UNION OF INDIA & ORS. v. VKC FOOTSTEPS INDIA PVT LTD.

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[DR DHANANJAYA Y CHANDRACHUD, J.]

goods or services and the refund of excess balance of input A of ITC under inverted duty structure is a means to achieve this end. If the excess tax credit is not refunded, the tax liability of the supplier will be in excess of the liability fixed by the charging section and such interpretation should be avoided. B

21Copy pinpoint21. Dr Arvind Poddar, learned Counsel appearing on behalf of the respondents22, urged that the respondents are in the business of providing dyeing and printing services for textile industries. For job work operations, they procure input goods (such as chemicals, stationeries and colours) and for providing outward supplies, they also avail of input services such as contract labour, consultancies, repairs of plants and machinery. The C rate on outward supply of job work on textile fabrics is 5 per cent, while the rate on input goods and the rate on input services is 12 per cent /18 per cent. Thus, most of the input goods and input services attract a higher rate of GST compared to rate of GST applicable on the outward supply which is 5 per cent. The inverted duty structure results where the rate of GST on inverted supplies is higher than the outward supplies. As a result, over a period of time, credit gets accumulated in the electronic credit ledger. In this backdrop, the following submissions have been urged: (i) Clause (ii) to the first proviso of Section 54(3) merely prescribes the eligibility conditions subject to which a refund of unutilised ITC could be made. The main part of Section 54(3) allows for a refund of any unutilised ITC subject to the satisfaction of two conditions – either that the assessee is making zero rated supplies without payment on taxes or where the credit is getting accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. Clause (ii) of the first proviso merely prescribes a condition of eligibility subject to which refund of unutilised ITC could be made; (ii) Rule 89(5) while providing a procedure for computing refund under Section 54(3) imposes an artificial restriction which has not been prescribed in the main statute and is patently arbitrary and illegal. Section 49 allows credit utilization irrespective of whether it is out of input goods or input

22 Appearing in SLP (Civil) No 1868/2021 H

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A services. On the other hand, Rule 89(5) artificially restricts the credit by initiating the formula under which duty can be paid out of credit on input goods and input services only and hence the credit of input services will keep on accumulating. Rule 89(5) must allow the taxpayers to utilise and make payment through input services first and then the balance through credit on inputs; and (iii) It is paradoxical that while on the one hand the definition of net ITC has been amended to exclude ITC availed on input services, on the other hand, turnover of inverted supply of services and tax payable on such inverted rated supply of services has been included in the formula for calculating the maximum amount of refund. D.3 Rejoinder by Union of India

22Copy pinpoint22. In response to the submissions of the assessees, Mr N D Venkataraman, the learned ASG, has submitted the following propositions: (i) The submission of the respondents that Article 279A(6) of the Constitution mandates a harmonised structure of GST and obligates parity of treatment amongst goods and services is misplaced for the following reasons: E (a) Article 279A(6) does not compel parity of treatment between goods and services. In fact, Article 366(12) deals with the definition of ‘goods’, Article 366(26A) deals with the definition of ‘services’ and Article 366(12A) defines ‘goods and services’. Thus, goods and services are identified as two distinct aspects; (b) Article 279A deals with the GST Council. The purpose of Article 279A(6) is to ensure that the GST Council, while discharging its function, is guided by the need for a harmonised structure. Thus, the term ‘harmonised’ or, harmony in this context would mean uniformity, consistency, shared values and responsibilities between the Union Government and State Governments. The essence of Article 279(A)(6) is promotion of cooperative federalism;

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[DR DHANANJAYA Y CHANDRACHUD, J.]

(c) If the interpretation of the respondents is accepted, it would render Article 279A(4) otiose as it allows the GST Council to make recommendations including rates and floor rates with bands of GST. (ii) Registered assessees having unutilised ITC do not form a distinct and separate class. Unutilised ITC can accumulate on account of huge discounts on output supplies of goods or services; as a business strategy to indulge in predatory pricing; loss of business resulting in undervaluation of goods; an Act of God; and inverted duty structure on account of inputs or input services, among other reasons . Thus, C although registered assessees accumulating unutilised ITC constitute one category, it has numerous species. Parliament is entitled to choose the species out of the category and grant concessions or benefits. This would amount to treating equals equally, and unequals unequally; D (iii) The doctrines of equivalence, neutrality or secondary stage cascading effect are inapplicable and should not be used to read in grant of refund for unutilised ITC on input services. Although the stated goal of the doctrines may be convergence of a destination-based tax, policy issues as to how to achieve the stated goal must be left to the discretion of the Union Government and the State Governments. The level, type and time frame to achieve a complete convergence is a policy issue which cannot be subject to judicial review; (iv) After the ITC on account of both inputs and input services is booked into an electronic ledger, it forms a homogenous nucleus and the source of the ITC (that is whether it arises from input or input services) cannot be determined. Thus, the formula provided in Rule 89(5) is necessary to make such a bifurcation; and G (v) Prior to the enactment of GST, MODVAT/CENVAT Rules contained formulae to determine the quantum of eligibility of credit. Similarly, to legally dissect the homogenous unutilised ITC, a formula may be resorted to determine eligibility, restrictions, or refunds. H

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A E Constitutional Scheme of GST

23Copy pinpoint23. The idea which permeates GST legislation globally is to impose a multi stage tax under which each point in a supply chain is potentially taxed. Suppliers are entitled to avail credit of tax paid at an anterior stage. As a result, GST fulfils the description of a tax which is based on value addition. Value addition is intended to achieve fiscal neutrality and to obviate a cascading effect of taxation which traditional tax regimes were liable to perpetuate. In a sense therefore, the purpose of a tax on value addition is not dependent on the distribution or manufacturing model. The tax which is paid at an anterior stage of the supply chain is adjusted. The fundamental object is to achieve both neutrality and equivalence by the grant of seamless credit of the duties paid at an anterior stage of the supply chain.

24Copy pinpoint24. The State VAT legislation in India represented a significant stage in the evaluation of fiscal legislation based on the principle of value addition. In All India Federation of Tax Practitioners v. Union of D India23, this Court, speaking through a two judge Bench, noted the principle that VAT is a consumption tax as it is borne by the consumer. The Court observed that with its increasing importance in the economy, the service sector is “occupying the centre stage of the Indian economy”. As economists postulate, there is no distinction between consumption of goods and consumption of services both of which satisfy human wants and needs. The Court underscored that service tax is a destination-based consumption tax, not a charge on business but on the consumer of the service.

25Copy pinpoint25. Though the erstwhile regime recognised the principle of value addition-based consumption taxes, there was an absence of a seamless flow of credit, particularly between Central and State levies. The background material antecedent to the adoption of the constitutional and legal structure underlying GST in the country indicates the importance which was ascribed to developing a tax regime which would achieve a continuous chain of set-off from the original producer and service provider’s point up to the retailer’s level in the supply chain and eliminate the burden of cascading tax effects. Thus, the first discussion paper on GST in India published by the Empowered Committee of State Finance Ministers on 10 November 2009 emphasised that :

23 H 2007 (7) SCC 527

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[DR DHANANJAYA Y CHANDRACHUD, J.]

“1.14 … In the GST, both the cascading effects of CENVAT and service tax are removed with set-off, and a continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level is established which reduces the burden of all cascading effects. This is the essence of GST, and this is why GST is not simply VAT plus service tax but an improvement over the previous system of VAT and disjointed service tax.”

26Copy pinpoint26. The Statement of Objects and Reasons appended to the Constitution (One-Hundred and Twenty-Second Amendment) Bill 2014 which eventually became the Constitution (One Hundred and First Amendment) Act 2016 postulates that GST shall replace a number of indirect taxes levied by the Union Government and the State Governments. The object was to introduce a goods and service tax which would fulfil two fiscal priorities namely, (1) removing the cascading effect of taxes; and (2) providing for a common national market for goods and services. An extract from the Statement of Objects and Reasons is set out below: D “The Constitution is proposed to be amended to introduce the goods and services tax for conferring concurrent taxing powers on the Union as well as the States including Union territory with Legislature to make laws for levying goods and services tax on every transaction of supply of goods or services or both. The goods and services tax shall replace a number of indirect taxes being levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The proposed Central and State goods and services tax will be levied on all transactions involving supply of goods and services, except those which are kept out of the purview of the goods and services tax.”

27Copy pinpoint27. Now, it is in this backdrop that it becomes necessary to advert to the constitutional amendment and the resulting legislation. The One Hundred and First Amendment to the Constitution is a watershed moment in the evolution of cooperative federalism. Since its origin, the G Constitution contained a three-fold distribution of legislative power. Under Article 246, the subjects of legislation enumerated in the Union List of the Seventh Schedule were assigned to Parliament, those in the State List were assigned exclusively to the States and those in the Concurrent List were assigned both to Parliament and the States with precedence to Parliament under the provisions of Article 254. H

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28Copy pinpoint28. To illustrate, Entry 84 of the Union List provided for duties of excise on tobacco and other goods manufactured or produced in India except – (a) alcoholic liquors for human consumption; and (b) opium, hemp and other narcotic drugs and narcotics. Entry 54 of the State List provided for taxes on sale or purchase of goods other than newspapers subject to Entry 92A of the Union List which provided for taxes on the B sale or purchase of goods other than newspapers in the course of interstate trade or commerce. Entry 97, the residual entry of the Union List subsumed within it among other subjects, taxes not mentioned in the Union, State or Concurrent List, thereby bringing with its ambit the notion of ‘rag-bag’ legislation. The field contemplated by the erstwhile Entry C 83 of the Union List (duties of customs including export duties) or Entry 97 did not travel into the area of trading. State legislation in the area of sales tax and VAT defined the ambit of the expression ‘inputs’, ‘capital goods’ and ‘input tax credit’.

29Copy pinpoint29. The One Hundred and First Constitutional Amendment brought about a significant merger by contemplating a fiscal umbrella comprehending GST. Article 246A was adopted in terms of which, notwithstanding anything contained in Article 246 and Article 254, Parliament and (subject to Clause (2)), the State Legislature of every State have the power to make laws with respect to GST imposed by the Union or by the State under clause (2) of Article 246A24. Parliament has the exclusive power to make laws with respect to goods and services tax where the supply of goods or of services, or both takes place in the course of inter-State trade or commerce. With the enactment of the One Hundred and First Constitutional Amendment, Entry 84 of the Union List has been restructured to incorporate duties of excise on the following goods manufactured or produced in India, namely –

24 “Article 246A. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such G State. (2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods; or of services, or both takes place in the course of inter-State trade or commerce. Explanation. – The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the H Goods and Services Tax Council.”

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[DR DHANANJAYA Y CHANDRACHUD, J.]

(a) petroleum crude; A (b) high speed diesel; (c) motor spirit (commonly known as petrol); (d) natural gas; (e) aviation turbine fuel; and B (f) tobacco and tobacco products.

30Copy pinpoint30. Entry 54 of the State List has been restructured to provide for taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, other than in the course of inter- State trade or commerce.

31Copy pinpoint31. Article 246A has brought about several changes in the constitutional scheme: (i) Firstly, Article 246A defines the source of power as well as the field of legislation (with respect to goods and services tax) obviating the need to travel to the Seventh Schedule; (ii) Secondly, the provisions of Article 246A are available both to Parliament and the State legislatures, save and except for the exclusive power of Parliament to enact GST E legislation where the supply of goods or services takes place in the course of inter-State trade or commerce; and (iii) Thirdly, Article 246A embodies the constitutional principle of simultaneous levy as distinct from the principle of concurrence. Concurrence, which operated within the fold F of the Concurrent List, was regulated by Article 254.

32Copy pinpoint32. The One Hundred and First Constitutional Amendment brought in amendments to the constitutional dictionary of definitions contained in Article 366. Clause 12 of Article 366 contained a definition of the expression “goods” to include all materials, commodities and articles. G Clause 12A has been introduced by the amendment to define “goods and services tax”: “Clause (12A) “goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption”. H

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A Clause 26A has been introduced to define “services”: “Clause (26A) “Services” means anything other than goods” ‘Services’, therefore, under the constitutional scheme means anything other than goods.

33Copy pinpoint33. The constitutional scheme embodying GST is facilitated through the composition of the GST Council under Article 279A. The GST Council is to consist of the Union Finance Minister, the Union Minister of State in charge of Revenue of Finance; and the Minister In-charge of Finance or Taxation or any other Minister nominated by each State Government. Clause (4) of Article 279(A) empowers the GST Council to make recommendations to the Union and the States on the aspects comprehended in sub-clauses (a) to (h) of Clause (4), which are extracted below: “[…] (a) the taxes, cesses and surcharges levied by the Union, the D States and the local bodies which may be subsumed in the goods and services tax; (b) the goods and services that may be subjected to, or exempted from the goods and services tax; (c) model Goods and Services Tax Laws, principles of levy, E apportionment of Goods and Services Tax levied on supplies in the course of inter-State trade or commerce under article 269A and the principles that govern the place of supply; (d) the threshold limit of turnover below which goods and services may be exempted from goods and services tax; F (e) the rates including floor rates with bands of goods and services tax; (f) any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster; G (g) special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and (h) any other matter relating to the goods and services tax, as the Council may decide.” H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

Clause (6) of Article 279A stipulates that: A “(6) While discharging the functions conferred by this article, the Goods and Services Tax Council shall be guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services.” B

34Copy pinpoint34. Article 279A(6) indicates that in the discharge of its functions, the GST Council is to be guided by the need for a harmonised structure of goods and services tax and the development of a harmonised national market for goods and services. This emphasis on harmony is crucial to co-operative federalism. It underscores that in a federal arrangement C where the States and Union are converging together for the first time to adopt the same event for taxation, both sets of partners must be guided by the over-arching need to preserve harmony. Harmony postulates balance, an acceptance of mutual co-existence. Clauses (7) to (11) of Article 279A contain provisions for quorum, procedure and voting. Clause (9) is a clear indicator of the absence of supremacy either of the Union D of the States. Under sub clause (a) of Clause 9, the vote of the Union Government is to have a weightage of one-third of the total votes cast, while the votes of all the State Governments together are to have a weightage of two-thirds of the total votes cast. Every decision of the Council is to be taken by a majority of not less than three-fourths of the E weighted votes of the members present and voting. The principle of harmony does not postulate exact coincidence in all points of comparison or reference. Harmony is a postulate of cooperative federalism and is founded on the principle of mutual co-existence, deference and equality of the coexisting units. F F CGST Act F.1 Definitions

35Copy pinpoint35. While understanding the provisions of Section 54(3), it becomes necessary to advert to some of the key definitions contained in the CGST Act. G Section 2 (52) defines the expression goods in the following terms: “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.” H

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36Copy pinpoint36. The expression ‘goods’ is defined on the basis of a ‘means and includes’ formula. Following well-settled principles of statutory interpretation, the legislature uses the expression ‘means’ when it intends the definition to be exhaustive. The use of the expression ‘includes’ is intended to convey an expansive meaning. By using the expression “means and includes”, the legislature intends to employ an extensive definition, incorporating subjects which may not ordinarily fall within the common understanding of the expression. Thus, the expression ‘goods’ is defined to mean every kind of movable property other than money and securities. It also includes certain other items incorporated in the inclusive part (“but includes”) of the definition. The expression ‘goods’ is broadly defined. The expression ‘services’ is defined in Section 2(102) in the following terms: “Section 2(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. Explanation: For the removal of doubts, it is hereby clarified that the expression “services” includes facilitating or arranging transactions in securities.” E The expression ‘services’ is thus distinguished from goods since the expression means “anything other than goods”.

37Copy pinpoint37. The definition of the expression ‘input’ is contained in Section 2(59) which reads thus:

F “2(59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business” The expression ‘input’ is thus defined to mean goods other than capital goods. The definition however, incorporates a requirement of use, actual or intended, by a supplier or in the course or furtherance of G business.

38Copy pinpoint38. ‘Input service’ is defined in Section 2(60) as follows: “input service” means any service used or intended to be used by a supplier in the course or furtherance of business;” H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

The definition of “input service” is parallel to that of “input”, with A the important distinction that while ‘input’ is defined with reference to “any goods”, ‘input service’ is defined in relation to “any service”. Both sets of definitions incorporate the further requirement of use or intended use by a supplier in the course or furtherance of business.

39Copy pinpoint39. The expression “input tax” is defined in Section 2(62) : B “Input tax” in relation to a registered person, means the Central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes— (a) the integrated goods and services tax charged on import of goods; C

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9; (c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax D Act; (d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or (e) the tax payable under the provisions of sub-sections (3) E and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy.” The expression ‘input tax’ in relation to a registered person means (i) the Central, State, Integrated or Union Territory tax; (ii) charged on F any supply of goods or services or both made to a registered person. This is followed by an inclusive definition.

40Copy pinpoint40. The expression ‘input tax credit’ is defined in Section 2 (63): “2(63) “input tax credit” means the credit of input tax” G Evidently, since input tax credit means the credit on input tax, the definition of the expression ‘input tax’ has to be read into Section 2(63) in understanding the ambit of the expression ‘input tax credit’. Now, input tax is the tax charged on the supply of goods or services or both. Apart from the above definitions there are three other definitions which H

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A must be noted at this stage. The expression ‘inward supply’ is defined in Section 2 (67) in the following terms: “2(67) “inward supply” in relation to a person, shall mean receipt of goods or services or both whether by purchase, acquisition or any other means with or without consideration.”

41Copy pinpoint41. The expression ‘output tax’ is defined in the following terms: “2(82) “output tax” in relation to a taxable person, means the tax chargeable under this Act on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis” C The expression ‘outward supply’ is defined in Section 2(83) thus: “2(83) “outward supply” in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business.”

42Copy pinpoint42. Again, as in the case of inward supply, the expression “outward supply” incorporates the supply of goods or services or both. The expression “output tax” in other words means tax chargeable under the Act on the taxable supply of goods or services or both. The above definitions fall into three clusters: the first cluster relates to receipt – Section 2(62), Section 2(63) and Section 2(67); the second cluster consists of outward supply and output tax - Section 2(82) and Section 2(83); and the third cluster consists of goods, services, input and input services – Section 2(52), Section 2(102), Section 2(59) and Section 2(60). F F.2 Section 16 & Section 49 of the CGST Act

43Copy pinpoint43. Section 16 is comprised in Chapter V and is titled as ‘input tax credit’. The marginal note to Section 16 indicates that the provision relates to eligibility and conditions for taking ITC. Sub-Section (1) of Section 16 is in the following terms: G “16 Eligibility and conditions for taking input tax credit. – (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

the course or furtherance of his business and the said amount A shall be credited to the electronic credit ledger of such person.”

44Copy pinpoint44. Under sub-Section (1) Section 16: (i) every registered person shall be entitled to take credit to input tax charged on any supply of goods and services or both to him; B

(ii) which are used or intended to be used in the course or furtherance of his business; (iii) subject to such conditions and restrictions as may be prescribed; and C (iv) in the manner specified in Section 49.

45Copy pinpoint45. The amount of input tax credit is to be credited in the electronic credit ledger of the registered person. Sub-Section (2) spells out the conditions upon the fulfilment of which the entitlement to the credit of input tax in respect of any supply of goods or services can be availed. D Sub- Section (2) of Section 16 is in the following terms: “16. […] (2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,–– E

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed; (aa) the details of the invoice or debit note referred to in clause (a) F has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under Section 37 (b)he has received the goods or services or both. G Explanation.—For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services- (i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, H

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A whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise; (ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person. B (c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and (d) he has furnished the return under section 39: C Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment: Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed: Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon” F

46Copy pinpoint46. Section 16(2) indicates that the credit of input tax charged on any supply of goods or services, or both, can be availed of by a registered person subject to the conditions which are set out in the provisos. Input tax, as we have already seen, has been defined in Section 2(62) as tax charged on any supply of goods or services or both. The credit of input G tax is, therefore, relatable both to the supply of goods and services. Whether tax is paid on the supply of goods or services, the recipients receive ITC in a similar manner. Taxes on goods and services are identifiable, but upon credit to the electronic ledger they form a common pool for utilization. Section 16(1) indicates that the manner in which input tax credit can be utilized is spelt out in Section 49. Sub- Section (1) H of Section 49 provides:

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[DR DHANANJAYA Y CHANDRACHUD, J.]

“Section 49 (1) - Every deposit made towards tax, interest, penalty, fee or any other amount by a person by internet banking or by using credit or debit cards or National Electronic Fund Transfer or Real Time Gross Settlement or by such other mode and subject to such conditions and restrictions as may be prescribed, shall be credited to the electronic cash ledger of such person to be maintained in such manner as may be prescribed...”

47Copy pinpoint47. Sub-Section (3) of Section 49 envisages that the amount available in the electronic cash ledger may be used for making any payment towards tax, interest, penalty, fees or any other amount payable under the provisions of the Act or its rules in the manner and subject to conditions and within such time as is prescribed. Similarly, sub-Section C (4) of Section 49 stipulates that the amount available in the electronic credit ledger can be used for making payment towards output tax under the CGST Act or under the IGST Act in such manner and subject to the conditions and within such time as is prescribed. Sub-Section (5) of Section 49 spells out the priorities according to which the amount of ITC D available in the electronic credit ledger can be utilized. Sub Section (6) of Section 49 is significant and provides as follows: “(6) The balance in the electronic cash ledger or electronic credit ledger after payment of tax, interest, penalty, fee or any other amount payable under this Act or the rules made thereunder may E be refunded in accordance with the provisions of Section 54.”

48Copy pinpoint48. The provisions of Section 16 and Section 49 indicate the following position: (i) The ITC in the electronic credit ledger may be availed of for making any payment towards output tax under the CGST F Act or under the IGST Act; (ii) The amount available in the electronic cash ledger may be used for making any payment towards tax, interest, penalty, fees or any other amount payable under the CGST Act or its rules; G (iii) The balance in the electronic cash ledger or electronic credit ledger after the payment of tax, interest, penalty, fees or any other amount payable under the Act or rules may be refunded in accordance with the provisions of Section 54; and H

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A (iv) Sub Section (6) of Section 49, in other words contemplates a refund of the balance which remains in the electronic cash ledger or electronic credit ledger in the manner stipulated by the provisions of Section 54. F.3 Interpretation of Section 54(3) of the CGST Act

49Copy pinpoint49. The controversy in the present case turns upon the interpretation of Section 54, which is found in Chapter XI titled as ‘Refunds’. The marginal note of Section 54 is titled “Refund of Tax”. Section 54(1) provides thus: “54. (1) Any person claiming 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: Under sub-Section (1) of Section 54, an application has to be made within two years of the relevant date by a person claiming refund of tax and interest (if any, paid on the tax or any other amount paid), in such form and manner as prescribed. Explanation 1 to Section 54 is in the following terms: “Provided that a registered person, claiming 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 the return furnished under section 39 in such manner as may be prescribed.” Sub-Section (3) of Section 54 is in the following terms: “Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period: Provided that no refund of unutilised input tax credit shall be allowed in cases other than–– (i) zero rated supplies made without payment of tax; G (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: H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty: Provided also that no refund of input tax credit 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.”

50Copy pinpoint50. The submission which was urged by the assessees before the Gujarat and Madras High Courts, as well as this Court, is that under the substantive part of Section 54(3), Parliament has contemplated that the claim of refund may extend to any unutilized ITC. ITC means credit of input tax and since ‘input tax’ is defined with reference to the tax charged on the supply of goods or services or both, a refund may be claimed not only of the tax charged on input goods but also input services as a whole. According to the Revenue, the first proviso to Section 54(3) is a restriction. On the other hand, assessees have urged that the first proviso sets out only a condition or provision for eligibility and once it is fulfilled, the refund is available on the entirety of the unutilized ITC including the credit which is relatable to tax paid on input goods and input services.

51Copy pinpoint51. The crux of the dispute in the present case pertains to how sub-Section (3) to Section 54 and Explanation 1 to sub-Section (1) of Section 54 are to be understood and interpreted. For convenience of analysis, the interpretation of sub-Section (3) of Section 54 can be distributed in its main tier and the three provisos. The main part of sub- Section (3) provides that a registered person may claim refund of any unutilized ITC at the end of any tax period. Tax period is defined in Section 2(106) as the period for which the return is required to be furnished. While enacting Section 54(3), Parliament has envisaged a claim for the refund of unutilized ITC by a registered person at the end of the tax period. The first tier is the main provision of Section 54(3) which lays down four conditions: (i) A claim of refund; G (ii) By a registered tax person; (iii) Of any unutilized ITC; and (iv) At the end of any tax period, subject to the provisions of sub- Section (10). H

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52Copy pinpoint52. The second tier is the first proviso. The first proviso begins with the expression “no refund of unutilized ITC shall be allowed in cases other than” which is followed by clauses (i) and (ii). The opening line of the first proviso contains two expressions of significance, namely, “no refund shall be allowed” and “in cases other than”. The expression ‘allowed’ in the proviso must be contrasted with the expression ‘claim’ B in the substantive part of sub-Section (3). A refund can be allowed only in the eventualities envisaged in clauses (i) and (ii). The expression ‘other than’ operates as a limitation or restriction.

53Copy pinpoint53. The third tier of sub-Section 54(3) consist of the two clauses of the first proviso which deal with two distinct cases: Clause (i) deals with zero-rated supplies made without payment of tax, while Clause (ii) deals with credit which has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. Proviso (ii) embodies the concept of an inverted duty structure. Proviso (ii) states that the refund of unutilized ITC shall be allowed only when the credit has accumulated because the rate of tax of inputs is higher than the rate of tax on output supplies. Input, as we have already noted, is defined in Section 2(59) to mean goods other than the capital goods. ‘Output supplies’ is not defined in the statute. As seen above, Section 16 stipulates the eligibility and conditions for availing ITC. ITC accumulates when the credit cannot be utilized either partly or in whole and this may occur for a variety of reasons. The credit of ITC may accumulate for several reasons. Without spelling out an exhaustive list of circumstances, the accumulation may be due to: (a) an inverted duty structure when the GST on output supplies is less than the GST on inputs; (b) stock accumulation; (c) capital goods; and (d) partial reverse mechanism for certain services. There could be other reasons as well, such as excessive discounts or predatory pricing.

54Copy pinpoint54. The distortion caused by unutilized accumulated ITC was noticed before the advent of the GST regime, in the context of the State VAT legislation under the erstwhile regime. A White Paper on State- G level Value Added Tax by the Empowered Committee of State Finance Ministers dated 17 January 2005 contemplated that if any credit remained unutilized in a month, it will be carried forward. If even at the end of second year there is an excess unadjusted ITC, the same will be refunded: “Carrying Over of Tax Credit H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

2.4 If the tax credit exceeds the tax payable on sales in a month, A the excess credit will be carried over to the end of next financial year. If there is any excess unadjusted input tax credit at the end of second year, then the same will be eligible for refund….” Based on this, a provision for refund of unadjusted ITC was inserted in Section 11 of the Gujarat Value Added Tax Act read with B Rule 15(6) of the Gujarat Value Added Tax Rules 200625. When the GST regime was under discussion, the first discussion paper by the Empowered Committee of State Finance Ministers published on 10 November 2009 acknowledged the problem of the accumulation of ITC on account of the rate of input tax being higher than output tax and suggested that a refund be provided of accumulated ITC. The relevant extract from the discussion paper dealing with the ‘Salient features of the GST model’ reads thus: “3.2…(vi) Ideally, the problem related to credit accumulation on account of refund of GST should be avoided by both the Centre and the States except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax etc. where, again refund/adjustment should be completed in a time bound manner.”

55Copy pinpoint55. The report of the Joint Committee, Empowered Committee of State Finance Ministers on Business Process for GST and on Refund E Process published in August 2015 noted that under the proposed GST law, ITC will be allowed, so as to remove the cascading effect of taxes and it is the ultimate customer who should bear the burden of taxes. However, the report noticed that there can be cases where there is an accumulation of credit due to an inverted duty structure. The report F envisaged that there would fewer rates of taxes and exemptions under

25 Rule 15 “(6) Where the tax credit (other than tax credit on capital goods) admissible in the year remains unadjusted against the output tax as per section 11, such amount shall be refunded not later than expiry of two years from the end of the year in which such tax credit had become admissible: G Provided that the dealer claiming such refund shall have to prove to the satisfaction of the assessing authority that the purchases of the goods on which such tax credit had been calculated have been disposed off in the manner referred to in sub-section (3) of section 11 within the period by which refund under this sub-rule becomes admissible.” See also, Section 51 of the Maharashtra Value Added Tax Act 2002 read with Rule 60 of the Maharashtra Value Added Tax Rules 2005 H

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A GST and hence, the chances of an inverted duty structure would be “minimal”. At the same time, it recommended a refund of carried forward ITC in the following terms: “(H) REFUND OF CARRY FORWARD INPUT TAX CREDIT: i) As stated earlier, ITC is allowed to remove cascading and under B modern VAT laws, tax is charged on value addition only and tax is not charged on tax. It is for this reason that the ultimate consumer is liable to bear the tax burden. ii) It is noted that the ITC may accumulate on account of the following reasons : C a) Inverted Duty Structure i.e. GST on output supplies is less than the GST on the input supplies; b) Stock accumulation; c) Capital goods; and D d) Partial Reverse charge mechanism for certain services. iii) As regards the accumulated ITC attributed to accumulation of stock or capital goods, it is recommended that GST Law may provide that refund of carried forward ITC may not be allowed and such amount would be carried forward to the next tax period E (s). The GST Law may provide for appropriate provisions in this regard. iv) Under the proposed GST law, it is proposed to have fewer tax rates and fewer exemptions and therefore it is felt that chances of inverted duty structure would not be there or would be very minimal. But still there might be a possibility that ITC may accumulate on account of inverted duty structure. v) It is recommended that in such case, cash refund may be granted after due audit and should be sanctioned only after the input tax credit has been matched from the purchase and sales statements filed along with monthly returns. The refund would be granted on submission of application. It may be mentioned, however, that presently the Centre does not grant refund in such cases.…” (emphasis supplied) H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

While enacting Clause (ii) of the first proviso to Section 54(3) in A the CGST Act, Parliament, took legislative notice of a specific eventuality namely “where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies”. Parliament would be cognizant of the fact that ITC may accumulate for a variety of reasons, of which an inverted duty structure is one situation. Parliament B was legislating to provide for a refund and therefore restricted it to the two situations spelt out in clauses (i) and (ii) of the first proviso. The opening words of the substantive part of Section 54(3) contemplate a claim of refund of “any unutilized input tax credit”. Undoubtedly, any unutilized ITC would include credit on account of tax charged on any supply of goods or services or both. The opening sentence of Section C 54(3) provides for (i) a claim of refund by a registered person; (ii) of any unutilized input tax credit; (iii) at the end of any tax period. But the impact of the first proviso, as its opening words indicate, is that : (i) “No refund” of unutilized ITC “shall be allowed” “in cases other than” (i) and (ii); D (ii) The expression “claim” in the substantive part must be distinguished from the phrase “shall be allowed” in the opening sentence of the first proviso. Likewise, the expression “may claim refund” in the opening part must be distinguished from “no refund” in the opening part of the first proviso; (iii) The impact of the first proviso is that a refund of unutilized ITC shall be allowed only in cases falling under (i) and (ii). The expression ‘only’ in the previous sentence is not a judicial addition to statutory language but follows plainly from the expressions “no refund” of unutilized ITC shall be allowed “in cases other than”; (iv) The expression “in cases other than” is a clear indicator that clauses (i) and (ii) are restrictive and not conditions of eligibility. A refund, in other words, can be allowed in the two contingencies spelt out in clauses (i) and (ii) of the first proviso; (v) There is a clear distinction between clause (i) and clause (ii) of the first proviso: (a) in the case of exports, the contingency is zero-rated supplies without any distinction H

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A between input goods or input services; (b) in contrast for domestic supplies, clause (ii) relates to the accumulation of credit on account of rate of tax on inputs being higher than the rate of tax on output supplies; (vi) The legislative draftsperson has made a clear distinction B between clause (i) and clause (ii) of the first proviso and it was in this context that the opening words of Section 54(3) have used the expression “may claim refund of any unutilized ITC”; (vii) Explanation 1 to Section 54, while defining the expression C “refund” for the purposes of the section adopts an inclusive definition covering (a) refund of tax paid on zero rated supplies of goods or services or both; (b) refund of tax paid on input goods or inputs services used in making such zero- rated supplies; (c) refund of tax on supply of goods regarded as deemed exports; and (d) refund of unutilized ITC as provided under sub-section(3) of Section 54; and (viii) Explanation 1 indicates that with reference to exports, the legislature has brought within its fold ITC on input goods and input services. In contrast, in the case of domestic supplies it has contemplated refund of unutilized ITC “as provided under sub-section(3)”. The Explanation is a clear indicator that in respect of domestic supplies, it is only unutilized credit which has accumulated on the rate of tax on input goods being higher than the rate of output supplies of which a refund can be allowed. Clause (ii) of the first proviso in other words is a restriction and not a mere condition of eligibility.

56Copy pinpoint56. The fulcrum of the argument of the assessees before the Gujarat and Madras High Courts and before this Court is that clause (ii) of the first proviso prescribes a condition of eligibility and not a restriction on the entitlement to refund. The entire basket of unutilized ITC, whether traceable to goods or services, is in the submission, eligible for refund. This submission has been made before the Court on three planes. The first plane on which the submission has been urged is that the purpose of enacting Section 54(3) was to ensure against a cascading effect or ‘sticking’ inputs tax. According to the assesses, the GST regime is a H result of a long-standing exercise of legislative preparation in the doctrine

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of equivalence and tax neutrality. According to the submission, the doctrine of equivalence postulated an equivalence between goods and services in the VAT regime, which must a fortiori be so under the auspices of a unified GST legislation which contemplates that businesses are only pass-through entities. The second plane of the submission is that the function of the GST Council, as specified in Article 279A(6), is that it is to be guided by the need for a harmonized structure of GST and a harmonized national market for goods and services. Clause (12A) of Article 366 provides for the levy of GST on both- goods and services. In this context, it was urged that in any fiscal regime, there are five essential components comprising of (a) taxable events; (b) taxable persons; (c) measure of tax; and (d) rate of tax; and (e) administrative machinery. In C all these, it is urged that the CGST makes absolutely no distinction between goods and services. Section 16 which provides for the utilization of ITC makes no distinction between goods and services. The pale of the law, it was urged, applies substantive provisions similarly in the case of goods as well as services except as regard rates. But as regards rates, it was D urged that even within the category of goods, the rates may or do vary. The legislature, for the first time, introduced anti-profiteering provisions based on the precept that a reduction in the rate of tax must be passed on to the consumer. When neutrality was not intended, as in the case of Section 17(5), a specific provision has been made by the legislature where the ITC cannot be availed of in those cases. Once the threshold of E Section 17(5) is crossed, tax neutrality must, in their submission, be achieved. Finally, it was also urged that an inverted duty structure arises in many cases where the rate of tax on output supplies is reduced in order to fulfil certain objectives guided by public interest such as encouraging infrastructure development. In this backdrop, it was submitted that where the reduction of the rate of tax on outward supplies is in pursuance of the policy of the State, the ultimate object of achieving tax neutrality must be given full effect by fully effectuating a refund under Section 54(3) by allowing a refund of unutilized ITC, whether relatable to goods or services.

57Copy pinpoint57. The submission based on the doctrine of equivalence places reliance on the decision of a three judge Bench of this Court in Association of Leasing and Financial Service Companies v. Union of India26. Chief Justice S H Kapadia, speaking for a three judge Bench, dealt with the validity of the provisions of Sections 65(12) and 65(105) 26 2011 (2) SCC 352 H

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A (zm) of the Finance Act 1994, in so far as the said provisions sought to levy service tax on leasing and hire purchase. The levy of service tax on financial leasing services was challenged as being beyond the competence of Parliament by virtue of Article 366(29A) of the Constitution. While construing the issue, the Court adverted to the decision in All India Federation of Tax Practitioners (supra) and observed: B “Service tax is an economic concept based on the principle of equivalence in a sense that consumption of goods and consumption of services are similar as they both satisfy human needs. Today with the technological advancement there is a very thin line which divides a “sale” from “service”. That, applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/ saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. It is this principle of equivalence which is inbuilt into the concept of service tax under the Finance Act, 1994. That service tax is, therefore, a tax on an activity. That, service tax is a value added tax. The value addition is on account of the activity which provides value addition, for example, an activity undertaken by a chartered accountant or a broker is an activity undertaken by him based on his performance and skill. E This is from the point of view of the professional. However, from the point of view of his client, the chartered accountant/broker is his service provider. The value addition comes in on account of the activity undertaken by the professional like tax planning, advising, consultation, etc. It gives value addition to the goods manufactured or produced or sold. Thus, service tax is imposed every time service is rendered to the customer/client. This is clear from the provisions of Section 65(105)(zm) of the Finance Act, 1994.”

58Copy pinpoint58. The above formulation of the doctrine of equivalence dwelt on the economic rationale underlying the enactment of service tax. The economic rationale is based on the equivalence of goods and services, both of which are instruments for the satisfaction of human needs. The principle recognizes that there is, in economic terms, an equivalence between production or manufacture of saleable goods and production of marketable and saleable services. The issue before this Court, however, H

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is whether an a priori equivalence between goods and services for the purpose of bringing both within a composite tax regime must result in the conclusion that a refund of unutilized ITC must be made available to both - input goods as well as input services, disregarding the provision which has been inserted by the legislature in the present case in the form of Section 54(3). The answer to this is clear. The Court while interpreting the provisions of Section 54(3) must give effect to its plain terms. The Court cannot redraw legislative boundaries on the basis of an ideal which the law was intended to pursue.

59Copy pinpoint59. Sub-Section (6) of Article 279A has provided that while discharging its functions the GST Council shall be guided by the need for (a) a harmonised structure of goods and service tax; and (b) the development of a harmonised national market for goods and services. In emphasizing the need, the constitutional provision reflects a goal, object and aspiration to be achieved. By emphasizing this, the provision underscores the vision that the GST Council should bear in mind in the discharge of its constitutional functions. The constitutional object is however to be realized under the auspices of legislation duly enacted under the provisions of Article 246A. The GST Council is intended to function towards the advancement of a harmonised structure for GST and market for goods and services. Contemporary doctrine would suggest that these objects of the fiscal regime may be furthered by bearing in mind (i) the doctrine of equivalence; (ii) the doctrine of neutrality; and E (iii) the need of obviating secondary stage cascading effects. The realpolitik of tax policy and governance in the real world may not always match up to ideals. In an ideal tax regime, with a uniform rate of taxes on inputs goods, input services and outward supplies, the chance of accumulating unutilized ITC as a result of an inverted rate structure would be minimal. An inverted duty structure arises where the rate of tax on inputs exceeds the rate of tax on output supplies as a result of which the unutilized ITC may get accumulated. The jurisprudential material which has been relied upon by the assesses portrays an ideal state of GST legislation. In the well-known treatise on VAT, Alan Schenk and Oliver Oldman27 explained the principled basis in VAT/GST legislation for the grant of refund of excess input tax credit. According to the authors:

27 Alan Schenk and Oliver Oldman, VALUE ADDED TAX : A COMPARATIVE APPROACH (Cambridge Tax Law Series, 2007) H

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A “II. Treatment of Excess Input Credits –Carry Forward, Offset, or Refund: As was discussed earlier and will be discussed in detail in Chapter 7, most countries define the jurisdictional reach of their VATs under the destination principle. Applying the destination principle, exports are free of tax (zero rated). As a result, exporters commonly report excess input VAT in their periodic VAT returns. In addition, even registered persons making sales taxable at a positive rate may experience occasional excess input VATs, such as when they make capital purchases generating substantial input credits or when they increase their inventory as part of an expansion of their businesses. There is an implicit assumption in VAT systems that registered persons will recover input VAT used in making taxable sales so that the input VAT does not enter into the pricing structure for those sales. To accomplish that goal, a normative or well-structured D VAT must grant registered persons the right to recover excess input VATs within a reasonable period of time after incurring the input t(a)x (sic). … In the EU, the Sixth Directive provides that if there are excess input tax deductions, “Member States may either make a refund E or carry the excess forward to the following period according to conditions which they shall determine. For Member States, excess credits must be refunded after being carried forward six months. However, Member States may refuse to refund or carry forward if the amount of the excess is insignificant…” F (emphasis supplied)

60Copy pinpoint60. The jurisprudential basis furnishes a depiction of an ideal state of existence of GST legislation within the purview of a modern economy, as a destination-based tax. But there can be no gain saying the fact that fiscal legislation around the world, India being no exception, makes G complex balances founded upon socio-economic complexities and diversities which permeate each society. The form which a GST legislation in a unitary State may take will vary considerably from its avatar in a nation such as India where a dual system of GST law operates within the context of a federal structure. The ideal of a GST framework which Article 279A(6) embodies has to be progressively realized. The H

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doctrines which have been emphasized by Counsel during the course of the arguments furnish the underlying rationale for the enactment of the law but cannot furnish either a valid basis for judicial review of the legislation or make out a ground for invalidating a validly enacted law unless it infringes constitutional parameters. While adopting the constitutional framework of a GST regime, Parliament in the exercise of its constituent power has had to make and draw balances to accommodate the interests of the States. Taxes on alcohol for human consumption and stamp duties provide a significant part of the revenues of the States. Complex balances have had to be drawn so as to accommodate the concerns of the states before bringing them within the umbrella of GST. These aspects must be borne in mind while assessing the jurisprudential vision and the economic rationale for GST legislation. But abstract doctrine cannot be a ground for the Court to undertake the task of redrawing the text or context of a statutory provision. This is clearly an area of law where judicial interpretation cannot be ahead of policy making. Fiscal policy ought not be dictated through the judgments of the High Courts or this Court. For it is not the function of the Court in the fiscal arena to compel Parliament to go further and to do more by, for instance, expanding the coverage of the legislation (to liquor, stamp duty and petroleum) or to bring in uniformity of rates. This would constitute an impermissible judicial encroachment on legislative power. Likewise, when the first proviso to Section 54(3) has provided for a restriction on the entitlement to refund it would be impermissible for the Court to redraw the boundaries or to expand the provision for refund beyond what the legislature has provided. If the legislature has intended that the equivalence between goods and services should be progressively realized and that for the purpose of determining whether refund should be provided, a restriction of the kind which has been imposed in clause (ii) of the proviso should be enacted, it lies within the realm of policy.

61Copy pinpoint61. The submission which has been urged on behalf of the assessees is that registered persons constitute a class within the meaning of sub-Section (3) of Section 54 and each of them is entitled to claim a refund of unutilized ITC whether its origin lies in input goods or input services. In other words, it has been urged that Section 54(3) constitutes one homogenous class of registered persons who have unutilized ITC. The fallacy of the argument is in the hypothesis that unutilized ITC cannot be unbundled for the purpose of fiscal legislation. Accumulated ITC may result due to a variety of circumstances, some of which may while H

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A others may not lie within the volition of a registered person. We have referred to some of these factors earlier, including (i) High discount pricing; (ii) Predatory pricing; B (iii) Shut down of business or industry; (iv) Business loss; (v) Economic compulsion to sell at below value prices; and (vi) Stoppage of work. C

62Copy pinpoint62. These examples are indicators that the class, comprising of registered persons with unutilized ITC, covers a bundle of species as opposed to one unique or homogenous specie. Once we recognize this, it is necessary to allow the legislature the latitude to distinguish between credits arising out of the input goods stream and input service stream. D GST legislation in India is the product of hard constitutional and legislative work which stretched over several decades. Our fiscal regime is yet to arrive at an ideological position of one bundle for goods and services based on a single rate structure. Broadly speaking, goods and services are taxed at 5 per cent, 12 per cent, 18 per cent and 40 per cent. As on date, there is an absence of uniformity in rates and it is the multiplicity of rates which has given rise to an inverted duty structure. Registered persons with unutilized ITC may conceivably form one class but it is not possible to ignore that this class consists of species of different hues. Given these intrinsic complexities, the legislature has to draw the balance when it decides upon granting a refund of accumulated ITC which has remained unutilized. In doing so, Parliament while enacting sub-Section (3) of Section 54 has stipulated that no refund of unutilized ITC shall be allowed other than in the two specific situations envisaged in clauses (i) and (ii) of the first proviso. Whereas clause (i) has dealt with zero rated supplies made without the payment of tax, clause (ii), which governs domestic supplies, has envisaged a more restricted ambit where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. While the CGST Act defines the expression ‘input’ in Section 2(59) by bracketing it with goods other than capital goods, it is true that the plural expression ‘inputs’ has not been specifically defined. But there is no reason why the ordinary principle of H

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construing the plural in the same plane as the singular should not be applied. To construe ‘inputs’ so as to include both input goods and input services would do violence to the provisions of Section 54(3) and would run contrary to the terms of Explanation-I which have been noted earlier. Consequently, it is not open to the Court to accept the argument of the assessee that in the process of construing Section 54(3) contextually, the Court should broaden the expression ‘inputs’ to cover both goods and services. F.4 Construing the proviso

63Copy pinpoint63. Provisos in a statute have multi-faceted personalities. As interpretational principles governing statutes have evolved, certain basic ideas have been recognized, while heeding to the text and context. Justice GP Singh, in his seminal text, Principles of Statutory Interpretation28 formulates the governing principles of interpretation which have been adopted by courts while construing a statutory proviso. The first rule of interpretation is that: D “The normal function of a proviso is to except something out of the enactment or to qualify something enacted therein which but for the proviso would be within the purview of the enactment. As stated by LUSH, J.: “When one finds a proviso to a section the natural presumption is that, but for the proviso, the enacting part of the section would have included the subject- matter of the proviso. In the words of LORD MACMILLAN: “The proper function of a proviso is to except and to deal with a case which would otherwise fall within the general language of the main enactment and its effect is confined to that case.” The proviso may, as LORD MACNAGHTEN laid down, be “a qualification of the preceeding enactment which is expressed in terms too general to be quite accurate”. The general rule has been stated by HIDAYATULLAH, J., in the following words: “As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment, and ordinarily, a proviso is not interpreted as stating a general rule”. And in the words of KAPUR, J.: “The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as

28 Justice GP Singh, P RINCIPLES OF STATUTORY INTERPRETATION 215-234, (14th Ed., Lexis Nexis) H

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A it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment.” 29 (emphasis supplied)

64Copy pinpoint64. But then these principles are subject to other principles of statutory interpretation which may supplement or even substitute the B above formula. These other rules which have been categorized by Justice GP Singh are summarized as follows: (i) A proviso is not construed as excluding or adding something by implication:

C “Except as to cases dealt with by it, a proviso has no repercussion on the interpretation of the enacting portion of the section so as to exclude something by implication which is embraced by clear words in the enactment.”30 (ii) A proviso is construed in relation to the subject matter of the D statutory provision to which it is appended: “The language of a proviso even if general is normally to be construed in relation to the subject-matter covered by the section to which the proviso is appended. In other words normally a proviso does not travel beyond the provision to which it is a proviso. “It is a cardinal rule of interpretation”, observed E BHAGWATI, J., “that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other.” 31 (iii) Where the substantive provision of a statute lacks clarity, a F proviso may shed light on its true meaning: “If the enacting portion of a section is not clear, a proviso appended to it may give an indication as its true meaning. As stated by LORD HERSCHELL: “ Of course a proviso may be used to guide you in the selection of one or other of two possible G constructions of the words to be found in the enactment, and show when there is doubt about its scope, when it may

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reasonably admit of doubt as to having this scope or that, which A is the proper view to take of it.”32 (iv) An effort should be made while construing a statute to give meaning both to the main enactment and its proviso bearing in mind that sometimes a proviso is inserted as a matter of abundant caution: B “The general rule in construing an enactment containing a proviso is to construe them together without making either of them redundant or otiose. Even if the enacting part is clear effort is to be made to give some meaning to the proviso and to justify its necessity. But a clause or a section worded as a C proviso, may not be a true proviso and may have been placed by way of abundant caution.”33 (v) While ordinarily, it would be unusual to interpret the proviso as an independent enacting clause, as distinct from its main enactment, this is true only of a real proviso and the draftsperson of the statute may have intended for the proviso to be, in substance, a fresh enactment: “To read a proviso as providing something by way of an addendum or as dealing with a subject not covered by the main enactment or as stating a general rule as distinguished from an exception or qualification is ordinarily foreign to the proper function of a proviso. However, this is only true of a real proviso. The insertion of a proviso by the draftsman has not always strictly adhered to its legitimate use and at times a section worded as a proviso may wholly or partly be in substance a fresh enactment adding to and not merely excepting something out of or qualifying what goes before.”34

65Copy pinpoint65. Perhaps the most comprehensive and oft-cited precedent governing the interpretation of a proviso is the decision of this Court in S Sundaram Pillai v. V R Pattabiraman35. Justice S Murtaza Fazal Ali speaking for a three judge Bench of this Court held: G

32 Id at p. 223 33 Id at p. 226 34 Id at p. 228 35 (1958) 1 SCC 591 H

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A “43. …To sum up, a proviso may serve four different purposes: (1) qualifying or excepting certain provisions from the main enactment: (2) it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable: (3) it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and (4) it may be used merely to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision.”

66Copy pinpoint66. While enunciating the above principles, S Sundaram Pillai (supra) took note of the decision in Hiralal Rattanlal v. State of UP36 where Justice KS Hegde, speaking for a four judge Bench of this Court observed that while ordinarily, a proviso is in the nature of an exception, the precedents indicate that sometimes a proviso is in the nature of a separate provision, with a life of its own. The Court held: “22… Ordinarily a proviso to a section is intended to take out a part of the main section for special treatment. It is not expected to enlarge the scope of the main section. But cases have arisen in which this Court has held that despite the fact that a provision is called a proviso, it is really a separate provision and the so-called proviso has substantially altered the main section. In CIT v. Bipinchandra Maganlal & Co. Ltd., Bombay [AIR 1961 SC 1040 : (1961) 2 SCR 493 : (1961) 41 ITR 290] this Court F held that by the fiction in Section 10(2)(vii) second proviso read with Section 2(6-C) of the Indian Income Tax Act, 1922 what is really not income is, for the purpose of computation of assessable income, made taxable income.” Besides the decision in CIT v. Bipinchandra Maganlal37, the Court in Hiralal Rattanlal (supra) adverted to the earlier decisions in G State of Rajasthan v. Leela Jain 38 and Bihar Cooperative Development Cane Marketing Union Ltd. v. Bank of Bihar39. 36 (1973) 1 SCC 216 37 AIR 1961 SC 1040 38 AIR 1965 SC 1296 39 H AIR 1967 SC 389

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[DR DHANANJAYA Y CHANDRACHUD, J.]

67Copy pinpoint67. In their effort to persuade this Court to accept the submission A that the first proviso to Section 54(3) is in the nature of an eligibility condition as distinct from a restriction on the substantive part (contained in the opening words) of the provision, Counsel appearing on behalf of the assessees have sought to buttress their submissions with the following facets: B (i) Clause (ii) of the first proviso refers to “rate of tax” as distinct from the quantum of tax; (ii) The expression “in cases other than where…” adverts to situations or circumstances; (iii) The expression “on account of” would mean “due to”; C

(iv) The use of the expression ‘inputs’ (the singular being defined in Section 2(59) but not the plural) and the corresponding use of the expression “output supplies” (which is not defined, though “outward supply” is defined in Section 2(83)); D (v) Section 54(8) and Section 49(6) provide that the balance in the electronic credit ledger is to be refunded and makes no distinction between a credit relatable to goods or to services; (vi) The expression “on account of” has been used in Section 22(3) and Section 18(3) and is distinct from the use of the E expression “to the extent of” in Section 23(1)(b) and the proviso to Section 12(2). “To the extent of” is a limiting expression and has a distinct connotation from “on account of”; (vii) The Ministry of Finance has issued a circular dated 31 F December 201840 clarifying the following position: “4. Representations have been received stating that while processing the refund of unutilized ITC on account of inverted tax structure, the departmental officers are denying the refund of ITC of GST paid on those inputs which are procured at equal or lower rate of GST than the rate of G GST on outward supply, by not including the amount of such ITC while calculating the maximum refund amount as 40 Circular No 79/53/2018-GST available at <https://www.cbic.gov.in/resources//htdocs- cbec/gst/Circular-No-79.pdf;jsessionid=CFAC18978FCA5664090473EACD101561> (accessed on 12 September 2021) H

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A specified in rule 89(5) of the CGST Rules. The matter has been examined and the following issues are clarified: a) Refund of unutilized ITC in case of inverted tax structure, as provided in section 54(3) of the CGST Act, is available where ITC remains unutilized even after setting off of B available ITC for the payment of output tax liability. Where there are multiple inputs attracting different rates of tax, in the formula provided in rule 89(5) of the CGST Rules, the term “Net ITC covers the ITC availed on all inputs in the relevant period, irrespective of their rate of tax. C b) The calculation of refund of accumulated ITC on account of inverted tax structure, in cases where several inputs are used in supplying the final product/output, can be clearly understood with help of the following example: i. Suppose a manufacturing process involves the use of an D input A (attracting 5 per cent GST) and input B (attracting 18 per cent GST) to manufacture output Y (attracting 12 per cent GST). ii. The refund of accumulated ITC in the situation at (i) above, will be available under section 54(3) of the CGST Act E read with rule 89(5) of the CGST Rules, which prescribes the formula for the maximum refund amount permissible in such situations. iii. Further assume that the claimant supplies the output Y having value of Rs. 3,000/- during the relevant period for which the refund is being claimed. Therefore, the turnover of inverted rated supply of goods and services will be Rs. 3,000/-. Since the claimant has no other outward supplies, his adjusted total turnover will also be Rs. 3,000/-. iv. If we assume that Input A, having value of Rs. 500/- and Input B, having value of Rs. 2,000/-, have been purchased in the relevant period for the manufacture of Y, then Net ITC shall be equal to Rs. 385/- (Rs. 25/- and Rs. 360/- on Input A and Input B respectively). v. Therefore, multiplying Net ITC by the ratio of turnover of inverted rated supply of goods and services to the adjusted total turnover will give the figure of Rs. 385/-.

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[DR DHANANJAYA Y CHANDRACHUD, J.]

vi. From this, if we deduct the tax payable on such inverted rated supply of goods or services, which is Rs. 360/-, we get the maximum refund amount, as per rule 89(5) of the CGST Rules which is Rs. 25/-.”

68Copy pinpoint68. Para 4(b) of the Circular thereafter proceeds to give certain illustrations. The above circular, it is urged, would demonstrate that the phrase “on account of” in the proviso is interpreted by the State qua goods as a threshold condition. Hence even if one input in the basket of inputs of a manufacturer results in an inverted duty structure, the whole of the accumulated ITC can be availed of. On the other hand, for services the same phrase is interpreted so as to mean ‘to the extent of’. The expression “on account of” as understood for goods by the above circular must apply for services as well, meaning thereby that it is a threshold condition alone.

69Copy pinpoint69. The above submissions demonstrate the scholarship which has been brought to bear upon the controversy by Counsel appearing on behalf of the assessees. The above aspects of the statutory provision – D Section 54(3) - must be juxtaposed together with all the features of the statutory provision including Explanation- I which have been adverted to earlier. The analysis earlier indicates why on a reading of the provision as a whole, clauses (i) and (ii) of the first proviso are restrictions and not mere conditions of eligibility. It is not possible for the Court to restrict the ambit of clause (ii) of the proviso, based on a circular which has been issued by the Ministry of Finance on 31 December 2018. In substance, the argument boils down to an effort to lead this Court to hold that in spite of the language which has been used in clause (ii) of the first proviso, (where the credit is accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies), input services must be read into the term “inputs”. The assessees argue that the Departmental understanding, as reflected in the circular, should be the basis of interpreting a statutory provision. Such an exercise would be impermissible, when its effect is to expand the area of refund contemplated by the first proviso to cover input services in addition to input goods despite statutory language to the contrary. Sub-Section (3) of Section 54 begins, in its main part, with the stipulation that a registered person may claim refund of any ‘unutilised ITC at the end of any tax period’. Whether we construe the first proviso as an exception or in the nature of a fresh enactment, the clear intent of Parliament was to confine H

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A the grant of refund to the two categories spelt out in clauses (i) and (ii) of the first proviso. That clauses (i) and (ii) are the only two situations in which a refund can be granted is evident from the opening words of the first proviso which stipulates that “no refund of unutilised input tax credit shall be allowed in cases other than”. What follows is clauses (i) and (ii). The intent of Parliament is evident by the use of a double – B negative format by employing the expression “no refund” as well as the expression “in cases other than”. In other words, a refund is contemplated in the situations provided in clauses (i) and (ii) and no other. To put it differently, the first proviso can be recast, without altering its meaning to read that a refund of unutilised ITC shall be allowed only in the cases C governed by clauses (i) and (ii). Clause (i) deals with zero rated supplies without payment of tax. Explanation-1 to Section 54 clarifies that the expression ‘refund’ includes refund of tax paid on zero rated supplies on goods or services or both, or on inputs or input services used in making such zero-rated supplies. On the other hand, in the case of deemed exports, Explanation-1 refers to a refund of tax on the supply of goods. D Likewise in regard to domestic supplies, governed by clause (ii) of the first proviso, the expression ‘refund’ means refund of unutilised ITC as provided under sub-Section (3). With the clear language which has been adopted by Parliament while enacting the provisions of Section 54(3), the acceptance of the submission which has been urged on behalf of the assessee would involve a judicial re-writing of the provision which is impermissible in law. Clause (ii) of the proviso, when it refers to “on account of” clearly intends the meaning which can ordinarily be said to imply ‘because of or due to’. When proviso (ii) refers to “rate of tax”, it indicates a clear intent that a refund would be allowed where and only if the inverted duty structure has arisen due to the rate of tax on input being higher than the rate of tax on output supplies. Reading the expression ‘input’ to cover input goods and input services would lead to recognising an entitlement to refund, beyond what was contemplated by Parliament.

70Copy pinpoint70. We must be cognizant of the fact that no constitutional right is being asserted to claim a refund, as there cannot be. Refund is a matter of a statutory prescription. Parliament was within its legislative authority in determining whether refunds should be allowed of unutilised ITC tracing its origin both to input goods and input services or, as it has legislated, input goods alone. By its clear stipulation that a refund would be admissible only where the unutilised ITC has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output

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[DR DHANANJAYA Y CHANDRACHUD, J.]

supplies, Parliament has confined the refund in the manner which we have described above. While recognising an entitlement to refund, it is open to the legislature to define the circumstances in which a refund can be claimed. The proviso to Section 54(3) is not a condition of eligibility (as the assessees’ Counsel submitted) but a restriction which must govern the grant of refund under Section 54(3). We therefore, accept the submission which has been urged by Mr N Venkataraman, learned ASG. F.5 Constitutional validity: The ultra vires doctrine

71Copy pinpoint71. The submission which has been urged on behalf of the assessees is that if Section 54(3) is construed to confine a refund of unutilised ITC only to the extent that the accumulation arises on account of the rate of tax on inputs (meaning input goods) exceeding the rate of tax on outward supplies, the principles underlying Article 14 of the Constitution would be attracted and the statutory provision would suffer from the vice of arbitrariness. The submission is that this has become an incident of a class legislation: the class consists of registered persons having unutilised ITC. The class comprises of the following species (i) D domestic suppliers; and (ii) exporters. The sub-species are (i) input goods; and (ii) input services. Opposing this submission, the learned ASG’s submission is that this is a valid classification, denying one of the species namely input services the benefit of refund.

72Copy pinpoint72. The principle which Counsel for the assesses espouse is sought to be buttressed by relying upon the decision in State of Jammu & Kashmir v. Triloki Nath Khosa41 and in Re The Special Courts Bill, 197842. The principles which are gleaned by Counsel from the above decisions, in their application to the present case, are that: (i) Once the ITC comes within the fold of the electronic credit ledger and is comprised into a homogenous credit, a ‘micro distinction’ cannot be carried out; and (ii) A similarity of features between species comprised in the class is sufficient: in the case of goods as well as services, the taxable event is the value addition tax and the administrative machinery treats goods as well as services similarly. The mere fact of goods being tangible is a matter of no consequence. 41 (1974) 1 SCC 19 42 (1979) 1 SCC 380 H

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73Copy pinpoint73. Equality, it has been stressed in the above submission, cannot be cabined, cribbed and confined. Differentiating between goods and services, it has been urged, is not permissible and does not have a reasonable nexus to the object sought to be achieved. There is an evident difference in the rates at which goods and services are taxed but, according to the submission, this is not a provision for revenue harvesting. B Finally, on this limb of submission, it has been urged that the wide latitude which is available with the legislature in the case of fiscal legislation is only where a revenue harvesting measure is involved. The twin test of reasonableness and the nexus with the object sought to be achieved must be demonstrated. The nexus (a) must be based on the object of the legislation alone; and (b) indicate a discernible principle which emanates from the classification. With the clarification on inputs by the Ministry of Finance, it is urged that no discernible principle emerges.

74Copy pinpoint74. Counsel for the assesses also argued that before the High Courts of Gujarat and Madras, the Union Government did not urge that outflow of finance was the reason to exclude refunds on input services and it is not open to the Court to conjure up a reason. In support of the above submissions on constitutional validity, which have been urged by Mr Sujit Ghosh, learned Counsel, Mr Arvind Datar, learned Senior Counsel has urged that it would be paradoxical to posit on the one hand that goods and services are pari materia for the purpose of levy, collection and penalty but, that a distinction will be made between them for the purpose of refund.

75Copy pinpoint75. As a matter of first principle, it is not possible to accept the premise that the guiding principles which impart a measure of flexibility to the legislature in designing appropriate classifications for the purpose of a fiscal regime should be confined only to the revenue harvesting measures of a statute. The precedents of this Court provide abundant justification for the fundamental principle that a discriminatory provision under tax legislation is not per se invalid. A cause of invalidity arises where equals are treated as unequally and unequals are treated as equals. G Both under the Constitution and the CGST Act, goods and services and input goods and input services are not treated as one and the same and they are distinct species.

76Copy pinpoint76. Parliament engrafted a provision for refund Section 54(3). In enacting such a provision, Parliament is entitled to make policy choices H and adopt appropriate classifications, given the latitude which our

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[DR DHANANJAYA Y CHANDRACHUD, J.]

constitutional jurisprudence allows it in matters involving tax legislation and to provide for exemptions, concessions and benefits on terms, as it considers appropriate. The consistent line of precedent of this Court emphasises certain basic precepts which govern both judicial review and judicial interpretation of tax legislation. These precepts are: (i) Selecting the objects to be taxed, determining the quantum of tax, legislating for the conditions for the levy and the socio-economic goals which a tax must achieve are matters of legislative policy. Chief Justice M. Hidayatullah, speaking for the Constitution Bench in Assistant Commissioner of Urban Land Tax v. Buckingham and Carnatic Co. Ltd.43 held: C

“10…The objects to be taxed, the quantum of tax to be levied, the conditions subject to which it is levied and the social and economic policies which a tax is designed to subserve are all matters of political character and these matters have been entrusted to the Legislature and not to the Courts. In applying the test of reasonableness it is also essential to notice that the power of taxation is generally regarded as an essential attribute of sovereignty and constitutional provisions relating to the power of taxation are regarded not as grant of power but as limitation upon the power which would otherwise be practically without limit. (ii) The same principle has been reiterated in Federation of Hotel & Restaurant Association of India v. Union of India44, where Justice MN Venkatachaliah (as the learned F Chief Justice then was), speaking for the Constitution Bench held: “46. It is now well settled that though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of G a fiscal policy legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing 43 (1969) 2 SCC 55 44 (1989) 3 SCC 634 H

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A law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment what is looked into is not its phraseology, but the real effect of its provisions. A legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the B law would not be discriminatory. Decisions of this Court on the matter have permitted the legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes.

C 47. But, with all this latitude certain irreducible desiderata of equality shall govern classifications for differential treatment in taxation laws as well. The classification must be rational and based on some qualities and characteristics which are to be found in all the persons grouped together and absent in the others left out of the class. But this alone is not sufficient. Differentia must have a rational nexus with the object sought to be achieved by the law. The State, in the exercise of its governmental power, has, of necessity, to make laws operating differently in relation to different groups or classes of persons to attain certain ends and must, therefore, possess the power to distinguish and classify persons or things. It is also recognised that no precise or set formulae or doctrinaire tests or precise scientific principles of exclusion or inclusion are to be applied. The test could only be one of palpable arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience.” (iii) In matters of classification, involving fiscal legislation, the legislature is permitted a larger discretion so long as there is no transgression of the fundamental principle underlying the doctrine of classification. In Hiralal Rattanlal (supra), Justice KS Hegde, speaking for a four judge Bench observed: “20. It must be noticed that generally speaking the primary purpose of the levy of all taxes is to raise funds for public good. Which person should be taxed, what transaction should

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[DR DHANANJAYA Y CHANDRACHUD, J.]

be taxed or what goods should be taxed, depends upon social, economic and administrative considerations. In a democratic set up it is for the Legislature to decide what economic or social policy it should pursue or what administrative considerations it should bear in mind. The classification between the processed or split pulses and unprocessed or unsplit pulses is a reasonable classification. It is based on the use to which those goods can be put. Hence, in our opinion, the impugned classification is not violative of Article 14.” (iv) More recently in Union of India v. NITDIP Textile Processors Private Limited 45 , a two judge Bench C observed: “67. It has been laid down in a large number of decisions of this Court that a taxation statute, for the reasons of functional expediency and even otherwise, can pick and choose to tax some. A power to classify being extremely broad and based on diverse considerations of executive pragmatism, the judicature cannot rush in where even the legislature warily treads. All these operational restraints on judicial power must weigh more emphatically where the subject is taxation. Discrimination resulting from fortuitous circumstances arising out of particular situations, in which some of the tax- payers find themselves, is not hit by Article 14 if the legislation, as such, is of general application and does not single them out for harsh treatment. Advantages or disadvantages to individual assessees are accidental and inevitable and are inherent in every taxing statute as it has to draw a line somewhere and some cases necessarily fall on the other side of the line.”

77Copy pinpoint77. The principles governing a benefit, by way of a refund of tax paid, may well be construed on an analogous frame with an exemption from the payment of tax or a reduction in liability (Assistant G Commissioner of Commercial Tax (Asst.) v. Dharmendra Trading Company46).

45 (2012) 1 SCC 226 46 (1988) 3 SCC 570 H

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78Copy pinpoint78. In Elel Hotels and Investments Limited and Others v. Union of India47, Justice MN Venkatachaliah (as the learned Chief Justice then was) held that: “20…It is now well settled that a very wide latitude is available to the legislature in the matter of classification of objects, persons and things for purposes of taxation. It must need to be so, having regard to the complexities involved in the formulation of a taxation policy. Taxation is not now a mere source of raising money to defray expenses of Government. It is a recognised fiscal tool to achieve fiscal and social objectives. The differentia of classification presupposes and proceeds on the premise that it distinguishes and keeps apart as a distinct class hotels with higher economic status reflected in one of the indicia of such economic superiority. The presumption of constitutionality has not been dislodged by the petitioners by demonstrating how even hotels, not brought into the class, have also equal or higher chargeable receipts and how the assumption of economic superiority of hotels to which the Act is applied is erroneous or irrelevant.”

79Copy pinpoint79. In Spences Hotel Pvt Ltd. v. State of West Bengal48, a two judge Bench, speaking through Justice KN Saikia, revisited the precedents of this Court governing the principles of classification in tax legislation and held: “24…The history of taxation is one of evolution as is the case in all human affairs. Its progress is one of constant growth and development in keeping with the advancing economic and social conditions; and the fiscal intelligence of the State has been advancing concomitantly, subjecting by new means and methods hitherto untaxed property, income, service and provisions to taxation. With the change of scientific, commercial and economic conditions and ways of life new species of property, both tangible and intangible gaining enormous values have come into existence and new means of reaching and subjecting the same to contribute towards public finance are being developed, perfected and put into practical operation by the legislatures and courts of this country, of course within constitutional limitations.”

47 (1989) 3 SCC 698 48 H (1991) 2 SCC 154

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80Copy pinpoint80. The Court held that the principle of equality does not preclude A the classification of property, trade, profession and events for taxation – subjecting one kind to one rate of taxation and another to a different rate. The State may exempt certain classes of property from any taxation at all and impose different specific taxes upon different species which it seeks to regulate. The Court held: B “27. ”Perfect equality in taxation has been said time and again, to be impossible and unattainable. Approximation to it is all that can be had. Under any system of taxation, however, wisely and carefully framed, a disproportionate share of the public burdens would be thrown on certain kinds of property, because they are visible and tangible, while others are of a nature to elude vigilance. C It is only where statutes are passed which impose taxes on false and unjust principle, or operate to produce gross inequality, so that they cannot be deemed in any just sense proportional in their effect on those who are to bear the public charges that courts can interpose and arrest the course of legislation by declaring such enactments D void.” “Perfectly equal taxation”, it has been said, “will remain an unattainable good as long as laws and government and man are imperfect.” ‘Perfect uniformity and perfect equality of taxation’, in all the aspects in which the human mind can view it, is a baseless dream.” E

81Copy pinpoint81. Parliament while enacting the provisions of Section 54(3), legislated within the fold of the GST regime to prescribe a refund. While doing so, it has confined the grant of refund in terms of the first proviso to Section 54(3) to the two categories which are governed by clauses (i) and (ii). A claim to refund is governed by statute. There is no constitutional entitlement to seek a refund. Parliament has in clause (i) of the first F proviso allowed a refund of the unutilized ITC in the case of zero-rated supplies made without payment of tax. Under clause (ii) of the first proviso, Parliament has envisaged a refund of unutilized ITC, where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. When there is neither a G constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted. Such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to H

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