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  • Devansh Kathuria



While, interpreting a taxing statute the court has to proceed with more caution as in the word of J. Bhagwati, “In construing fiscal statute and in determining the liability of a subject to tax one must have regard to the strict letter of law, on the other hand if the case is not covered under the four corners of law the same cannot be imposed by inference or by probing into the intention of the legislature”.[1] Therefore, it becomes aptly clear that courts shall only apply primary rules of statutory interpretation and give effect to the clear and plain meaning of the words used by the legislation and shall not go into the task of carving out the legislative intent from such words.

Though a plethora of judgments suggests that taxing statutes in its entity be interpreted by applying the primary principles of statutory interpretation and strictly construed but the primary rule of statutory interpretation also is that an interpretation should not lead to defeating the purpose of the statute and an interpretation which reduces the futility of the statute must be avoided.[2] Therefore, sometimes a situation might arise where these two principles are in conflict and it is then when the task of coming to the interpretation which represents the intention of the legislature more aptly becomes quite difficult for the court as can be said in the words of Lord Cranworth that, “There is no Possibility of mistaking midnight for noon; but at what precise moment twilight becomes darkness is hard to determine”.[3] Similarly, in a case involving such a conflict especially while dealing with a taxing statute, there can be more than one answer to the same question of interpretation.

As such a conflict was also seen in two recent judgments of two different High Courts while dealing with similar core issues arrived at two different conclusions. The issue at the core of these cases was that in an inverted tax structure i.e. a situation when the rate of tax on input goods or services exceeds the rate of tax on output supplies as governed by section 54(3) and rule 59 of the CGST Act, 2017 (“CGST ACT”) and CGST Rules, 2017 (“CGST Rules”) respectively. Whether the word “input” used under rule 59 to determine the net Input Tax Credit (“ITC”) is inconsistent with the provision of sec. 54(3) and should it be construed in such a way as to include input services to do away with the inconsistency within the section.

Key Definitions:

Input: Goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.[4]

Input Tax: a tax charged on the supply of goods and services or both made to a registered person.[5]

Input Tax Credit (“ITC”): the credit accumulated on the account of input tax.[6]

VKC Footsteps Ltd. v. Union of India[7]


The writ petition in the Gujarat High Court was filed by businessmen engaged in the activity of manufacturing and supplying footwear upon which a Goods and Service Tax (“GST”) is chargeable at the rate of 5%. The majority of the inputs and input services are such where the GST is payable at a higher rate than what is collected by them upon the sale of the footwear i.e. at the rate of 12% or 18%. Thus, the total GST paid by the Petitioner on procurement of input is higher than the tax payable on their outward supply of footwear. Therefore, even after utilizing the credit for payment of GST on outward supply, unutilized credit is accumulated in the electronic credit ledger of the Petitioners.

One of the most significant characteristics of GST is to effectively tax the goods at the hands of the final consumer only and to absorb all the taxes paid at any of the former stages in the tax on outward supply. And where the situation is contrasting, the manufacturer can rely upon a refund of accumulated unutilized credit as the only resort to achieve the said objective. The sec. 54(3) of the Central Goods and Service Tax Act,2017 (for short “CGST Act”) provides for refund of unutilized input tax credit where the credit is accumulated on the account of the tax rate on inputs being higher than the tax rate on output supplies to achieve the same objective. Such a condition as defined before is called an inverted duty structure. The provisions of sec. 54(3) act also lays down the condition precedent for the grant of refund on account of inverted duty structure i.e. “rate of tax on inputs is higher than the rate of tax collected on output supplies”, the quantum of refund i.e. to include credit availed on input services apart from inputs is also defined as the term “input tax” and “Input tax credit” are defined in the Act itself as tax charged on supply of goods or services or both and as the credit of input tax respectively.

Rule 89(5) of the Central Goods and Service Tax Rules, 2017 (for Short “CGST Rules, 2017”) was enacted to determine the formula to calculate the refund on account of inverted duty structure and an assessee is entitled to a refund of the unutilized input tax credit availed during the relevant period proportionate to the turnover of inverted rated supply of goods vis-a-vis total turnover of the assessee for that period.

The provision of Rule 89(5) of the CGST Rules, 2017 as originally introduced was amended via a Notification,[8] which prescribed a revised formula for determining the refund on account of inverted duty structure with retrospective effect from 01.07.2017, vide a Notification[9] the amended formula denied refund on the input tax credit availed on input services and allow relief of refund of input tax credit availed on inputs alone under the Rule.

Thus, in the present case, revenue allowed the refund of the accumulated input tax credit of tax paid on inputs such as synthetic leather, PU Polyol, etc. However, a refund of accumulated credit of tax paid on procurement of input services such as job work service, goods transport agency service, etc. is being denied. The Petitioners have therefore challenged the validity of amended Rule 89(5) of the CGST Rule, 2017 to the extent it denies refund of input tax credit relatable to input services.


1. Whether the amended Rule 8 of the CGST Rules is ultra vires Section 54(5) inasmuch as Section 54(3) of the CGST Act, 2017 which provides for refund of ‘any unutilized input tax credit accumulated on account of inverted duty structure thereby covering credit of both ‘input goods’ and ‘input services’;

2. Whether the amended Rule 89 of the CGST Rules, 2017, is violative of Article 14 of Constitution of India inasmuch as it treats dealers with accumulated credit on inputs and dealers with accumulated credit on input services differently;

3. Whether Sec. 164(3) of the CGST Act, 2017 is unconstitutional inasmuch as it suffers from the vice of excessive delegation;

Contentions of Petitioner

The main contention of the petitioner was that a subordinate rule cannot deviate from the purpose of the parent enactment and therefore cannot narrow down the scope of a provision from its original broader scope. While relying on a statement of object and reasons for the constitutional amendment to introduce Goods and Service Tax it was contended that the basic aim and purpose behind it was to reduce the cascading of tax the way it existed in the previous model and to only impose a tax on the value added to the product and not the whole of it. Similarly to further the purpose refund provisions in the case of inverted duty structure was introduced in the act with a broad classification of the input tax credit by using the words “any unutilized input tax credit”[10] and the only condition precedent to avail such refund is provided for in the proviso of the sec. and therefore, the rule cannot further introduce any additional conditions or restrictions in the garb of providing for a formula to calculate Net ITC.

Contention of Revenue

Whereas the revenue contended that rule 59 of CGST Rules, does not project any contradiction to the provisions of sec. 54(3) of CGST Act as it only lays down a mode of calculation of Net ITC which can be availed for refund as per the provision of sec. 54(3) whereas, sec. 54(3) in the form of a proviso provides for an embargo on the refund and therefore, under sec 164 of the act empowering the central govt. rule is valid.

Ratio Decidendi

The court deciding the matter relied on the statement of object and reasons and various other tools to prescribe the intention behind the introduction of the GST model of taxation and held the same was implemented to avoid the structural problems in the existing regime and do away with the cascading of tax and therefore in the light of the purpose of the enactment of the act and the language prescribed in the sec. 54(3) of the CGST Act the court while citing the judgment in the case of Babaji Kondaji Garad v. Nasik Merchants Co-operative Bank Ltd.[11] Held that when a subordinate rule is in conflict with a statute it is the statute which will prevail over the rule the court observed that after a conjoint reading of the provisions of the act and rules it clearly seems that the rule while chalking out the formula for the valuation of Net ITC excludes the input tax credit on the account of input services whereas the act provides for the inclusion of the same therefore while keeping in mind the purpose behind the act the word ‘input’ cannot be given the meaning as provided by the definition of the act and therefore Net ITC shall be construed to include input services in its scope under rule 59 of CGST Rules.

Development of Law

Tvl.Transtonnelstroy Afcons Joint venture v. Union of India[12]

The second judgment in this regard from the Madras High Court came in contrasting light to that of the first judgment the contentious issues were similar to that of the previous judgment the court examined the following points before rejecting the view of Gujarat High Court. The court observed that the Gujarat High Court failed to appreciate the proviso to the sub-clause (3) of sec. 54 of CGST Act which further qualifies the input tax credit available for a refund only to the extent of the tax on input goods being greater than the tax on output supplies and thereby excluding tax on input services. The court first to appreciate this view discussed the rules of interpretation applied to the proviso of any section, and relied upon the judgment in the case of H.E.H. Nizam's Religious Endowment Trust v. CIT[13] and held that a proviso can perform the following functions:

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 color of the substantive enactment itself; and

4. It may be used merely to act as an optional addendum to the enactment with the sole object of explaining the real intendment of the statutory provision.”

The court then observed that while keeping in mind the nature and scope of a proviso clause under sec. 54(3) of CGST Act, undoubtedly entitle the registered person to claim a refund of any unutilized credit but the same principle clause is qualified by way of a proviso which establishes a condition precedent to claiming refund of the unutilized ITC only for the tax paid on input goods as the proviso uses the language “provided that no refund of unutilized input tax credit shall be allowed in cases other than”, which carves out the intention of the legislature clearly of qualifying the provisions of the sec under CGST Act and therefore a registered person can only claim the refund if those conditions are met with. And therefore, if it is interpreted to mean and include input services the phrase “where the credit accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies” used in clause (ii) of the section would be rendered ineffective. Since it is the cardinal rule of interpretation that every word of the statute must be given a meaning, therefore, such an interpretation would be bad in law and hence it shall be interpreted to mean only to include input tax as a part of ITC to be refunded back to the assessee. Also, the rule under CGST Rules also as amended is constitutional since it is the principle of interpretation that clearly states that the terms shall be understood to mean as is defined under the definitions clause of the act. The court while relying on Indo International Industries v. CST,[14]reiterated that,

“If any term or expression has been defined in the enactment then it must be understood in the sense in which it is defined but in the absence of any definition being given in the enactment the meaning of the term in common parlance or commercial parlance has to be adopted.”

It can be seen that both the cases from the respective High Courts though having similar issues related to the rules of interpretation with the similar factual matrix are based on different findings and have, therefore, arrived at concurring judgments. It is quite possible as while the judgment of the Gujarat High Court takes into consideration the objective behind the enactment of GST i.e. effectively taxing the goods at the hands of the final consumer and therefore not creating a burden on the manufacturer. Whereas the Madras High Court took the proviso into consideration to interpret the taxing statute as per the definitions provided for in the act. It will be very interesting to see how the Hon’ble Supreme Court of India decides on the matter when it comes to consideration.


Interpreting a taxing statute can be a very tedious task for the judiciary as under ordinary circumstances the statute must be interpreted strictly as tax is one of the sovereign functions of the state and hence the same cannot be collected except with the proper authority of law. Therefore, the provisions should always be interpreted to cover the provision under the four corners of the letter of law but the difficulty arises when the strict interpretation leads to ambiguity or making the provisions redundant and ineffective. The provisions of the CGST Act cannot always be strictly interpreted by taking into consideration only the internal aids such as the statute itself rather the external aids such as the historic background and the economic viability also becomes relevant as these kinds of enactments are enacted to remedy a very specific problem and such as the whole objective behind the enactment of the goods and service tax was to make sure that the good and services are taxed only at the hands of the final consumer and at the intermediary stages as the former system of indirect taxation i.e. the value-added tax suffered from the vice of cascading of taxation and the burden fell on the intermediaries as well the sole reason to repeal the existing system and to bring the GST system was to do away with such shortcomings as the Latin legal maxim states “Leges Posteriores Priores Contrarias Abrogant”.

Therefore, the intention of the legislature was very much incepted in the statement of object and reasons itself. And every provision of the enactment shall be interpreted while referring to such object and reasons and not only the act itself.


In this particular case, there are certain aspects that were overlooked by both High Courts while deciding the matter. Firstly, the balanced view of external and internal aid to the legislature since this is one of those exceptional circumstances both the internal and the external aid to the interpretation becomes important as the statement of object and reasons define the basic intention of the enactment the provisions of the enactment and the rules made therein form the practical aspect of the intended use. The first judgment overlooked the internal aids by not taking into consideration the proviso to the sec. 54(3) of the CGST Act and therefore the judgment cannot be said to be conclusive enough on the matter. While the Madras High Court overlooked the statement of object and reasons and heavily relied upon the proviso both the approach proves to be inconclusive to draw any interpretation with respect to the intention of the legislature.

In this case, the certain overlooked pointers that can be analyzed to come to a more correct version of the intention of the legislature are:

  • The very first starting point shall be the statement of object and reasons to understand the working of the goods and service tax i.e. to avoid the cascading of taxes and create a burden solely on the consumer of such goods and services.

  • Then the nexus shall be made between the provision in question and the statement of object and reasons to make sure that the consistency remains intact i.e. the proviso of the sec. 54(3) of CGST Act and shall be interpreted to qualify the conditions in such a way that it does not lead to cascading of taxes and defeat the whole purpose of the statute.

  • The term “input” shall be interpreted not only by keeping in mind the primary rule of interpretation i.e. to restrict the interpretation as in accordance of the definition provided under the definition clause and rather the scope shall be given a broader meaning to include the meaning used in common parlance as the restricted view does not fully upholds the purpose of the enactment and makes the provision redundant.

  • The proviso should be read as a whole and not only to give meaning to certain phrases used in the proviso as one of the clauses to the proviso also creates a qualification with respect to the quantum of the input tax credit to be allowed for a refund to not include those goods and services as notified by the government therefore if services were to be excluded absolutely an exception to the same would prove to be futile and hence the use of the term “input” in the proviso as defined in the definition clause is not conclusive enough to determine the intention of the legislature.

After a careful consideration of the above pointers, it can be concluded that substantially the decision of the Gujarat High Court is in the right direction but the reasons that led to the same cannot be said to be apt and conclusive to reach such a decision.

[1] A.V. Fernandez v. State of Kerala, AIR 1957 SC 657.

[2] M. Pentiah v. Veeramallappa Muddala, AIR 1961 SC 1107.

[3] Jane Starford Boyse v. John T. Rossborough, (1857) 6 HLC 22, p. 45.

[4] § 2(59), CGST Act, 2017.

[5] § 2(62), CGST Act, 2017.

[6] § 2(63), CGST Act, 2017.

[7] Special Civil Application No. 2792 of 2019.

[8] No. 21 /2018-CT dated 18.4.2018.

[9] No. 26/2018-CT dated 13.6.2018.

[10] § 54(3), CGST Act, 2017.

[11] (1984) 2 SCC 50.

[12] W.P No.8596 of 2019.

[13] AIR 1966 SC 1007.

[14] AIR 1981 SCC 1079.

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