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

A fashion the rate of tax, concessions and exemptions. If the judiciary were to do so, it would run the risk of encroaching upon legislative choices, and on policy decisions which are the prerogative of the executive. Many of the considerations which underlie these choices are based on complex balances drawn between political, economic and social needs and aspirations and are a result of careful analysis of the data and information B regarding the levy of taxes and their collection. That is precisely the reason why courts are averse to entering the area of policy matters on fiscal issues. We are therefore unable to accept the challenge to the constitutional validity of Section 54(3). G Rule 89(5) C

82Copy pinpoint82. Rule 89(5) of the CGST Rules provides for the computation of the refund of ITC on account of an inverted duty structure. The rule, as it was originally enacted, provided for a refund of ITC paid both on input goods and input services. Rules 89(5) was amended on 18 April 2018 with prospective effect. On 13 June 2018, Rule 89(5) as amended D was substituted with retrospective effect from 1 July 2017. The effect of this amendment is that refund of unutilized ITC can only be availed on input goods.

83Copy pinpoint83. Section 164 of the CGST Act empowers the ‘government’ (the expression ‘government’ being defined in Section 2(53) to mean the E Central Government) to make rules for carrying out the provisions of the Act on the recommendations of the GST Council. Sub-Section (3) of Section 164 stipulates that that power to make rules shall include the power to make rules with retrospective effect not earlier than the date on which the provisions of the Act came into force. As a result of the F amendment of Rule 89(5), the formula which has been specified for the refund of ITC is as follows: “Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods and services. G Explanation- For the purposes of this sub-rule, the expressions- (a) Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

(b) Adjusted Total turnover shall have the same meaning as assigned to them in sub-rule (4).” G.1 The validity of Rule 89(5) of CGST Rules in exercise of the rule-making power under Section 164 of the CGST Act

84Copy pinpoint84. A preliminary submission which has been urged by Mr V Sridharan, learned Senior Counsel is that the rule-making power under Section 164 of the CGST Act can only be used if specific authority for making the rule is granted by the particular section of the CGST Act. Elaborating on this submission, Mr V Sridharan has submitted that under the CGST Act, various sections expressly employ the word “prescribed” to indicate that rules may be formulated by way of delegated legislation for that particular section. As an instance, Mr Sridharan points out that Section 9 provides that the manner in which tax is to be collected may be ‘prescribed’; Section 16(1) provides for conditions and restrictions for availing ITC which may be ‘prescribed’ and Section 31(2) provides that the time within which a person supplying a taxable service must issue an invoice may be ‘prescribed’. These are examples where the statute has expressly contemplated that rules would have to be framed to give effect to a specific provision. It is the submission of Mr Sridharan that in the absence of such words in the text of the legislation, the government cannot exercise its authority under Section 164 of the CGST Act to frame rules for other sections. Thus, since Section 54(3) does not provide any words which indicate that specific authority has been granted for framing rules, Rule 89(5) is (according to the submission) invalid.

85Copy pinpoint85. We are unable to accept the above submission as it proceeds on a misconception. Under Section 164(1), confers an express power on the Central Government to make rules for carrying out the provisions of the CGST Act on the recommendations of the GST Council. It may be true that in certain specific statutory provisions, the Act recognizes, by using the expression ‘prescribes’, that rules may be framed for that purpose. But the converse cannot be assumed inferentially, by presuming that in other areas, recourse to the rule making power cannot be taken. By its very nature, a statutory provision may not visualize every eventuality which may arise in implementing the provisions of the Act. Hence it is open to the rule making authority to frame rules, so long as they are consistent with the provisions of the parent enactment. The rules may interstitially fill-up gaps which are unattended in the main legislation or introduce provisions for implementing the legislation. So H

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A long as the authority which frames the rules has not transgressed a provision of the statute, it cannot be deprived of its authority to exercise the rule making power. The wide powers given under Section 164 of the CGST Act are only limited by the provisions of the Act itself, in furtherance of which a rule maybe framed. It is for this reason that the powers under Section 164 are not restricted to only those sections which B grant specific authority to frame rules. If such a construction, as Mr Sridharan has hypothesised, were to be acceptable, it would render the provisions of Section 164 otiose. Thus, we find that the absence of the words “as may be prescribed” in Section 54(3) does not deprive the rule making authority to make rules for carrying out the provisions of the C Act. G.2 The vires of Rule 89(5) vis-à-vis Section 54(3) of the CGST Act

86Copy pinpoint86. The next submission which has been urged by Mr V Sridharan, learned Senior Counsel is that Rule 89(5) is not in line with Section D 54(3). The rule, as retrospectively amended, is asserted to be ultra vires Section 54(3) in as much as it restricts the computation of refund by taking into account only the credit availed on input goods. Moreover, under Section 54(1), the CGST Rules can provide only the form and manner in which an application for refund can be made and the substantive E provisions of the CGST Act cannot, it is urged, be curtailed by making a contrary rule. The above submission which seeks to apply the doctrine of ultra vires is based on the hypothesis that the rule is not in line with Section 54(3). The submission, in other words, is based on the assumption that Section 54(3) allows for a refund of unutilized ITC as a result of an inverted duty structure due to input goods as well as input services. F

87Copy pinpoint87. The second limb of Mr Sridharan’s submission is that any rules framed under Section 164 of the CGST Act must be for “carrying out the provisions of the Act”. According to the submission, Section 54(3) provides for entitlement to refund of unutilized ITC, its quantum and for cases in which refund is to be granted. This is a complete code G which does not require any rules for its operations and there is no reference in Section 54(3) enabling the Government to frame rules in this regard. Hence, the exercise of the rule making power is urged to be unnecessary and unwarranted.

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[DR DHANANJAYA Y CHANDRACHUD, J.]

88Copy pinpoint88. The rule-making power under Section 164(1) of the CGST A Act may be exercised in numerous situations. As we have already noticed earlier in this judgment accumulation of credit may occur due to a variety of reasons including the absence of outwards supplies in a tax period, making supplies at a loss including by discount or predatory pricing, bulk purchase of inputs, large opening balance of credit or change in the rate of tax during the tax period. A rule providing for identifying unutilized ITC which is attributable to supplies having an inverted duty structure and bifurcating it from credit which has accumulated due to other causes would be a rule required for carrying out the provisions of the Act. A second instance to illustrate the same point is that a rule may provide a proportionate formula for determining the pro rata amount of ITC relatable to the inverted duty structure vis-à-vis the total turnover. Such a formula is necessary where the assessee is engaged in outward supplies involving an inverted duty structure as well as those not involving an inverted duty structure. In fact, Mr Sridharan in his submissions also accepts that such a formula would be a rule made for carrying out provisions of the D Act. The third illustration in the link is with reference to exports. Under the CGST Act, ITC relatable to exports (which are zero-rated supplies) has to be refunded. The assessee may have both domestic sales as well as exports in which event there is a need for a proportionate formula. Rule 89(4) provides a formula for refund of ITC to cover a situation in which zero-rated supplies of goods or services or both has been done without payment of tax under bond or letter of undertaking in accordance with Section 16(3) of the IGST Act.

89Copy pinpoint89. Mr Sridharan, while arguing that Section 54(3) is a complete code in itself and does not warrant a rule to further the provisions of the Act, fairly concedes in his written note that a formula maybe required for bifurcating the accumulated ITC for the purpose of refund. According to the illustration which has been furnished by Mr Sridharan in his written note, where an assessee has supplies which fall under an inverted duty structure and supplies which do not, a refund of unutilized ITC can be availed of only related to the former but not the latter. A formula would be required to compute the ITC attributable to the two categories so that G a refund is granted to the former and not the latter. Rule 89(5) estimates the refund attributable to the inverted duty structure by adopting a proportionate turnover basis, that is by dividing the turnover of inverted duty structure supplies by the adjusted total turnover and multiplying it H

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A with the ‘Net ITC’. The submission proceeds to concede that the need and rationale for the formula contained in Rule 89(5) in considering the turnover of supplies relating to inverted duty structure vis-à-vis overall turnover is “understandable and reasonable”.

90Copy pinpoint90. The grievance however is that Rule 89(5) goes beyond the B “provisions of the Act” when in the garb of fixing a formula, it restricts the refund of ITC to input goods by denying ITC of input services. This is done by defining ‘Net ITC’ to mean ITC availed of inputs. The gravamen of the challenge is that this consequently ignores ITC relatable to input services. In other words, the submission is that Rule 89(5) cannot be construed to be a rule for carrying out the “provisions of the Act”. C

91Copy pinpoint91. Mr V Sridharan has also submitted that in case a rule restricts the purpose of the legislation, it can be struck down if it is ultra vires the principal statute. This is because despite a provision for laying rules before a House of Parliament, subjecting them to the procedure for modification and annulment, a rule can never be equated with the process D of legislation since in particular the rule lacks the assent of the President or the Governor as the case may be. In support of his submission, he has relied on the decision of a Constitution Bench in Kerala State Electricity Board v. Indian Alluvium Co. Ltd.49 and the decision in Bharat Hari Singhania v. Commissioner of Wealth Tax (Central)50 rendered by E a three judge Bench.

92Copy pinpoint92. The second limb of the line of challenge is that even though the rules are required to be recommended by the GST Council this will not elevate them to the status of a law enacted by the legislature. The submission which has been urged by Mr V Sridharan proceeds on an underlying assumption which is that Rule 89(5) by restricting the definition of Net ITC to mean ITC availed on input goods is an affront to Section 54(3). It is on this foundation, that it has been urged that a rule which is contrary to the statute cannot be saved merely on the ground that either (i) the rule has been laid before Parliament and is subject to its power of modification annulment or amendment; or (ii) the rule was made on the recommendations of the GST Council. The application of the second layer of the argument does not arise in the present case for the simple reason that Rule 89(5) in defining Net ITC to mean “input tax credit availed on inputs” does not transgress the statutory restriction which is 49 (1976) 1 SCC 466 50 H (1994) Supp 3 SCC 46

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[DR DHANANJAYA Y CHANDRACHUD, J.]

contained in proviso (ii) of Section 54(3). The challenge to Rule 89(5) as A a piece of delegated legislation on the ground that it is ultra vires Clause (ii) of the first proviso to Section 54(3) is therefore lacking in substance. As reasoned in the earlier part of this judgment, Clause (ii) of the first proviso is not merely a condition of eligibility for availing of a refund but a substantive restriction under which a refund of unutilized ITC can be B availed of only when the accumulation is relatable to an inverted duty structure, namely the tax on input goods being higher than the rate of tax on output supplies. There is therefore no disharmony between Rule 89(5) on the one hand and Section 54(3) particularly Clause (ii) of its first proviso on the other hand.

93Copy pinpoint93. For the sake of clarity, it is necessary to reproduce para 24.6 C and para 24.7 of the written submissions of Mr V Sridharan: “24.5 Similarly, this… court has in several cases extended the benefit of exemption/ lower rate in case where such denial to a particular case was ultra vires or unconstitutional, thereby enlarging the scope of beneficial provision. D

24.6 In the present case, challenge to the vires of Rule 89(5) is only because of definition of Net ITC in Explanation to the said rule which defines “Net ITC” as under: “Net ITC” shall mean input tax credit availed on inputs during the E relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both”

94Copy pinpoint94. Mr Sridharan urges that the words ‘inputs’ in Explanation (a) to Rule 89(5) be struck down as being severable to bring it “entirely in line with the main provision”. We are unable to accept this submission. F Explanation (a) to Rule 89(5) in defining ‘Net ITC’ to mean ITC availed on inputs (goods) is, as a matter of fact, entirely in line with the main provision, Section 54(3). On the contrary, to accept the submission of Mr Sridharan, would expand the ambit of Rule 89(5) beyond the terms governing the admissibility of a refund under Section 54(3) and would be hence impermissible. G G.3 The validity of the formula prescribed in Rule 89(5)

95Copy pinpoint95. Mr G Natarajan, Mr Sujit Ghosh, learned Counsel, and Mr V Sridharan, learned Senior Counsel, have also urged an alternative submission for the challenge to Rule 89(5). It has been submitted that H

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A the formula prescribed in Rule 89(5) which seeks to grant refund of the ITC accumulated on account of input goods, is inherently flawed and will lead to anomalous results. The alternative submission is made on the assumption that Section 54(3)(ii) read with Rule 89(5) is restricted to refund of ITC accumulated on account of input goods only, and not input services. B

96Copy pinpoint96. Mr G Natarajan, learned Counsel appearing on behalf of the intervenor, has submitted that as it was originally framed, ‘Net ITC’ in Rule 89(5) allowed for a refund on account of an inverted duty structure both for input goods and input services. The position was amended initially on 18 April 2018 with prospective effect and thereafter on 13 June 2018 C with retrospective effect on 1 July 2017. The formula prescribed in Rule 89(5) seeks to identify the quantum of ITC availed on input goods attributable to the outward supplies having an inverted rate structure. From such quantum of ITC on input goods, the tax payable by the supplier on such inverted rated supplies of goods and services is reduced to arrive D at the quantum of credit accumulating on account of inverted rate structure, which is eligible for refund. The submission of Mr Natarajan is that in the formula prescribed under Rule 89(5), while reducing “tax payable on such inverted rated supplies of goods or services”, the tax- payer should first be allowed to utilize the ITC availed on input services which is otherwise not eligible for refund. If the formula prescribed under E Rule 89(5) is not construed in the above manner, it is alleged that it will lead to inequality between taxpayers dealing with outward supplies involving only an inverted rate structure (single line of goods) and taxpayers dealing with outward supplies having both an inverted rate structure and those not having inverted rate structure. Thus, it has been submitted that the Court should read down the formula prescribed in Rule 89(5) to the effect that while calculating the refund entitlement as the difference between Net ITC and tax payable on such supplies having inverted rate structure, it is presumed that the ITC accumulated on account of input services be allowed to be used for payment of tax payable on inverted goods and services, and the remaining balance of tax, which is paid out of accumulated ITC on account of input goods, is deducted from Net ITC in the formula.

97Copy pinpoint97. Mr G Natarajan’s submission indicates an aberration where a registered person with a single product with an inverted duty structure is neither able to use the unutilized ITC for the payment of tax on output H

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[DR DHANANJAYA Y CHANDRACHUD, J.]

supply nor is allowed a refund. On the other hand, a registered person A with products involving an inverted duty structure and otherwise, is in a position to utilise the ITC availed on input services for payment of tax on turnover not having an inverted rate structure. Mr G Natarajan has given the following example: B

98Copy pinpoint98. The submission of Mr Natarajan has also been supported by F Mr V Sridharan in rebuttal. The formula in Rule 89(5) is reproduced below: “Maximum Refund Amount= {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} ? tax payable on such inverted G rated supply of goods and services” (emphasis supplied)

99Copy pinpoint99. Mr V Sridharan has urged that the second leg of the formula, that is, “tax payable on such inverted rated supply of goods and services” H

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A takes into account the entire tax payable on output supplies. In reality, the tax payable on output supplies would have been discharged by utilising the ITC on input goods and input services. However, the formula under Rule 89(5) presumes that nothing has been utilised from the ITC on input services and the entire tax on output supplies is discharged by utilising ITC on input goods. It was urged that although the stated objective of the formula is to grant refund of unutilised ITC accumulated on account of input goods, by deducting the entire sum of tax payable on output supplies, the quantum of such refund is reduced and the cascading effect of taxes is maximised. As a solution to the said anomaly, Mr Sridharan has proposed that for the purposes of Rule 89(5), an assumption must be made that ITC accumulated on account of input services, which is not refundable under Section 54(3), is used for discharging the output tax payable on inverted rate supply of goods and services. The remaining balance of output tax, must be then presumed to have been discharged from the ITC accumulated on account of input goods and it is only this remaining balance that should be deducted from the formula to calculate the refund. In other words, Mr Natarajan and Mr Sridharan propose an order of utilisation in the formula by which the ITC accumulated on account of input services is used first for discharging the tax liability and only then is the ITC accumulated on account of input goods used. During the course of his submissions, Mr Sridharan has relied on the decision of this Court in Commissioner of Income Tax, Coimbatore v. Lakshmi Machine Works51 and has urged before us to adopt a purposeful and schematic interpretation to the formula which will make it comparable and workable.

100Copy pinpoint100. Mr Sujit Ghosh has urged before us that the formula in Rule F 89(5) creates a distinction between suppliers of services having a higher component of input goods than input services as against suppliers of services having a higher component of input services than input goods. In his submissions, Rule 89(5) would favour the former as they would be entitled to a larger quantum of refund on account of more use of input goods. G

101Copy pinpoint101. In response to these submissions, Mr N Venkataraman, learned ASG, has conceded that certain inadequacies might exist in the formula. However, he has sought to justify the need for a formula in Rule 89(5). The ASG has submitted that under the scheme of the CGST 51 H (2007) 11 SCC 126

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[DR DHANANJAYA Y CHANDRACHUD, J.]

Act, the accumulated ITC arising out of input goods and input services is booked into the electronic credit ledger and is to be utilised thereafter for payment of tax on outward supplies on goods and services in accordance with Section 49 of the CGST Act. Once payments are made from the electronic ledger, the remaining quantum of unutilised ITC becomes one homogenous nucleus and it is impossible to attribute the unutilised ITC to its source, that is, it cannot be identified whether the balance unutilised ITC is arising from input goods or input services. In order to bifurcate the unutilised ITC into input goods and input services for the purpose of granting refund in accordance with Section 54(3)(ii) on ITC on inputs, Rule 89(5)3 has resorted to prescribing a formula to legally dissect the unutilised ITC. The learned ASG has urged that the prescription of formulae to artificially determine refund or utilisation is a common practice in the field of taxation and was used prior to the enactment of the CGST Act in MODVAT/CENVAT Rules for determining quantum of eligibility of credit. Another instance is Rule 42 and 43 of the CGST Rules 2017 which provide specific formulae in restricting the ITC when a registered supplier uses input goods, input services and capital goods for purpose of business and other than business purposes.

102Copy pinpoint102. The ASG, having justified the need for a formula, has then argued that a formula prescribed by delegated legislation may not be perfect and may have certain aberrations. However, a wide discretion is given to the policy makers in this regard and only if the formula is arbitrary and violative of Article 14 of the Constitution, can it be struck down. For this, the ASG has relied on the decision of a Constitution Bench of this Court in RK Garg v. Union of India52, where it was observed that economic legislation ought not to be measured by abstract symmetry, since it is essentially empirical in nature and is based on experimentation. We note however, that the ASG has not refuted the anomalies point out by the Counsel for the assessees.

103Copy pinpoint103. In our view, the justification of the formula under Rule 89(5) given by the ASG to create a legal bifurcation is valid. In this context, it would be material to advert to the provisions of Rule 42. Rule 42(1) provides that the ITC in respect of input goods or input services which attract the provisions of sub-Section (1) or sub-Section (2) of Section 17 being partly used for the purpose of business and partly for other purposes 52 (1981) 4 SCC 675 H

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A or partly used for affecting taxable supplies including zero rated supplies and partly for effecting exempts supplies shall be attributed for the purposes of business or for effecting taxable supplies in the manner which is indicated in the Rule. Sub-Section (1) of Section 17 provides that where the goods and services or both are used by a registered person partly for the purposes of any business and partly for any other purpose, the amount of credit shall be restricted to so much of the input tax as is attributable to the purpose of its business. Sub-Section (2) of Section 17 provides that where the goods or services or both are used by a registered person partly for effecting taxable supplies including zero rated supplies under the CGST Act or under the IGST Act and partly for effecting exempt supplies the amount of credit shall be restricted to so much of the input tax as is attributable to the taxable supplies including zero rated supplies. Rule 42, in other words, provides for the manner in which the attributions of ITC in respect of the input or input services under sub-Sections (1) or (2) of Section 17 shall be carried out. Rule 43 similarly provides the manner in which ITC in respect of capital goods attracting the provisions of sub-Section (1) of Section 17, used partly for business and partly for other purposes or partly for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies would be attracted to the purpose of business or for effecting taxable supplies. Both Rules 42 and 43 provide for a formula for attribution. Rule 86 provides for the maintenance of an electronic credit ledger. Rule 89(5) provides for a refund. In both sets of rule clusters, Rules 42 and 43 on the one hand and Rule 89(5) on the other hand, a formula is used for the purpose of attribution in a post assimilated scenario. The use of such formulae is a familiar terrain in fiscal legislation including delegated legislation under parent norms and is neither untoward nor ultra vires.

104Copy pinpoint104. We now turn to the submissions of the counsel for the assessees regarding the anomalies in the formula. In our view, the submission of Mr Sujit Ghosh, that the formula creates a distinction between suppliers having a higher component of input goods than those having a higher component of input services, and must be read down accordingly, must be rejected. The purpose of the formula in Rule 89(5) is to give effect to Section 54(3)(ii) which makes a distinction between input goods and input services for grant of refund. Once the principle behind Section 54(3)(ii) of the CGST Act is upheld, the formula cannot be struck down merely for giving effect to the same.

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[DR DHANANJAYA Y CHANDRACHUD, J.]

105Copy pinpoint105. The aberrations which have been pointed out by the Mr A Sridharan and Mr G Natarajan certainly indicate that the formula is not perfect. The formula makes a presumption that the output tax payable on supplies has been entirely discharged from the ITC accumulated on account of input goods and there has been no utilisation of the ITC on input services. While a similar formula is provided in Rule 89(4) with regard to zero rated supplies, in that case, the ‘Net ITC’ includes input goods and input services and thus, there is no imbalance between the different components of the formula. The formula prescribed in Rule 89(5) however, seeks to deduct the total output tax from only one component of the ITC, namely ITC on input goods. This in our view is at odds with reality, where the ITC on both input goods and input services is accumulated in the electronic ledger and is then utilised for the payment of output tax. In making such an assumption, the formula tilts the balance in favour of the Revenue by reducing the refund granted. We are equally cognizant of the fact that the proposed solution, that is prescribing an order of utilisation of the ITC accumulated on input services and input goods, may tilt the balance entirely in favour of the assessee as that would make a contrary assumption that the output tax is discharged by the ITC accumulated on account of input services entirely. Another possible solution could be that the Rule itself provides for a statutory assumption or a deeming fiction of utilisation of a certain percentage of ITC on input services towards the payment of output tax for the purpose of calculation of refund.

106Copy pinpoint106. While we are alive to the anomalies of the formula, an anomaly per se cannot result in the invalidation of a fiscal rule which has been framed in exercise of the power of delegated legislation. In RK Garg (supra), Justice P N Bhagwati (as the learned Chief Justice then was) F speaking for the Constitution Bench underscored the importance of the rationale for viewing laws relating to economic activities with greater latitude than laws touching civil rights. The Court held: “8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than G laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is H

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A particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. B Nowhere has this admonition been more felicitously expressed than in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J., said in his inimitable style: “In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events — self- limitation can be seen to be the path to judicial wisdom and institutional prestige and stability.” The Court must always remember that “legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry”; “that exact wisdom and nice adaption of remedy are not always possible” and that “judgment is largely a prophecy based on meagre and uninterpreted experience”. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Roig Refining Company [94 L Ed 381 : 338 US 604 (1950)] be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but

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[DR DHANANJAYA Y CHANDRACHUD, J.]

that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues.” (emphasis supplied)

107Copy pinpoint107. The dictum in RK Garg (supra) squarely applies to the present case in which the Government has exercised its powers of delegated legislation to frame a formula, which has certain inequities. However, these inequities are to be ironed out by the Government in the course of the application of the formula. We are affirmatively of the view that this Court should not in the exercise of the power of judicial review allow itself to become a one-time arbiter of any and every anomaly of a fiscal regime despite its meeting the jurisdictional framework for the validity of the legislation, including delegated legislation.

108Copy pinpoint108. Mr Sridharan had also urged that the formula may be read down as was done by this Court in Lakshmi Machine Works (supra). F In this case, the Court was faced with a question of whether excise duty and sales tax were to be included in the ‘total turnover’, which was a denominator in the formula prescribed under Section 80-HHC(3) of the Income Tax Act 1961 for the purpose of arriving at the deduction from profits retained for export business. In order to arrive at the deduction, the formula apportioned business profits by the ratio of export turnover G to total turnover. Various amendments had been made by the legislature to the formula in Section 80-HHC(3) to make the formula workable. The Court, speaking through Justice SH Kapadia (as the learned Chief Justice then was), observed that H

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A “21. According to The Law and Practice of Income Tax by Kanga and Palkhivala, the word “profits” in Section 28 should be understood in normal and proper sense. However, subject to special requirements of the income tax, profits have got to be assessed provided they are real profits. Such profits have got to be ascertained on ordinary principles of commercial trading and accounting. However, the Income Tax Act has laid down certain rules to be applied in deciding how the tax should be assessed and even if the result is to tax as profits what cannot be construed as profits, still the requirements of the Income Tax Act must be complied with. Where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act (see p. 455 of The Law and Practice of Income Tax by D Kanga and Palkhivala). Therefore, schematic interpretation for making the formula in Section 80-HHC workable cannot be ruled out. Similarly, purposeful interpretation of Section 80-HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the legislature intended E to exclude items like commission and interest from deduction on the ground that they did not possess any element of “turnover” even though commission and interest emanated from exports. We have to read the words “total turnover” in Section 80-HHC as part of the formula which sought to segregate the “export profits” F from the “business profits”. Therefore, we have to read the formula in entirety. In that formula the entire business profit is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover ÷ total turnover which constitutes Section 80-HHC concession (deduction). Income in G the nature of “business profits” was, therefore, apportioned. The above formula fixed a ratio in which “business profits” under Section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words “total turnover” but also to the words “export turnover”, “total export turnover” and “business profits”. That is the reason why we have quoted hereinabove H

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extensively the illustration from the Direct Taxes (Income Tax) A Ready Reckoner of the relevant word.”

109Copy pinpoint109. The Court in Lakshmi Machine Works (supra) was dealing with a question of interpretation, where the formula was silent on inclusion of sales tax or excise duty, in the definition of total turnover. Thus, a schematic interpretation was adopted to give effect to the intent of the B legislature.

110Copy pinpoint110. In Commissioner of Income Tax v. HCL Technologies Limited53, a two judge Bench of this Court considered whether, while calculating ‘export profit’ for the deduction under Section 10-A of the C Income Tax Act 1961, software development charges are to be excluded from the definition of ‘total turnover’. For calculating the export profit, the total profits of the business were apportioned by the ratio of export turnover to total turnover. The issue was complicated as these charges were allowed to be deducted from export turnover, which was a component of the total turnover and the numerator in the formula. D However, the Revenue had denied the deduction from the total turnover, the denominator. The Court interpreted and revised the formula as otherwise it would lead to undesirable results. In doing so, Justice RK Agrawal observed that E “16. The respondent Company has claimed deduction under Section 10-A as per certificates filed on Form 56-F. The respondent, while computing the deduction, has taken the same figure of export turnover as of total turnover. […]

17. In the above backdrop, we are of the opinion that the definition F of total turnover given under Sections 80-HHC and 80-HHE cannot be adopted for the purpose of Section 10-A as the technical meaning of total turnover, which does not envisage the reduction of any expenses from the total amount, is to be taken into consideration for computing the deduction under Section 10-A. G When the meaning is clear, there is no necessity of importing the meaning of total turnover from the other provisions. If a term is defined under Section 2 of the IT Act, then the definition would be applicable to all the provisions wherein the same term appears. As 53 (2018) 16 SCC 709 H

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A the term “total turnover” has been defined in the Explanation to Sections 80-HHC and 80-HHE, wherein it has been clearly stated that “for the purposes of this section only”, it would be applicable only for the purposes of those sections and not for the purpose of Section 10-A. If denominator includes certain amount of certain type which numerator does not include, the formula would render undesirable results. […]

22. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10-A of the IT Act are allowed only in export turnover but not from the total turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the respondent which could have never been the intention of the legislature.

23. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. (emphasis supplied) In Arun Kumar and Others v. Union of India54, a challenge was raised to the validity of the Rule 3 of the Income Tax Rules 1962 which amended the method of computing valuation of a ‘perquisite’ (which includes rent free accommodation provided to an assessee by their employer) under Section 17(2) of the Income Tax Act 1961. The appellants argued that the amended Rule did not provide the assessee with the right to claim before the assessing officer that there was no G “concession” in the matter of rent with respect to the accommodation provided and thus, Section 17(2) and Rule 3 were not applicable. An argument was raised to “read down” the Rule by introducing the principle

54 H (2007) 1 SCC 732

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[DR DHANANJAYA Y CHANDRACHUD, J.]

of audi alteram partem. Rejecting this argument, the Court, speaking A through Justice CK Thakker, noted that “55. The doctrine of “reading down” is well known in the field of constitutional law. Colin Howard in his well-known work Australian Federal Constitutional Law states: B Reading down puts into operation the principle that so far as it is reasonably possible to do so, legislation should be construed as being within power. It has the practical effect that where an Act is expressed in language of a generality which makes it capable, if read literally, of applying to matters beyond the relevant legislative power, the Court will construe it in a more limited sense so as to keep it within power.” The Court after reviewing the judicial precedents on this point observed: “61. But it is equally well settled that if the provision of law is explicitly clear, language unambiguous and interpretation leaves no room for more than one construction, it has to be read as it is. In that case, the provision of law has to be tested on the touchstone of the relevant provisions of law or of the Constitution and it is not open to a court to invoke the doctrine of “reading down” with a view to save the statute from declaring it ultra vires by carrying it to the point of “perverting the purposes of the statute. […] F

65. As we have already indicated earlier, Rule 3 prior to its amendment in 2001 was totally different. It dealt with the method of calculation of concession keeping in view the concept of “fair rental value”. In the light of the principle and phraseology in Rule 3, the rule-making authority provided an opportunity to the assessee to satisfy the assessing officer that the rent sought to be recovered G from the employee could not be said to be “concession” as it was “fair rent”, “reasonable rent”, “market rent” or “standard rent’. When the rule is amended and the concept of “fair rental value” has been done away with and the only method which has been H

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A adopted is to calculate the rent on the basis of population of the city in question, it cannot be successfully contended that the intention of the rule-making authority was to afford an opportunity to the assessee to convince the assessing officer that the rent recovered by the employer from his employee was not in the nature of concession. Nor a court of law would, by interpretative process, grant such opportunity to the assessee so as to enable him to convince the assessing officer that the rent fixed was not covered by Section 17(2)(ii) of the Act and therefore was not a “perquisite”. We are, therefore, unable to accept the argument of Mr Salve and allow import of the principles of natural justice in Rule 3.” (emphasis supplied)

111Copy pinpoint111. The above judicial precedents indicate that in the field of taxation, this Court has only intervened to read down or interpret a formula if the formula leads to absurd results or is unworkable. In the present case however, the formula is not ambiguous in nature or unworkable, nor is it opposed to the intent of the legislature in granting limited refund on accumulation of unutilised ITC. It is merely the case that the practical effect of the formula might result in certain inequities. The reading down of the formula as proposed by Mr Natarjan and Mr Sridharan by prescribing an order of utilisation would take this Court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Accordingly, we shall refrain from replacing the wisdom of the legislature or its delegate with our own in such a case. However, given the anomalies pointed out by the assessees, we strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same. H Conclusion

112Copy pinpoint112. Having devoted our attention to the submissions at the Bar, we have come to the conclusion that the judgment of the Madras High G Court needs to be affirmed by dismissing the appeals challenging that verdict while the appeals against the judgment of the Gujarat High Court by the Union of India should be allowed.

113Copy pinpoint113. The Division Bench of the Gujarat High Court having examined H the provisions of Section 54(3) and Rule 89(5) held that the latter was

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[DR DHANANJAYA Y CHANDRACHUD, J.]

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A (iii) The observations in paragraphs 104 to 111 shall be considered by the GST Council to enable it to take a considered view in accordance with law.

114Copy pinpoint114. Pending application(s), if any, stand disposed of.

B Ankit Gyan Appeals disposed of.