The Hon’ble Gujarat High Court under Rule 89(5) of the Central Goods and Services Tax Rules allowed the refund of unutilized Input Credit (ITC) on input services. Assessees having accumulated credit due to input services can now be accumulated, whereas the Hon’ble Madras High Court has taken a contrary view holding that Rule 89(5) is intra vires the Central Goods and Services Tax Act, 2017, consequently refund has been held to be allowable only to the extent of Input Credit (ITC) on input out of total unutilized Input Tax Credit.

It is important to understand the reasons based on which Hon’ble Madras High Court has not described to the views of Hon’ble Gujarat High Court especially when this issue is already under challenge before various other High Courts.

Findings of above tow High Courts – Gujarat and Madras High Court

A. Reasoning of Hon’ble Gujarat High Court

(i) Section 54(3) allows refund of “any unutilized input tax credit”. The term “Input tax credit” is defined in Section 2(63) of the said Act to mean the credit of input tax. The phrase “input tax” is defined in Section 2(62) of the said Act to mean the tax charged on any supply of goods or services or both made to any registered person.

(ii) Both “input” and “input service” are part of “input tax” and “input tax credit”.

(iii) Thus, as per Section 54(3) “any” unutilized Input Tax Credit (ITC) (which includes inputs and input services) could be claimed as refund. Rule 89(5) cannot restrict such refund to only inputs.

(iv) Explanation (a) to Rule 89(5) which defines the terms “Net NTC” is ultra vires. Section 54(3) to the extent it restricts refund only on inputs.

B. Reasoning of Hon’ble Madras High Court:

(i) Though Section 54(3) allows refund of “any unutilized input tax credit”, the clause (ii) of proviso to Section 54(3) uses the words “accumulated on account of rate of tax on inputs being higher than rate of tax on output supplies. If the proviso is interpreted merely to be a condition to claim refund of entire unutilized Input Tax Credit, the words “accumulated on account of” would become redundant.

(ii) The proviso, in addition to prescribing a condition also performs the function of limiting the quantum of refund.

(iii) Rule 89(5) as amended is within the rule making power under Section 164 and in line with Section 54(3).

(iv) The unamended rule 89(5), wherein refund of both input and input services available exceeded the scope of Section 54(3).

(v) The decision of the Hon’ble Gujarat High Court did not consider the scope, function the impact of proviso to Section 54(3).

Further findings of Madras High Court

Hon’ble Madras High Court has laid down the general principles governing claim of refund by way of the following findings:

(i) Refund claim other than a claim for excessive taxes paid inadvertently on account of the erroneous interpretation of applicable law or the declaration of a provision as unconstitution is in the nature of a benefit or concession.

(ii) Right of refund is purely statutory and cannot be availed of except strictly in accordance with the prescribed conditions.

(iii) The Parliament has wide latitude for classification. Thus, the non-conferment of the right of refund to the unutilized input tax credit from the procurement of input services cannot be said to be violative of Article 14 of the Constitution of India.

Issue still open for examination:

It is important to note that input tax credit is fungible and there is no correlation between the availment and utilization of input tax credit. In such a scenario, the question arises as to whether it is possible to determine the amount of credit which has accumulated on account of rate of tax on inputs being higher than rate of tax on output supplies. Once the amount of Input Tax Credit gets credited to the Electronic Credit Ledger, it loses its identity as being out of inputs and inputs services and forms part of a large pool. Therefore, it may not be possible to compute the amount of unutilized input tax credit attributable to the inverted duty inputs. Thus, this aspect of proviso is still open for examination.

Lingering question still an open issue:

Two contrary decisions of two different Hon’ble High Courts, the most question therefore arises whether the assessee stands. Assessees in Gujarat would be bound to follow the decision of jurisdictional High Court. Similarly, assessee in Tamil Nadu would be bound to follow the decision of jurisdictional High Court of Tamilnadu.

The Hon’ble Bombay High Court of Bombay in the case of Thana Electricity Supply Ltd. [1994] 206 ITR 727 (Bom) has held that the decision of a High Court is not a binding precedent for another High Court or Tribunals outside its territorial jurisdiction. At the best such a decision may have persuasive value. Further, the larger bench of a Tribunal in case of Atma Steels (P) Ltd. vs. CCE 1984 (17) ELT 331 (Trib.) (LB) has decided that the Tribunal has the judicial freedom to consider the conflicting decisions of two different High Courts and adopt the one considered more appropriate to the facts of a given case.

High Court decisions are not binding on Tribunals in a different territorial jurisdiction:

The decisions of Hon’ble High Court of Gujarat are not binding on Tribunals and authorities in other territorial jurisdictions. They may after considering those decisions take an appropriate independent view on this issue.

When two decisions are contradictory, one may argue that the decision more favoruable be considered as the lighter burden prevails on the assessee.


In view of the two contrasting decisions, the issue shall attain finality only after the matter is decided by the Hon’ble Supreme Court, i.e., the Apex Court. This will take very long time till such time issue will remain lingering and the taxpayers would suffer. Government should come out with clarification so that the taxpayers are bound to follow and will put an end to litigation.

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