Union of India vs. VKC Footsteps India Pvt. Ltd. – Supreme Court on Refund of ITC under Rule 89(5) (2021)

👞 Union of India vs. VKC Footsteps India Pvt. Ltd. – Supreme Court on Refund of ITC under Rule 89(5) (2021)

Union of India vs. VKC Footsteps India Pvt. Ltd.: One of the most debated issues under GST has been whether refund of unutilized Input Tax Credit (ITC) in cases of inverted duty structure (when input tax rates are higher than output tax rates) should cover both input goods and input services.

The controversy arose because:

• Section 54(3) of the CGST Act allows refund of “any unutilized ITC” in two cases:
  1. Zero-rated supplies, and
  2. Inverted duty structure.
• However, Rule 89(5) restricted refunds only to input goods, thereby excluding input services and capital goods.

This led to conflicting High Court rulings:

• Gujarat High Court (VKC Footsteps case): Held Rule 89(5) ultra vires Section 54(3) since “any unutilized ITC” includes both goods and services.
• Madras High Court (Transtonnelstroy Afcons case): Upheld Rule 89(5), restricting refunds only to input goods.

The matter finally reached the Supreme Court, which settled the law.

📂 Facts of the Case

• Assessee: VKC Footsteps India Pvt. Ltd., engaged in the manufacture and supply of footwear.
• Inputs procured: Synthetic leather, PU polyol, and other raw materials.
• Input services procured: Job work services, GTA services, etc.
• Issue: Footwear attracted a lower GST rate than inputs, leading to accumulated unutilized ITC.
• Refund Claim: Filed for accumulated ITC, including ITC on input services.
• Department’s Stand: Refunded ITC only on inputs, denied refund on input services.
• High Court Rulings: Contradictory views by Gujarat HC (favoring assessee) and Madras HC (favoring Revenue).
• Final Appeal: Taken up by the Supreme Court to resolve the conflict.

❓ Point of Dispute

• Whether Rule 89(5) restricting refund to input goods is ultra vires Section 54(3) of the CGST Act?
• Can an assessee under inverted duty structure claim refund of ITC on both inputs and input services, or only on input goods?

📑 Submissions by the Assessee

1. Section 54(3) allows refund of “any unutilized ITC”:
   • Since Section 2(62) defines ITC to include both goods and services, refund must cover both.
2. No differentiation at availment stage:
   • Law permits availment of ITC on both goods and services equally. Excluding services only at refund stage creates an artificial distinction.
3. Purpose of refund:
   • To avoid cascading of taxes. Denying refund on input services frustrates this objective.
4. Interpretation of proviso:
   • Proviso to Section 54(3) refers to “the credit” – meaning the same ITC defined in the main section (covering both goods and services).
5. Rule 89(5) narrows legislative intent:
   • By redefining “net ITC” to cover only input goods, the Rule restricts what the main Act permits, making it ultra vires.

📑 Submissions by the Revenue

1. Goods vs. Services – Constitutionally distinct:
   • Legislature is free to treat refund of goods differently from services.
2. Refund is not an absolute right:
   • It is a statutory concession; scope can be defined and restricted by law.
3. Section 54(3) restricts refunds:
   • First proviso permits refund only in limited cases (zero-rated or inverted duty structure).
   • Clause (ii) refers specifically to “inputs” – meaning input goods, not services.
4. Rule 89(5) validly framed under Section 164:
   • The Rule aligns with legislative intent.
5. Policy choice of Parliament:
   • Parliament consciously allowed full refunds (goods + services) only for exports (zero-rated supplies) but restricted refunds under inverted duty structure to input goods alone.

⚖️ Supreme Court Ruling

1. Refund = Statutory Right, not Constitutional Right
   • Right to refund is not automatic; it flows only from statutory provisions.
2. Legislative Intent Clear
   • Section 54(3) read with provisos indicates refund in inverted duty structure is confined to inputs (goods).
3. Rule 89(5) is intra vires
   • The Rule does not override Section 54(3); it simply operationalizes legislative intent.
4. Goods and Services = Different Classes
   • Treating them differently for refunds is permissible under tax law principles.
5. Resolution of High Court Conflict
   • Gujarat HC view (allowing refunds on input services) overruled.
   • Madras HC view (restricting refunds to input goods) affirmed.

Held:

Refund of unutilized ITC under inverted duty structure is restricted to input goods only. No refund can be claimed on input services or capital goods.

✅ Practical Impact on Businesses

• Refund restricted: Only ITC on input goods can be claimed; ITC on services will remain accumulated.
• Working capital impact: Industries with high input services (e.g., logistics-heavy sectors) face higher credit blockage.
• Policy clarity: Conflicting High Court rulings resolved; uniform treatment across India.
• Possible representations: Businesses may seek legislative amendment to include input services, but as of now, restriction applies.

🔑 Key Takeaways

1. Refund under inverted duty structure = only on input goods.
2. Refund is a concession, not a vested right.
3. Rule 89(5) is intra vires Section 54(3).
4. Contradictory rulings (Gujarat vs. Madras HC) resolved in favor of Revenue.
5. Businesses must factor in blocked ITC on services when pricing and planning.

📢 Why This Case Matters

The VKC Footsteps ruling is a landmark in GST jurisprudence. It underscores the limited nature of refund rights and clarifies that legislature can restrict refund benefits in line with policy objectives.

While it brought certainty by ending conflicting rulings, it also increased working capital pressures for industries dependent on input services, leaving scope for future reforms.

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