2025 (5) TMI 538 - HC - GST

Refund of accumulated Input Tax Credit (ITC) under the inverted duty structure provisions of Section 54(3)(ii) of the Central Goods and Services Tax (CGST) Act 2017 when the input and output supplies are the same goods - Validity and Scope of Circular No. 135/05/2020-GST restricting the refund - HELD THAT - Section 54(3)(ii) of the CGST Act does not proscribe/forbid the grant of refund where the input and the output are the same and that clause (ii) of proviso to sub- section (3) of Section 54 of the CGST Act does not contemplate comparing rate of tax on the principal input with the rate of tax chargeable on the principal output supply; further there is neither any reason nor any scope to further confine the refund of unutilised ITC only to cases where the rate on main input is higher than the rate of tax on the principal output. A perusal of the impugned orders will indicate that respondent has erroneously placed reliance upon Para 3.2 of Circular No. 135/05/2020-GST dated 31.03.2020 though the same has no application in the present case as the said Circular applies only to scenarios/situations where the ITC is accumulated on account of different rates being applicable at different points of time and merely seeks to address an issue where the ITC is accumulated on account of different rates being applicable at different points of time as held in the aforesaid judgments and the impugned orders deserve to be quashed and directions are to be issued to the respondent to refund the amount back to the petitioner. A perusal of the memorandum of petition will indicate that though the petitioner has not challenged the original orders dated 25.01.2022 and 13.04.2022 rejecting the refund claim of the petitioner in the present petition in view of the findings recorded by me hereinbefore that the said orders are illegal arbitrary and contrary to law and facts it is deemed just and appropriate to set aside the said orders as well as the impugned order at Annexure-A dated 28.02.2024 passed by the respondent appellate authority and direct the respondent to grant refund in favour of the petitioner as sought for in their refund applications together with applicable interest within a stipulated timeframe. Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether a registered person is entitled to claim refund of accumulated Input Tax Credit (ITC) under the inverted duty structure provisions of Section 54(3)(ii) of the Central Goods and Services Tax (CGST) Act, 2017, when the input and output supplies are the same goods but attract different GST rates on various inputs.

(b) Whether the Circular No. 135/05/2020-GST dated 31.03.2020, which restricts refund of accumulated ITC in cases where input and output supplies are the same, is applicable and binding in the facts of the present case.

(c) Whether the subsequent Circular No. 173/05/2022-GST dated 06.07.2022, which deleted the restrictive proviso in Circular No. 135/05/2020-GST, applies retrospectively and clarifies the entitlement to refund even where input and output supplies are the same.

(d) Whether the petitioner is entitled to interest on delayed refund under Section 56 of the CGST Act.

(e) The applicability and interpretation of Section 54(3)(ii) of the CGST Act and related judicial precedents regarding refund of unutilised ITC on account of inverted duty structure.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Entitlement to refund of accumulated ITC under inverted duty structure when input and output supplies are the same

Legal Framework and Precedents: Section 54(3)(ii) of the CGST Act allows refund of unutilised ITC where credit has accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies (excluding nil rated or fully exempt supplies). The proviso restricts refund to such cases.

Relevant judicial precedents include the Supreme Court decision in Union of India v. VKC Footsteps India Pvt. Ltd., which held that refund of unutilised ITC is confined to the two categories in clauses (i) and (ii) of the proviso to Section 54(3). The Delhi High Court in Indian Oil Corporation Ltd. vs Commissioner of CGST (2023) clarified that Section 54(3)(ii) does not forbid refund where input and output are the same goods, especially when multiple inputs attract different GST rates.

Court's Interpretation and Reasoning: The Court noted that the petitioner's output supplies such as LPG-Domestic, Bunker Fuel, and Superior Kerosene Oil attract GST at 5%, but inputs include items attracting GST at 5%, 18%, and 28%. The Court emphasized that the term "inputs" in plural in Section 54(3)(ii) indicates refund eligibility when credit accumulates due to higher tax rates on any inputs relative to output supplies.

The Court rejected the Revenue's argument that refund is not permissible because the principal input (bulk LPG) and output (bottled LPG) attract the same GST rate of 5%. The Court held that the presence of other inputs taxed at higher rates justifies refund under the inverted duty structure.

Key Evidence and Findings: The petitioner's detailed tabulation of inputs and their GST rates demonstrated accumulation of ITC due to higher tax rates on inputs like SC valves, safety caps, lubricants, etc., compared to the output supply.

Application of Law to Facts: The Court applied the plain language of Section 54(3)(ii) and held that refund is admissible where ITC accumulates because the aggregate tax on inputs exceeds that on outputs, regardless of whether the principal input and output are the same.

Treatment of Competing Arguments: The Court rejected the Revenue's reliance on the restrictive interpretation that refund is barred if input and output supplies are the same, noting that such interpretation ignores other inputs attracting higher rates and contradicts the legislative intent to avoid cascading tax effects.

Conclusion: The petitioner is entitled to refund of accumulated ITC under Section 54(3)(ii) despite input and output supplies being the same goods.

Issue (b): Applicability and binding nature of Circular No. 135/05/2020-GST dated 31.03.2020

Legal Framework and Precedents: Circular No. 135/05/2020-GST issued under Section 168(1) of the CGST Act provides clarifications for uniform implementation. Paragraph 3.2 initially restricted refund of accumulated ITC where input and output are the same goods, albeit at different GST rates at different times.

However, courts including Delhi High Court and Calcutta High Court in Shivaco Associates have held that such circulars cannot override or curtail statutory provisions and that Circular No. 135/05/2020 is not binding if it conflicts with Section 54(3)(ii).

Court's Interpretation and Reasoning: The Court observed that Circular No. 135/05/2020 was issued for uniformity but cannot derogate from the statutory provisions. The circular's restriction applies only to cases of ITC accumulation due to tax rate changes on the same goods at different times, not to cases where multiple inputs attract different rates simultaneously.

Key Evidence and Findings: The Court noted that the petitioner's case involves multiple inputs with different GST rates at the same time, not accumulation due to rate changes over time.

Application of Law to Facts: The Court held that the circular's restrictive proviso is inapplicable and cannot be used to deny refund where the statute clearly allows it.

Treatment of Competing Arguments: The Revenue's reliance on the circular was rejected as it conflicts with the statutory scheme and judicial precedents.

Conclusion: Circular No. 135/05/2020-GST does not bar the petitioner's refund claim and cannot override Section 54(3)(ii).

Issue (c): Effect of Circular No. 173/05/2022-GST dated 06.07.2022 substituting Para 3.2 of Circular No. 135/05/2020-GST

Legal Framework and Precedents: Circular No. 173/05/2022-GST deleted the restriction in Para 3.2 of Circular No. 135/05/2020, thereby allowing refund of accumulated ITC even where input and output supplies are the same, provided the rate of tax on inputs is higher than on outputs.

Supreme Court precedents such as Suchitra Components Ltd vs CCE and K.P. Varghese vs Income Tax Officers establish that beneficial circulars clarifying law apply retrospectively and bind the Department.

Court's Interpretation and Reasoning: The Court held that the substitution is clarificatory and beneficial and must be applied retrospectively. Therefore, the petitioner's refund claim falls squarely within the amended circular's scope.

Application of Law to Facts: The Court directed the respondent to apply the substituted circular and grant refund accordingly.

Conclusion: Circular No. 173/05/2022-GST applies retrospectively and supports the petitioner's entitlement to refund.

Issue (d): Entitlement to interest on delayed refund under Section 56 of the CGST Act

Legal Framework: Section 56 of the CGST Act mandates payment of interest on delayed refunds beyond 60 days from the date of receipt of a complete refund application.

Court's Interpretation and Reasoning: The Court held that since the refund claims were rejected and delayed, the petitioner is entitled to interest on the refund amount from the expiry of 60 days from the application date.

Precedents: The Court relied on Supreme Court and High Court decisions including Ranbaxy Laboratories Ltd vs UOI, Raghav Ventures vs Commissioner of Delhi GST, and Panaji Engineering P Ltd vs UOI, which affirm automatic entitlement to interest on delayed refunds.

Conclusion: The petitioner is entitled to interest on the refund amount in accordance with Section 56.

Issue (e): Interpretation of Section 54(3)(ii) of the CGST Act in light of multiple inputs and judicial precedents

Legal Framework: Section 54(3)(ii) allows refund where ITC accumulates due to higher tax rates on inputs than outputs. The statute does not restrict refund only to cases where principal input and output differ.

Judicial Precedents: The Delhi High Court in Indian Oil Corporation Ltd. vs Commissioner of CGST and other High Courts (Rajasthan, Calcutta, Gauhati, Kerala, Madras) have consistently held that refund cannot be denied merely because input and output are the same goods if other inputs attract higher tax rates causing ITC accumulation.

Court's Interpretation and Reasoning: The Court emphasized that the legislative intent is to prevent cascading taxes and allow refund of unutilised ITC arising from inverted duty structure, regardless of sameness of principal input and output.

Application of Law to Facts: The petitioner's multiple inputs attracting higher GST rates justify refund under the statute and judicial precedents.

Conclusion: The petitioner's claim for refund under Section 54(3)(ii) is valid and supported by law and precedent.

3. SIGNIFICANT HOLDINGS

The Court held:

"Clause (ii) of proviso to sub-section (3) of Section 54 of the CGST Act does not proscribe the grant of refund where the input and the output are the same. Clause (ii) merely restricts refund of unutilised ITC to cases where credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies."

"Circular No. 135/05/2020-GST dated 31.03.2020, which restricts refund where input and output supplies are the same, applies only to cases of ITC accumulation due to rate changes at different points in time and cannot override the statutory provisions of Section 54(3)(ii)."

"Circular No. 173/05/2022-GST dated 06.07.2022, which deleted the restrictive proviso, is clarificatory and beneficial in nature and applies retrospectively, binding the Department to allow refund in cases where input and output supplies are the same but inputs attract higher tax rates."

"The petitioner is entitled to refund of accumulated ITC on account of inverted duty structure, even when the principal input and output supplies are the same goods, as multiple inputs attract higher GST rates."

"Interest on delayed refund under Section 56 of the CGST Act is automatically payable from the expiry of 60 days from the date of receipt of refund application."

"The impugned orders rejecting refund claims relying on Circular No. 135/05/2020-GST are illegal, arbitrary and contrary to law and are hereby set aside."

"The respondent is directed to process the petitioner's refund applications and pay the refund amount along with applicable interest within a stipulated timeframe."