The appeals arose from conflicting judgments of the Gujarat High Court and the Madras High Court on the validity of Rule 89(5) of the Central Goods and Services Tax Rules, 2017 (CGST Rules). The Gujarat High Court, in VKC Footsteps India Pvt. Ltd. v. Union of India, held that the restriction of refund of unutilised input tax credit (ITC) only to input goods under Section 54(3) of the CGST Act, 2017 was unconstitutional, whereas the Madras High Court, in Tvl. Transtonnelstroy Afcons Joint Venture v. Union of India upheld the validity of the rule. The dispute centered on whether ITC accumulated due to an inverted duty structure could include tax paid on both input goods and input services.

The Supreme Court upheld the decision of the Madras High Court and set aside the Gujarat High Court’s ruling. It held that the proviso to Section 54(3) of the CGST Act expressly restricts refunds to unutilised ITC accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies, thereby excluding input services. The Court ruled that refund is a statutory right, not a constitutional entitlement, and must be governed strictly by the provisions of the statute. Consequently, Rule 89(5) of the CGST Rules, which limits refund to credit accumulated on input goods, was held to be valid and not ultra vires Section 54(3). The appeals filed by the Union of India were allowed, and the writ petitions were dismissed.