1. The Gujarat High Court in the case of VKC footsteps India Pvt. Ltd. v. Union Of India, Judgment dated 24.07.2020 has declared Explanation (a) to the Rule 89 (5) of the CGST Rules, which denied the refund of “un-utilized input tax” paid on “input services “ as part of “input tax credit” accumulated on account of inverted duty structure, as ultra vires the provision of Section 54 (3) of the CG ST Act, 2017. The said Explanation (a) to the Rule 89 (5) has been read down to the extent that Explanation (a) which defined “Net input tax credit” to mean “input tax credit” only.

2. A view is being expressed that the judgment of the Gujarat High Court, declaring the parliamentary law unconstitutional, is a binding precedent all over India and all the State Governments, Tribunals and High Courts should follow the same. The author of this article, with due respect, begs to differ from this view for the reasons stated below.

3. Late Dr. B.P. Saraf , Hon’ble Judge of the Bombay High Court, as he then was, had lucidly explained the law of binding precedents in the case of The Commissioner of Income Tax v. Thana Electricity Supply Limited, (1994) 206 ITR 727. The Court’s observations are reproduced below :

   Para 20 –

   1. ‘(a) the law declared by the Supreme Court being binding on all courts in India, the decisions of the Supreme Court are binding on all courts, except, however, the Supreme Court itself which is free to review the same and depart from its earlier opinion if the situation so warrants. What is a binding is, of course, the ratio of the decision and not every expression found therein.

   2. The decisions of the High Court are binding on the subordinate Courts and authorities or Tribunal’s under its superintendence throughout the territories in relation to which it exercises jurisdiction. It does not extend beyond its territorial jurisdiction.

   3. The position in regard to the binding nature of the decisions of a High Court on different Benches of the same court may be summed up as follows:

      1. a single judge of High Court is bound by the decision of another single judge or a Division Bench of the same High Court. It would be judicial impropriety to ignore that decision. Judicial comity demands that a binding decision to which his attention had been drawn should neither be ignored nor overlooked. If he does not find himself in agreement with the same, the proper procedure is to refer the binding decision and direct the papers to be placed before the Chief Justice to enable him to constitute a larger Bench to examine the question (see Food Corporation of India v. Yadav Engineer and Contractor, (1982) 2SCC499;

      2. A Division Bench of a High Court should follow the decision of another Division Bench of equal strength or a full Bench of the same High Court. If one Division Bench differs from another Division Bench of the same High Court, it should refer the case to a larger Bench.

      3. Where there are conflicting decisions of courts of coordinate jurisdiction, the later decision is to be preferred if reached after full consideration of the earlier decisions.

   4. The decision of one High Court is neither binding precedent for another High Court nor for courts or Tribunals outside its own territorial jurisdiction. It is well settled that the decision of a High Court will have the force of binding precedent only in the State or territories on which the court has jurisdiction. In other States or outside the territorial jurisdiction of that High Court it may, at best, have only persuasive effect.

   By no amount of stretching of the doctrine of stare decisis, can judgements of one High Court be given the status of a binding precedent so far as other High Courts or Courts or Tribunals within their territorial jurisdiction are concerned. Any such attempt will go counter to the very doctrine of stare decisis and also the various decisions of the Supreme Court which have interpreted the scope and ambit thereof. The fact that there is only one decision of any one High Court on a particular point or that a number of different High Courts have taken identical views in that regard is not at all relevant for that purpose. Whatsoever maybe the conclusion, the decisions cannot have the force of binding precedent on other High Courts or on any subordinate courts or Tribunals within their jurisdiction. That status is reserved only for the decisions of the Supreme Court which are binding on all courts in the country by virtue of Article 141 of the Constitution.

4. The law of Stare Decisis thus explained in Thana Electricity has not yet been overruled by the Supreme Court or contradicted by any judgment of our own High Court. However, the holders of other view say that the Supreme Court in their lordships’ judgment in Kusum Ingots & Alloys Ltd. v. Union of India (2004) 6 SCC254 in clear terms stated that an order passed on a writ petition questioning the constitutionality of a parliamentary Act, whether interim or final, keeping in view the provisions contained in Article 226 (2) of the Constitution would have effect throughout the territory of India. In other words, a support is being drawn from the judgment of the apex court in Kusum Ingots for the proposition that judgment of the Gujarat High Court in VKC Footsteps declaring the Explanation (a) to Rule 89(5) as ultra vires the Section 54(3) of the CGST Act is binding on State of Maharashtra and also on Bombay High Court.

5. To examine the correctness of this proposition, we will have to see whether the observations of the Supreme Court really convey that the declaration of provision of Union law by one High Court as unconstitutional binds the other High Court. For that purpose, we will have to read para 21 and 22 of the said judgement together:

   ‘21. A parliamentary legislation when it receives the assent of the President of India and is published in the Official Gazette, unless specifically excluded, will apply to the entire territory of India. If passing of legislation gives rise to a cause of action, a writ petition questioning the constitutionality thereof can be filed in any High Court of the country. It is not so done because a cause of action will arise only when the provisions of the Act or some of them which were implemented shall give rise to civil or evil consequences to the petitioner. A writ court, it is well settled, would not determine a constitutional question in a vacuum.

   22. The court must have the requisite territorial jurisdiction. An order passed on a writ petition questioning the constitutionality of a parliamentary Act, whether interim or final keeping in view the provisions contained in clause (2) of Article 226 of the Constitution of India, will have effect throughout the territory of India subject of course to the applicability of the Act.’ (Highlight by us).

6. Thus so read, both the paragraphs only convey that the parliamentary legislation has applicability all over India and consequently the writ petition challenging the constitutionality thereof can be filed in any High Court in India. The High Court in which the petition is so filed must have the requisite territorial jurisdiction and the order passed by it will have effect all over India. However, such effect would be subject to the power granted to the High Court under article 226 (2) of the Constitution of India.

7. Article 226 (1) of the Constitution empowers the High Court to issue directions, orders or writs to any person including government within it’s territorial jurisdiction. Article 226 (2) says that such power can be exercised even if the seat of the government or the residence of the person against whom the writ is issued is not in the territorial jurisdiction of the said High Court. However, the cause of action ( right to sue ) for the exercise of such power should arise within the territorial jurisdiction of such High Court. Article 226 (2) does not say anything further. Neither the observations of the Supreme Court in Kusum Ingots say that the order passed by the High Court has binding effect on the High Courts in other parts of the country nor article 226 (2) of the Constitution can be construed to mean so.

8. Article 141 of the Constitution specifically states that the law declared by the Supreme Court shall be binding on all Courts within the territory of India. If the makers of the Constitution wanted the law declared by any High Court to be binding on other High Courts then they would have provided for the same in similar manner. They have not said so and therefore the judgment of High Court having binding effect on other High Courts is out of question.

9. Even otherwise, these observations of the Supreme Court in Kusum Ingots are neither Ratio decidendi of that judgment nor Obiter dicta. These are only casual observations of the Supreme Court. In Kusum Ingots, the question that arose for consideration before the Supreme Court was whether the seat of the parliament or the legislature of a State would be relevant factor for determining the territorial jurisdiction of High Court to entertain a writ petition under article 226 of the Constitution. In that case, the appellant had a registered office at Mumbai. It obtained a loan from the Bhopal branch of State bank of India. The bank issued a notice for repayment of the said loan from Bhopal purported to be in terms of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Questioning the vires of the said Act, a writ petition was filed before the Delhi High Court by the appellant which was dismissed on the ground of lack of territorial jurisdiction. The only submission made on behalf of the appellant before the High Court as also before the Supreme Court was that as the constitutionality of a parliamentary Act was in question, the High Court of Delhi had the requisite jurisdiction to entertain the writ petition. The Supreme Court held that a writ petition questioning the constitutionality of a parliamentary Act shall not be maintainable in the High Court of Delhi only because the seat of the union of India is in Delhi. It was so held because the Court in that case found that there was no cause of action at Delhi. While delivering the judgment the Court made observations on the effect of an order passed by the High Court on writ petition wherein the constitutionality of the Union law was challenged, however whether such effect is persuasive or binding for other High Courts was never for determination.

10. In fact, the Supreme Court later on in the case of Ambica Industries (2007) 6 SCC 769 observed that the decision of High Court shall be binding only on the authorities which are within it’s jurisdiction and it will only be of persuasive value on the authorities functioning under a different jurisdiction. This decision was also rendered considering Article 226(2) of the Constitution and the location of cause of action, though partial.

11. Hon’ble Bombay High Court in Thana Electricity has reproduced the observations of Justice Chagla C.J. in the case of Mohandas Issardas v. A.N. Sattanathan, AIR 1955 113. The Court in that judgment explained the distinction between Ratio decidendi , Obiter dicta and casual observations in the following manner:

    (Para 31 & 32)

“ an obiter dictum is an expression of opinion on a point which is not necessary for the decision of a case. This very definition draws a clear distinction between a point which is necessary for the determination of the case and a point which is not necessary for the determination of the case. But in both cases points must arise for the determination of the Tribunal. Two questions may arise before a court for its determination. The court may determine both although only one of them may be necessary for the ultimate decision of the case. The question which was necessary for the determination of the case would be the ‘ratio decidendi’ ; the opinion of the Tribunal on the question which was not necessary to decide the case would be only an obit dictum.———

It cannot be suggested that the doctrine of obiter dicta was so far extended as to make the courts bound by any and every expression of opinion either of the Privy Council or of the Supreme Court, whether the question did or did not arise for the determination of the higher judicial authority. –.

12. The observations of the Supreme Court in the case of The Commissioner of Income Tax v. Sun Engineering Works (P) Ltd. (1992) 4 SCC 363 may also be seen: (Para 39)

    ‘It is neither desirable nor permissible to pick out a word or a sentence from the judgement of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgement must be read as a whole and the observations from the judgement had to be considered in the light of the questions which were before this Court. A decision of this Court takes it’s colour from the questions involved in the case in which it is rendered and while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgement, divorced from the context of the questions under consideration by this Court, to support their reasoning. In Madhav Rao Scindia v. Union of India (1971) 1 SCC 85 this Court cautioned :

    ‘it is not proper to regard a word, a clause or a sentence occurring in the judgement of the Supreme Court, divorced from its content as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgement.’

13. The Full Bench of the Bombay High Court in the case of Kamlesh Kumar Ishwardas Patel v. Union of India and Others, W.P. No.284 of 1994 dated 26.08.1994 has explained the law relating to ratio decidendi and Obiter dicta in the following manner :

‘ — what is binding under the provisions of article 141 of the Constitution of India, is the law declared by the Supreme Court. If there is clear enunciation or declaration of law, the same would be binding even though such a declaration of law was not strictly necessary for disposal of the case or the declaration of law is not followed by actual application thereof in the case in question. The law declared as well as applied in a particular decision becomes ratio decidendi of the case while a mere declaration of law, even though solemn and thoroughly reasoned, without application thereof is branded as obiter dictum.’

14. Hon’ble Bombay High Court has followed the above referred Full Bench decision in Kamlesh Kumar in another matter, namely, H.A.D.A. v. P.V. Anturkar, 2009  (3) L.J. and held that the observations of the Supreme Court in the case of Devraju Pillai v. Sellayya Pillai (1987) 1 SCC 61 were only casual observations.

15. As aforesaid, in Kusum Ingots, the question of the judgment of one High Court on the constitutionality of the provision of parliamentary Act, whether has binding effect or persuasive effect was never before the Supreme Court and therefore any observations made by the Court on the effect are neither ratio decidendi nor obiter dicta and are only casual observations having no precedential value.