2025 (7) TMI 914 - HC - GST

Refund of input - refund of the input has been limited to the rate of tax on the principle input namely the crude sunflower oil or not - HELD THAT - The issue has been decided by various Courts including this Court in the case of M/s. Indian Oil Corporation Ltd. Vs. The Assistant Commissioner Of Central Tax 2025 (5) TMI 538 - KARNATAKA HIGH COURT where it was held that It is apparent from the above that the Appellate Authority had accepted that Circular No. 135/05/2020 was applicable in cases where accumulation of ITC was due to reduction in tax. Nonetheless the Appellate Authority was of the view that the petitioner was not entitled to refund by virtue of the last sentence of paragraph 3.2 of the Circular 135/5/2020 which provided that provisions of Clause (ii) of Sub- section (3) of Section 54 was inapplicable where input and output supplies are the same. There is no dispute as regards the applicability of the decision in the Indian Oil Corporation s case to the present matter inasmuch as the legal principle decided by this Court in that matter is equally applicable to the present matter. Petition allowed.

Summary

Issues Presented and Considered

The core legal questions considered by the Court in these matters are:

• Whether the impugned orders passed by the Appellate Authority and Respondents in revision proceedings, which limited the refund of input tax credit (ITC) to the rate applicable on the principal input (crude sunflower oil), are liable to be quashed.
• Whether Circular No. 135/05/2020-GST dated 31.03.2020 issued by the Respondent is ultra vires the CGST/KGST Act and Rules made thereunder and unconstitutional insofar as it restricts the refund of ITC to principal inputs only.
• Whether the petitioner, a manufacturer of refined sunflower oil using multiple inputs, is entitled to refund of ITC on all inputs used in the manufacture, and not restricted to the principal input alone.
• Whether the refund of ITC sanctioned by the respondents was in accordance with the proviso (ii) to Section 54(3) of the KGST Act, 2017 and Rule 89(5) of the KGST Rules, 2017.

Issue-wise Detailed Analysis

Issue 1: Validity and correctness of the impugned orders limiting refund of ITC to principal input

Legal Framework and Precedents: The relevant provisions are Section 54(3) of the KGST Act, 2017 and Rule 89(5) of the KGST Rules, 2017, which govern the refund of ITC. The petitioner relied heavily on the decision in Indian Oil Corporation Ltd. v. Assistant Commissioner of Central Tax, where this Court interpreted Circular No. 135/05/2020-GST and held that the circular applies to cases where ITC accumulation is due to reduction in tax rate, but the refund cannot be denied solely because input and output supplies are the same.

Court's Interpretation and Reasoning: The Court acknowledged that the impugned orders restricted refund of ITC to the rate applicable on the principal input, crude sunflower oil, ignoring other inputs used in manufacture. The Court accepted the petitioner's submission that this approach was inconsistent with the legal principles laid down in Indian Oil Corporation Ltd. The Court noted that the Appellate Authority had misapplied the last sentence of paragraph 3.2 of Circular No. 135/05/2020, which states that Clause (ii) of Sub-section (3) of Section 54 does not apply where input and output supplies are the same. The Court observed that this restriction was not applicable in the petitioner's case since the petitioner uses multiple inputs, not just the principal input.

Key Evidence and Findings: The petitioner manufactures refined sunflower oil using multiple inputs, including pure sunflower oil as the principal input. The refund of ITC was restricted to the tax rate on crude sunflower oil alone, excluding other ingredients. The petitioner contended that such exclusion was unjust and contrary to statutory provisions and Circular No. 135/05/2020.

Application of Law to Facts: The Court applied the legal principle from Indian Oil Corporation Ltd. to the facts, concluding that the petitioner was entitled to refund of ITC on all inputs used in the manufacture, not just the principal input. The Court found that the impugned orders failed to consider this aspect and hence were liable to be quashed.

Treatment of Competing Arguments: The respondents argued that Circular No. 135/05/2020 was binding and that refund should be limited to principal input rates. The Court rejected this narrow interpretation, holding that the circular was not ultra vires but was misapplied by the Appellate Authority. The Court did not find merit in the respondents' contention that the refund should be restricted solely to the principal input.

Conclusions: The impugned orders restricting refund of ITC to principal input alone were quashed. The petitioner is entitled to refund on all inputs used in manufacture, consistent with the statutory provisions and the Court's earlier decision in Indian Oil Corporation Ltd.

Issue 2: Validity and constitutionality of Circular No. 135/05/2020-GST

Legal Framework and Precedents: Circular No. 135/05/2020-GST dated 31.03.2020 was issued under the CGST/KGST Act and Rules to clarify refund of ITC where accumulation is due to reduction in tax rate. The petitioner challenged the circular as ultra vires and unconstitutional.

Court's Interpretation and Reasoning: The Court examined the circular in light of the statutory provisions and found no basis to declare it ultra vires or unconstitutional. The Court accepted that the circular was applicable and binding but clarified that its provisions were to be correctly interpreted and applied. The Court emphasized that the circular did not intend to exclude refund on inputs other than the principal input when multiple inputs are used in manufacture.

Key Evidence and Findings: The circular was issued to address specific issues relating to ITC accumulation and refund. The petitioner's grievance was with the manner of its application rather than the circular's validity.

Application of Law to Facts: The Court held that the circular was valid and constitutional but had been misapplied by the Appellate Authority in the impugned orders. The circular's restriction on refund where input and output supplies are the same did not apply to the petitioner's case.

Treatment of Competing Arguments: The petitioner argued the circular was ultra vires; the respondents defended its validity. The Court sided with the respondents on validity but agreed with the petitioner on its misapplication.

Conclusions: Circular No. 135/05/2020-GST is valid and constitutional. However, its provisions must be interpreted correctly, and it cannot be used to deny refund of ITC on inputs other than the principal input when multiple inputs are involved.

Issue 3: Entitlement to refund of ITC on all inputs used in manufacture

Legal Framework and Precedents: Section 54(3) of KGST Act and Rule 89(5) of KGST Rules provide for refund of ITC where accumulation occurs due to reduction in tax rate. The principle laid down in Indian Oil Corporation Ltd. case supports refund entitlement on all inputs used in manufacture.

Court's Interpretation and Reasoning: The Court recognized that the petitioner's manufacture process involves multiple inputs, and restricting refund to principal input alone is contrary to the legislative intent and statutory provisions. The Court reinforced that the petitioner is entitled to refund on all inputs used in manufacture.

Key Evidence and Findings: The petitioner demonstrated that other inputs besides crude sunflower oil are used in manufacture and are eligible for ITC refund.

Application of Law to Facts: The Court applied the statutory provisions and precedent to hold that the petitioner's refund claim on all inputs is valid.

Treatment of Competing Arguments: Respondents argued for limiting refund to principal input; the Court rejected this narrow view.

Conclusions: The petitioner is entitled to refund of ITC on all inputs used in manufacture, not restricted to principal input alone.

Issue 4: Validity of refund sanctioned and quashing of impugned revision orders

Legal Framework and Precedents: The refund sanctioned by Respondent No. 2 was challenged by Respondent No. 1 in revision proceedings, leading to impugned orders. The Court considered the validity of these orders in light of statutory provisions and precedent.

Court's Interpretation and Reasoning: The Court found that the impugned revision orders were not sustainable as they contradicted the legal position established by the Court and statutory provisions. The Court quashed the revision orders dated 29.04.2024 and 16.07.2024.

Key Evidence and Findings: The refund was already sanctioned as per proviso (ii) to Section 54(3) and Rule 89(5). The revision orders attempted to curtail this refund unjustifiably.

Application of Law to Facts: The Court held that since the refund was sanctioned correctly, the revision orders were liable to be quashed.

Treatment of Competing Arguments: The respondents sought to uphold the revision orders restricting refund; the Court rejected this.

Conclusions: The impugned revision orders are quashed, and the refund sanctioned stands confirmed.

Significant Holdings

"It is apparent from the above that the Appellate Authority had accepted that Circular No. 135/05/2020 was applicable in cases where accumulation of ITC was due to reduction in tax. Nonetheless, the Appellate Authority was of the view that the petitioner was not entitled to refund by virtue of the last sentence of paragraph 3.2 of the Circular 135/5/2020, which provided that provisions of Clause (ii) of Sub- section (3) of Section 54 was inapplicable, where input and output supplies are the same."

The Court held that the above interpretation was incorrect and that the petitioner was entitled to refund of ITC on all inputs used in manufacture, not limited to the principal input alone.

The Court quashed the impugned orders in revision and upheld the validity of Circular No. 135/05/2020-GST, clarifying its correct application.

The Court confirmed that the refund sanctioned under proviso (ii) to Section 54(3) of the KGST Act and Rule 89(5) of the KGST Rules was lawful and refused to interfere with the refund already granted.

Finally, the Court disposed of all connected writ petitions in view of the above findings.