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The validity of CGST Rules under Rule 89(5)- A refund only for inputs under inverted tariffs: SC

Court name :Supreme Court of India

Civil Appeal No 4810 of 2021

Judgment Name:  Union of India & Ors. vs. KC Footsteps India Pvt Ltd.

Judgment Date: 13 September 2021.

Judges/ Bench: Justices D.Y. Chandrachud and M.R. Shah


In Section 54 of the Central Goods and Services Tax Act of 2017, Parliament included a mechanism for tax refunds. In instances when an input tax credit is not used, sub-section (3) provides for a return of the credit:

( i )non-taxable zero-rated supplies; and

(ii) Credit accumulation occurs “because the input tax rate is larger than the output tax rate.”

While Parliament contemplated a refund in the latter of the two scenarios, it was aware that ITC may accrue for a variety of reasons.

However, Parliament anticipated a circumstance in which the credit had accumulated as a result of an inverted duty structure, in which the credit had accumulated because the rate of tax on inputs was greater than the rate of tax on output supply.

 Section 54 of the law has been amended to include a return provision in response to this circumstance (3).

The Central Goods and Service Tax Rules 20173 were drafted using the rule-making authority granted under Section 164 of the CGST Act. In the case of a return due to an inverted tariff structure, Rule 89(5) gives a method for calculating the ITC refund.

 In the computation the sentence “Net ITC” is used. The phrase “net ITC” is defined as “input input tax credit on inputs” under Rule 89(5) of the Internal Revenue Code.

Brief facts of the case

The High Court of Gujarat and the High Court of Judicature in Madras were both served with Writ Petitions under Article 226 of the Constitution. Before the High Court, the petitioners argued, among other things, that:

(i) When ITC is accumulated as a result of an inverted tariff structure, Section 54(3) provides for a return.

(ii)The credit for input tax paid on both products and services is included in the ITC.

(iii)Section 54(3) does not limit the right to a refund to ITC that has accrued because the tax rate on inputs is greater than the tax rate on output supply. When the rate of tax on input services is higher than the rate of tax on output supplies, it also provides for a refund of unused ITC.

(iv) While Section 54(3) provides for a return of ITCs earned on both inputs and input services, Rule 89(5) is unconstitutional in that it excludes tax on input services from the formula’s application.

(v) If Section 54(3) is read as a prohibition on claiming a refund of accumulated ITC by limiting it to tax on inputs alone, it will be illegal since it will discriminate between inputs and input services.

Principle / Observations

  • According to a combined reading of the Act and Rules, prescribing the formula in Sub-rule 5 of Rule 89 of the CG GST Rules,2017 to exclude refunds of tax paid on “input service” as part of the refund of the unutilized input tax credit is in violation of the provisions of Sub-section 3 of Section 54 of the CGST Act,2017, which provides for the refund of the “unused input tax credit.”
  • “We consider that the “unused input tax” refund paid on input services as part of a “input tax credit” accruing on account of the inverted tariff structure is extra vires as provided for under Section 54(3) of the CGST Act, 2017, as explained in Rule 89(5).

Contentions of Petitioners

The petitioners argued in front of the High Courts that section 54(3), which provides for refund of ITC originating in imports as well as input services regulation 89 (5), is unconstitutional since it excludes tax on services from the formula’s scope. They further stated that if section 54(3) is construed as a prohibition on claiming a refund of accrued ITC for taxes on inputs alone, it would be illegal since it would result in discrimination between inputs and input services. According to them, the first provision’s clause(ii) specifies a condition of eligibility rather than a restriction on the right to a return.

Judgement held

As a result, the respondents are directed to allow the petitioners’ refund claim, taking into account the unutilized input tax credit of “input services” as part of the “net input tax credit” (Net ITC) for the purpose of calculating the refund of the claim as per Rule 89(5) of the CGST Rules,2017 for claiming refund under Sub-section 3 of Section 54 of the CGST Act,2017 for claiming refund under Sub-section 3 of Section 54 of the CGST Act,2017.

As a consequence, the petitions are granted for the reasons stated above. To the degree stated, the rule is rendered absolute.There is no specific sequence of costs.


Hon’ble High Court’s ruling is significant and will enhance industry cash flow in the framework of the inverted duties.. Industries are now able to get reimbursement of input services and a fresh petition for refund of capital products can be submitted before the Court.

This judgement is extremely laudable in favour of the inverted tariff structure of the taxpayers. With respect to the application, as there is no contradictory judgement in this matter till now, this judgement is applicable to India.



Written by: Shreya Kashyap (School of law UPES, Dehradun.)

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