Kerala High Court Declares Rule 96(10) of CGST Rules Ultra Vires: Exporters Entitled to IGST Refunds

"Subordinate Legislation Cannot Override Rights Granted by Parent Statute" – Justice Gopinath P. In an important judgement Kerala High Court declared Rule 96(10) of the Central Goods and Services Tax (CGST) Rules, 2017, ultra vires Section 16 of the Integrated Goods and Services Tax (IGST) Act, 2017. The ruling, in favor of M/s. Sance Laboratories Private Limited and various petitioners, deemed the rule manifestly arbitrary and unconstitutional, quashing all actions based on it from October 23, 2017, to October 8, 2024. This judgment has significant implications for exporters' rights to claim Integrated GST (IGST) refunds.

The petitioners, a group of exporters, challenged Rule 96(10) of the CGST Rules, arguing that it unreasonably restricted their right to claim IGST refunds when they had availed benefits under certain government notifications. The provision, they claimed, effectively denied refunds if even a fraction of inputs was sourced under specific exemptions, contradicting Section 16 of the IGST Act, which promotes zero-rated supply and ensures no tax is exported.

Rule 96(10) restricted refund eligibility for exporters who had availed themselves of benefits under notifications like No. 48/2017-CT and No. 78/2017-Cus, creating a scenario where full refunds could be denied based on minimal procurement. The petitioners contended this rule was not only ultra vires the parent legislation but also violated Article 14 (Right to Equality) by discriminating between exporters under different refund pathways—specifically between those claiming refunds under Rule 89 and Rule 96.

Whether Rule 96(10) was ultra vires Section 16 of the IGST Act.

If the rule unlawfully restricted the statutory rights granted to exporters.

Whether Rule 96(10) was "manifestly arbitrary" under the doctrine outlined in Shayara Bano v. Union of India (2017) 9 SCC 1.

Subordinate Legislation and Legislative Authority: The court emphasized that subordinate legislation must align with its parent statute. Citing precedents such as Union of India v. Intercontinental Consultants and Technocrats (P) Ltd. (2018) 4 SCC 669, the court reiterated that rules imposing conditions beyond what the parent act authorized were invalid. Justice Gopinath P. concluded that Rule 96(10) imposed a disproportionate restriction not supported by Section 16 of the IGST Act, which does not limit the right to claim refunds when integrated tax is paid on exports.

Applying the Shayara Bano standard, the court found that Rule 96(10) created excessive and unreasonable outcomes. The provision unjustly discriminated between exporters opting for different refund mechanisms (Rule 89 vs. Rule 96), leading to unequal treatment without reasonable justification. The ruling noted that this contravened Article 14, rendering the rule unconstitutional.

Justice Gopinath P. highlighted how Rule 96(10) created an anomalous distinction:

Exporters using the "Letter of Undertaking" (LUT) method under Rule 89 could claim refunds of unutilized input tax credit (ITC) without restrictions related to specific notifications.

Conversely, exporters opting for direct IGST payment and claiming refunds under Rule 96 faced full denial of refunds if they had procured any inputs under the specified notifications.

This resulted in a discriminatory outcome that the legislature had not intended, reinforcing the claim of manifest arbitrariness.

The ruling held that although Rule 96(10) was deleted by Notification No. 20/2024-Central Tax, effective from October 8, 2024, the deletion did not address past denials or pending refund claims. Thus, the court declared the rule ultra vires for the period between October 23, 2017, and October 8, 2024, ensuring that actions based on it, including show-cause notices and adjudications, were void.

"Subordinate legislation cannot create restrictions that undermine the substantive rights granted by the parent statute," Justice Gopinath P. observed, adding that any conditions imposed by rules must align with the legislative framework and objectives of the statute.

Rule 96(10) declared ultra vires: The court declared Rule 96(10) of the CGST Rules ultra vires Section 16 of the IGST Act and unenforceable for the period it was in effect.

Quashing of actions: All proceedings based on Rule 96(10) for the period from October 23, 2017, to October 8, 2024, were quashed.

Protection for petitioners: The court ordered that no IGST refunds already made could be recovered based on this rule during the specified timeframe.

Appeal provisions: Exporters affected by orders under Rule 96(10) could file appeals on unrelated issues within two weeks, deemed timely given interim protections.

The Kerala High Court’s ruling reasserts the supremacy of legislative intent and statutory rights over subordinate regulations. It underscores that while fiscal policies can impose reasonable conditions to prevent revenue leakage, such restrictions must not nullify the rights conferred by the parent statute or create undue discrimination.

Date of Decision: October 10, 2024