only prescribes the form and manner. The Advocate for the Petitioner maintained that rules must align with statutory provisions, and their purpose is to enforce, not contravene these provisions. Consequently, the amendment to Rule 89(4)(C) of the CGST Rules is ultra vires to Section 54(1) of the CGST Act and violates Article 14 of the Constitution of India.

Subject:

Rule 89(4)(C) of the CGST Rules breaches the rights of the supplier for the rejection of refund of unused ITC accrued on account of export of zero-rated supply of goods.

Had:

The Hon’ble Delhi HC in W.P.(C) 9908 & 9912/2021 held as under:

• It was noted that the right to claim a refund of unutilized ITC arises when goods are exported. Under Section 54(1) of the CGST Act, the Petitioner has the right to file a refund application within two years from the relevant date. According to Explanation clause 2(a) to Section 54 of the CGST Act, the relevant date for the supply of goods for export is the date on which the ship or aircraft carrying the goods departs from India.
• It was also observed that the substitution of Rule 89(4)(C) of the CGST Rules should be applied prospectively from March 23, 2020. The Respondent erred in applying Rule 89(4)(C) of the CGST Rules to calculate the export turnover for determining the Petitioner’s refund claims for Impugned Periods 1 and 2, and this contention was rejected.
• Drawing from the judgment of the Honorable Karnataka High Court in M/s. Tonbo Imaging India Pvt. Ltd. vs. Union of India and Others [W.P.(C) No. 13185/2020 dated February 16, 2023], the Court further noted that the Honorable Karnataka High Court had already invalidated the substitution made in Rule 89(4)(C) of the CGST Act regarding the ceiling limit imposed on the valuation of export turnover, deeming it arbitrary, ultra vires, and contrary to the provisions of Section 54 of the CGST Act.
• The Court’s opinion was that Rule 89(4)(C) of the CGST Rules should not apply to determine the amount of refund for unutilized ITC, and the Petitioner has a legitimate claim for this refund.
• Consequently, the Court held that the Impugned Orders should be set aside and directed the Respondent to process the GST refund of the accumulated ITC, along with any applicable interest.

Our Statements:

The decision rendered by the Honorable Delhi High Court is commendable since it upholds the rights of exporters engaged in the zero-rated supply of goods by challenging unfair regulations that restrict the Exporter’s ability to claim refunds for unused Input Tax Credit (ITC).

Appropriate Conditions Under CGST Section 54:

Tax Refund-

“(1) Any person claiming a refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed:

Provided that a registered person, claiming a refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49, may claim such refund in such form and manner as may be prescribed.

Explanation.- For the purposes of this section,-

(1)……………………………

(2) “relevant date” means-

(a) in the case of goods exported out of India where a refund of tax paid is available in respect of goods themselves or, as the case may be, the inputs or input services used in such goods,”

CGST Rules of 89(4)(C)

89. Application for refund of tax, interest, penalty, fees or any other amount

4(C). “Turnover of zero-rated supply of goods” means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both.”