India: Misutilization of Powers by the Government


published on 30 April 2020 | reading time approx. 5 minutes


While, the Goods and Services Tax (‘GST’) ecosystem is designed to ensure smooth automated compliances and filing process covering inter alia electronic records, e-filing, online payment, submission of forms, letters, etc., one cannot deny the bumpy ride we have had so far with the GST Network.



One of the major talking point for industry at large is powers of Government to frame rules under the GST regime.  Repeatedly the series of petition have been filed before multiple state High Courts on powers to make rules especially surrounding the transitional GSTR TRAN-1 and courts have heard the petitions and decided accordingly.

Recently, an amendment is introduced by way of introduction of Rule 96B in the Central Goods and Services Tax Rules, 2017 (“CGST Rules”) vide Notification No. 16/2020-Central Tax dated 23 March 2020 and this article will be discussing this article will be discussing the validity of the said rules.


Relevant legal provisions which are under consideration

As per Section 2(5) of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”), “export of goods” means taking the goods out of India to a place outside India.

Similarly, IGST Act also defines the term “export of service”.  As per Section 2(6) of the IGST Act the definition of the term “export of service” has multiple conditions which are enlisted below:

  1. The supplier of service is located in India;
  2. The recipient of service is located outside India;
  3. The place of supply of service is outside India;
  4. The payment of such services has been received by the supplier of service in convertible foreign exchange; and
  5. The supplier of service and recipient of service are not merely establishment of distinct person in accordance with Explanation 1 to Section 8 of the IGST Act.


From the bare perusal of the definition of the terms “export of goods” and “export of service”, one of the material difference which is evident is the fact that for supply to qualify as “export of goods”, there is no condition/restriction on the supplier to realize the remittance in convertible foreign exchange which is existing in the definition of the term “supply of service”.

Further, attention is also invited to Section 54 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) which enables refund of GST in various situations including the case of “zero rated of supply of goods or services or both”.  As per Explanation 1 to Section 54 of the CGST Act, the refund includes refund of tax paid on zero rated supply of goods or services or both as well as refund of Input Tax Credit (‘ITC’) as per Section 54(3) of the CGST Act.  Further, the restrictions provided under proviso to Section 54(3) as well as under Section 54(10) does not prescribe the condition for realization of export proceeds in respect of export of goods as a pre-condition for sanction of refund or prescribes any powers to prescribe recovery mechanism if such export proceeds are not realized after sanctioning of the refund claim.

Attention is also invited to Section 16 of the IGST Act which defines the term “zero rated supply” and which means export of goods or services or both or supply to a Special Economic Zone (‘SEZ’) unit or developer.

As per the aforesaid legal provisions, none of the legal provisions under CGST Act/IGST Act stipulates a condition that realization of export proceeds is pre-requisite to qualify any supply as “export of goods”.

Further, it is pertinent to note that powers to grant refund and conditions for availing the benefit prescribed under Section 54 of the CGST Act is a complete code in itself. Further, it is pertinent to note that Chapter X of CGST Rules, as amended from time to time, prescribes procedure for filing refund claim under Section 54 of the CGST Act.  Further, the provisions under Rule 89 to Rule 97 are specifically prescribed as per the powers conferred under Section 54 of the CGST Act.

Having said above, Rule 96B has been introduced in CGST Rules empowering the tax authorities to invoke powers under Section 73 or 74 of the CGST Act to recover the amount of refund sanctioned to the exporter of goods either for unutilized input tax credit or IGST paid on export of goods if the export proceeds have not been realized within the time limits as may be prescribed under Foreign Exchange Management Act, 1999 along with applicable interest under Section 50 of the CGST Act.

Doctrine of Ultra-Vires

The Doctrine of Ultra-Vires is a judge made law and it is result of numerous decisions given by different courts around the globe. The term “Ultra-Vires” is combination of two words Ultra and Vires.  In Latin, “Ultra” means beyond and “Vires” means powers and thus the expression “Ultra-Vires” means “Beyond the Power”.

Accordingly, the delegated legislations have been repeatedly tested with this doctrine of “Ultra-Vires” wherein the powers of Government as entrusted by Constitution of India or Parent Legislation passed by Parliament of India has been tested.  There can be multiple counts on which such delegated legislations can be tested and one of such test is “delegated legislation is ultra-vires the enabling or parent act” which will be discussed in detail in this article.

Application of Doctrine of Ultra-Vires

In the present case, as discussed above, there is an apparent difference in the definition of the term “export of goods” and “export of services”. The definition of term “export of goods” has never contemplated any realization of the export proceeds. Hence, GST paid on export of samples (by file GR waiver) would also be entitled to avail the benefit of refund of IGST paid at the time of export of goods. Accordingly, the refund can be sanctioned under Section 54 of the CGST Act in respect of any export of goods whether in respect of unutilized ITC or IGST paid on export of goods.

However, with the aforesaid introduction of Rule 96B, the authorities surely will dispute to sanction the refund of IGST paid at the time of export as well as will not consider the said value of exports for calculation of “export turnover of goods” while calculating the refund of unutilized ITC.  Further, proceeding may also be initiated in respect of refund claims already sanctioned.

As discussed above, insertion of such rule for recovery of refund sanctioned are beyond the powers vested by the parent legislation and hence would be prone to challenge by the taxpayers.

Reliance in this regard is placed on the decision of Hon’ble Bombay High Court decision in case of Essel Mining & Industries Ltd. [2011 (270) ELT 308 (Bom.)] wherein the Hon’ble High Court had held that additional restrictions imposed by way of issuing circular is bad in law and ultra-vires the parent legislation of Foreign Trade Policy.  Accordingly, the said circular was quashed by Hon’ble High Court.

Similar view was also taken by Hon’ble Bombay High Court in case of Indian National Shipowners Association [2009 (13) STR 235 (Bom.)] wherein levy of service tax under reverse charge mechanism was sought to be introduced by way amending the Service Tax Rules, 1994 whereas powers to create a levy of service tax was only vested with the Parliament of India.  Accordingly, such amendment in rules was held to be ultra-vires and quashed by Hon’ble High Court.  Further, appeal filed by revenue authorities against the order of Hon’ble High Court before Hon’ble Apex Court of India was quashed and reported at [2010 (17) STR J57 (SC)].

In view of the aforesaid judicial precedents, the powers for recovery of refund sanctioned in respect of “export of goods” introduced by of insertion of Rule 96B in CGST Rules, 2017 could be challenged on the grounds that these powers are ultra-vires to the parent legislation and hence may be quashed by Hon’ble Courts. 


In the present case, considering the amendment is already introduced by exposure of litigation risk cannot be ruled out. Therefore, it is advisable that the exporter of goods shall make all the attempts to realize the export proceeds within the time limits as prescribed under FEMA to avoid the probable litigation.

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