Nahar Industrial Enterprises Limited Vs Union of India (Rajasthan High Court)
The Nahar Industrial Enterprises Limited vs. Union of India case, heard in the Rajasthan High Court, sheds light on the complexities of Goods and Services Tax (GST) refund claims in cases involving multiple inputs and outputs. This case underscores the significance of adhering to the statutory provisions and objectives of GST refunds in such scenarios.
1. Nature of the Petitioner’s Business: Nahar Industrial Enterprises Limited is engaged in the manufacture of various types of yarn, including cotton yarn, cotton blended yarn, polyester/viscose yarn, and polyester/viscose blended yarn. These products have different GST rates, ranging from 0.1% to 12%. The petitioner uses various raw materials and inputs, each attracting different GST rates, ranging from 5% to 28%.
2. GST Rates on Inputs and Outputs: The case involves a detailed analysis of GST rates applied to both inputs and output supplies. For instance, cotton yarn and cotton blended yarn have a GST rate of 5%, while other inputs like packing material, store consumables, and spares have rates ranging from 12% to 28%. The situation becomes even more complex when dealing with polyester/viscose blended yarn and polyester/viscose yarn, where multiple inputs with varying GST rates are used to produce output supplies.
3. Statutory Provisions and Legislative Intent: The case closely examines Section 54(3) of the Central Goods and Services Tax Act, 2017 (CGST Act). This section deals with the refund of unutilized input tax credit (ITC) and focuses on the concept of an “inverted duty structure.” The court emphasizes the legislative intent and purpose of this provision, which is to refund accumulated ITC when the rate of tax on inputs is higher than the rate on output supplies.
4. Strict Interpretation of Taxing Statutes: The court relies on the principle of strict interpretation of taxing statutes, emphasizing the need to adhere to the clear and unambiguous language used in the law. The use of plural words like “inputs” and “output supplies” in the statute highlights that the provision applies to scenarios involving multiple inputs and outputs.
5. Key Legal Precedents: The court refers to important legal precedents, including the case of Union of India & Others vs. VKC Footsteps India Private Limited, to establish that the scheme of refund based on an inverted duty structure applies regardless of the number of inputs and output supplies involved. The central criteria are whether the rate of tax on inputs exceeds the rate on output supplies, which holds true in this case.
6. Applying Rule 89(5) of CGST Rules, 2017: The court clarifies that the computation of the refund amount is determined by Rule 89(5) of the Central Goods and Services Tax Rules, 2017. This rule provides a formula for calculating the maximum limit of the refund based on the statutory parameters, and the refund claim should adhere to this formula.
7. Conclusion: The Rajasthan High Court’s decision in the Nahar Industrial Enterprises Limited vs. Union of India case reinforces the principle that GST refunds should not be denied solely due to the presence of multiple inputs and outputs with varying GST rates. The court upholds the strict interpretation of the law, emphasizing that the legislative intent is to refund accumulated input tax credit when the rate of tax on inputs is higher than the rate on output supplies.
The judgment highlights the importance of statutory provisions and the need to follow the rule of law in GST refund claims. This case sets a precedent for similar situations in the future, ensuring that taxpayers are not unfairly denied their rightful refunds when an inverted duty structure exists.
FULL TEXT OF THE JUDGMENT/ORDER OF RAJASTHAN HIGH COURT
1. As the common issue of law arises for consideration in these petitions, this common order shall govern disposal of these writ petitions filed by one and the same petitioner with reference to different tax periods ventilating its grievance on account of rejection of its claim for refund of unutilised input tax credit. For brevity and convenience, the facts stated in D. B. Civil Writ Petition No. 8476/2021 are being referred to.
2. The petitioner, a public limited company, seeks to assail orders dated 06.10.2020 and 11.05.2021 passed by Respondent No. 3, Additional Commissioner (Appeals), Central Goods and Services Tax, Jaipur, whereby, petitioner’s appeals, against the orders rejecting its claim for refund, have been disposed off.
3. Facts of the case:
Quint essential facts necessary for adjudication of controversy involved in these writ petitions are in narrow encompass and stated infra:
3.1 The petitioner-company is engaged in manufacturing of textiles and its operation thereof ranging from spinning, weaving and processing. It is registered under the provisions of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as ‘the CGST Act, 2017’). In the process of manufacturing, the petitioner uses various raw materials. Rate of goods and services tax (hereinafter referred to as ‘GST’) on inputs varies from 5% to 28%. The raw materials used are cotton, manmade fibre and other inputs. The output/manufactured products are cotton yarn, cotton blended yarn, polyester/viscose yarn, polyester/viscose blended yarn. The rate of GST on outputs ranges from 0.1% to 12%. According to the petitioner, as the rates of GST on inputs was higher than the rates of GST on outputs, it is entitled to claim refund of unutilised credit at the end of relevant tax period, it being a case of inverted duty structure, under the statutory scheme of Section 54, sub-section (3) of the CGST Act, 2017.
3.2 For the relevant year in question, i.e. January, 2020 to March, 2020, the petitioner filed refund application under Section 54(3) of the CGST Act, 2017, to the tune of Rs. 1,31,39,059/- in respect of the unutilised input tax credit accumulated on account of inverted tax structure. According to the petitioner, application was filed on the GSTN portal of the petitioner in the form and manner prescribed under Rule 89 of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as ‘the CGST Rules, 2017’).
3.3 A show cause notice was issued proposing rejection of claim for refund on the statement that the petitioner’s case does not fall under the category of “inverted duty structure”. Vide order dated 24.08.2020, the adjudication proceedings eventually culminated in rejection of petitioner’s claim for refund on the ground that the petitioner’s case does not fall in the category of inverted duty structure.
3.4 Feeling aggrieved, the petitioner preferred separate appeals against rejection of claim for refund for different tax periods before the Commissioner (Appeals), Central Excise and CGST, Jaipur (hereinafter referred to as ‘the Appellate Authority’). Those appeals came to be disposed off by the learned Appellate Authority vide two common orders dated 06.10.2020 and 11.05.2021, affirming the findings recorded by the Adjudicating Authority that the petitioner’s case does not fall in the category of inverted duty structure and it is not entitled to refund of unutilised ITC through invocation of the provisions contained in Section 54(3) of the CGST Act, 2017.
3.5 Though Section 112 of the CGST Act, 2017 provides for further appeal before Goods and Service Tax Appellate Tribunal (GSTAT), there being no Appellate Tribunal in existence, rejection of petitioner’s claim by the Adjudicating Authority and its affirmation by the Appellate Authority is under challenge in these writ petitions.
4. Submissions on behalf of the petitioner:
4.1 Learned counsel appearing on behalf of the petitioner contended that the impugned order of rejection of its claim for refund of unutilised input tax credit is illegal and based on complete misinterpretation and misconstruction of not only against the letter, but also the spirit of the statutory scheme of refund engrafted under Section 54, sub-section(3) of the CGST Act, 2017. According to him, the scheme of refund under Section 54(3) of the CGST Act, 2017 is attracted where the credit, as input tax credit, has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. This gives rise to a situation of inverted duty structure during a particular tax period and, therefore, the credit accumulated due to inverted duty structure entitled the petitioner to claim refund as per the mechanism of refund specified under Rule 89 of the CGST Rules, 2017 through application of a specified formula applied for relevant tax period.
4.2 Further submission is that there being no dispute that packing material, consumables, spares etc. used as raw material are qualified as input in terms of provisions contained in Section 16 of the CGST Act, 2017 read with definition of “input” under Section 2(59) of the CGST Act, 2017, petitioner’s claim for refund was required to be considered by applying the principle that Section 54(3) of the CGST Act, 2017 and Rule 89(5) of the CGST Rules, 2017 do not stipulate one-to-one correlation between all inputs or outputs. Referring to the formula specified under Rule 89(5) of the CGST Rules, 2017, it is contended that net ITC claimed during the claim period is to be considered relating to all inputs. Further contention is that since ITC and adjusted total turnover is taken GSTIN wise, therefore, the inverted rated supplies will also be taken GSTIN wise, i.e., turnover of all input supplies which are taxed at a rate lower than the rate of tax on inputs.
It is also argued that in case of multi taxable output supplies, the scheme of Section 54(3) of the CGST Act, 2017 read with Rule 89(5) of the CGST Rules, 2017 requires a rational construction implying a workable formula that the determination of inverted duty supplies will be done by comparing the average rate of duty of inputs with the rate of duty of outputs and when the formula is logically interpreted, the same envisages consideration of all inputs and all outputs.
4.3 Next submission of learned counsel for the petitioner is that denominator “Adjusted Total Turnover” as contained in under Rule 89 of the CGST Rules, 2017, expressly provides for inclusion of all products quantified under the expression “sum total of the value of”. Thus, it is contended, law provides for refund calculation GSTIN wise and not productwise.
4.4 The formula as specified in Rule 89(5) of the CGST Rules, 2017 envisages that the output liability on all inverted rated supplies is deducted from the input tax credit apportioned to such inverted rated supplies and when such ITC is more than the output liability, refund amount will be positive and would give rise to a claim for refund.
It is also contended that GSTN portal, which itself only allows filing of refund application GSTIN wise and the portal only allows the claimant to file a refund application for one tax period only once, it is neither permissible, nor possible to claim refund by filing multiple refund applications product wise for the same tax period.
It is further contended that ground of rejection is not referable to any of the provisions of the law. It is based only on the consideration that the output sales is to the extent of 80% of goods having 5% duty only and input too is majorly of 5% rate. Hence, the rate being more or less the same, it is not a case of inverted duty structure, which consideration is not permissible while examining as to whether it is a case of inverted duty structure. The submission is that 100% cotton goods are only 50% of the total goods and the rest is cotton dominated blends for which other inputs have rates of 18% whereas output rate is 5%. Further, rest of the outputs are synthetic dominated blends and 100% polyester/viscose for which inputs bear rate of 12%, 18% and 28%. Legal submission is that the law does not recognise the words, “more or less”. Even if overall rate of all inputs is marginally higher than the rate of output, credit accumulations would entitle refund under “inverted rated structure” as provided under Section 54(3) of the CGST Act, 2017.
4.5 Further submission is that other ground of rejection is that refund is mainly due to high input purchases and they are in stock during the claim period is again not referable to the scheme of Section 54(3) of the CGST Act, 2017 or the formula under Rule 89(5) of the CGST Rules, 2017 as it does not talk of stock, but only refers to output turnover (adjusted turnover) during the claim period. Rule 89(5) of the CGST Rules, 2017 envisages that total ITC claim of inputs during the claim period gets consumed in respect of the turnover of the claim. In other words, if refund is sanctioned, ITC claimed for the relevant period cannot be carried forward to the subsequent periods. The usages finishes in a particular claim period only. Even if tax period is taken as one year, there is accumulation of credit, thus, nullifying stock impact and refund accrues by application of formula envisaged in Rule 89(5) of the CGST Rules, 2017.
Further contention is that determining factor for applicability of Section 54(3) of the CGST Act, 2017 read with Rule 89(5) of the CGST Rules, 2017 is rate of tax and quantum of ITC content and not value/quantum of individual inputs (going into an output) and the outputs.
4.6 The third ground of rejection of petitioner’s claim for refund is Circular No. 125/44/2019-GST dated 25.11.2019 which is not applicable to the present case as it only pertains to one product and many inputs whereas present being a case of many inputs and many outputs, is also not based on correct understanding and import of the aforesaid circular. In any case, that was not a ground for rejection of the claim of the petitioner by the Adjudicating Authority. Therefore, the affirmation of rejection of the claim of the petitioner by the Appellate Authority on such ground was not available.
4.7 Further submission is that reference to table presented by the department to buttress the submission that there is no accumulation in two quarters in the financial year 2019-20 was not the basis for the order passed by the Commissioner (Appeals). There is no challenge to the computation of inverted rated supplies but the claim is denied on the ground that present is not a case of inverted duty structure. Computation of accumulated credit on account of inverted rated supplies has to be only in accordance with the provisions contained in Section 54 of the CGST Act, 2017 by applying the formula prescribed in Rule 89 of the CGST Rules, 2017 and not otherwise. Deduction of total output liability from total ITC (as contained in the chart) is not the correct way of arriving at the refund amount. The formula envisages that the ITC gets apportioned on the basis of the turnover, i.e., it gets allocated to inverted duty supplies and to supplies other than inverted. Assuming, though not admitting, that the method used by the department is correct, there is accumulation in various periods. Referring to the language narrated in Section 54 of the CGST Act, 2017, it is contended that the term “output supplies” has been used in plural form which is indicative of legislative intention that all output supplies are to be included for ascertaining inversion and not just one output. Rejection of claim of the petitioner is based on misinterpretation of the words, “output supplies” as only output whereas the definition as well as the formula prescribed under Rule 89(5) of the CGST Rules, 2017 will only include supplies where the rate of tax on output is lower than rate of tax on inputs.
5. Submissions on behalf of the respondents:
5.1 Referring to the pleadings in the reply, learned counsel for the respondents would submit that the petitioner’s claim for refund was scrutinised and after due application of mind to various grounds and the facts obtaining on record as also taking into consideration the spirit of provisions with regard to refund based on inverted duty structure, the Adjudicating Authority rejected the claim. The Appellate Authority affirmed the order of the Adjudicating Authority after detailed consideration of the contentions and having found that the refund claim filed by the petitioner-taxpayer was not fit to be categorised under inverted duty structure and claim of the petitioner was rejected. The authorities, i.e., Adjudicating Authority and the Appellate Authority both found that inputs and outputs both were attracting same rate of GST of 5%, 12% and 18%.
5.2 Further submission of learned counsel for the respondents is that under Section 54(3) of the CGST Act, 2017, a registered person may claim refund of any unutilised input tax credit at the end of any tax period meaning thereby that refund of unutilised input tax credit shall be allowed only in cases where credit has accumulated on account of rate of tax of inputs being higher than the rate of tax of output supplies. Therefore, it is contended, in order that a claim for refund is allowed under inverted duty structure, it is not only required to be established that rate of tax on inputs is higher than the rate of tax on output supplies, but also that the credit has accumulated on that count only. He would further submit that refund is allowable only by application of the formula specified in Rule 89(5) of the CGST Rules, 2017. In the present case, rate of tax of inputs was found to be more or less 5%, 12% and 18% whereas the tax rate on output supply was also 5%, 12% and 18%. ITC availed on the inputs procured at the rate of 28% GST was very negligible. Taking into consideration these peculiar facts obtaining on record, the Adjudicating Authority as well as the Appellate Authority were of the view that tax rate on the inputs and outputs are more or less the same and thus, the petitioner does not qualify for refund and, therefore, present is not a case covered under inverted duty structure. As the authorities were of the opinion that inverted duty structure scenario is not present, there was no occasion to apply the formula mentioned in Rule 89(5) of the CGST Rules, 2017.
5.3 Learned counsel for the respondents also places reliance upon the clarificatory circulars issued by the Central Government on 31.12.2018 and 18.11.2019 wherein it has been clarified that the refund of unutilised ITC in case of inverted duty structure, as provided in Section 54(3) of the CGST Act, 2017, is available only where ITC remains unutilised even after setting off of available ITC for payment of output tax liability. He would further submit that the petitioner, having availed input tax credit for the particular tax period, utilised the same for payment of output tax liability and, therefore, there was, in fact, no accumulation of tax as claimed by the petitioner. Relying upon clarificatory circular dated 18.11.2019, it is submitted that no refund is available in respect of unutilised transitional credit which is of earlier tax regime (TRAN-1). A chart has been annexed with the written submissions to demonstrate that there was no accumulation of ITC. The authorities found that the petitioner was engaged in the manufacturing of cotton yarn, cotton blended yarn, polyester/viscose yarn, polyester/viscose blended yarn and the major inputs of the taxpayer was cotton, manmade fibre which constituted 75% to 85% of total inputs of taxable value received during the relevant period at the rate of 5% GST whereas during the relevant period more than 75% of the total output supply of the taxpayer is 100% cotton yarn and cotton blended yarn (consisting of more than 50% cotton) which attracts rate of 5% GST. Thus, the inward supply and outward supply was found to be equal and at par, i.e., at the rate of 5% GST. The accumulation during the relevant tax period was mainly because the petitioner during the relevant period procured more inputs and affected less output supplies. Therefore, it is contended, the accumulation was not due to rate of tax of inputs being higher than the rate of tax on output supplies. In such a situation, Section 54(3) of the CGST Act, 2017 is not attracted as there is no accumulation on account of input tax rates being higher than the output supply tax rates. Learned counsel would further submit that Circular dated 31.12.2018 is not applicable because the said circular deals with those cases where output supplies attract the single rate of GST and multiple inputs are used attracting different rates of GST. As in the present case, there are multiple output supplies attracting different rate of GST (5%, 12% and 18%) and multiple input supplies attracting same rate of GST (5%, 12% and 18%), the petitioner is not entitled to refund by relying upon Circular dated 31.12.2018. Relying upon the decision of the Hon’ble Supreme Court in the case of Union of India & Others Vs. VKC Footsteps India Private Limited (2022) 2 SCC 603, it is submitted that stipulation in the first proviso to Section 54(3) of the CGST Act, 2017, namely, “no refund shall be allowed”, and “in cases other than”, operate as limitation on the expression “claim” used in substantive part of Section 54(3) of the CGST Act, 2017. Therefore, the provision is couched in negative language which manifests intention of the legislature to confine refund only to two specific situations as stipulated in sub-clause (i) and (ii) of first proviso to Section 54(3) of the CGST Act, 2017. He would further submit that refund, not being a fundamental right or constitutional right, cannot be claimed de hors the statutory scheme.
6. Statutory provisions:
6.1 Section 54 of the CGST Act, 2017 provides for refund of tax. Under sub-section (1) of Section 54 of the CGST Act, 2017, a person claiming refund of “any tax and interest”, if any, paid on such tax or any other amount paid, is required to make an application within a period of two years of the relevant date. Further, Section 54(3) of the CGST Act, 2017 provides for a claim of refund of unutilised ITC. The provision contained in sub-sections (1), (2) and (3) of Section 54 of the CGST Act, 2017, being relevant for adjudication of controversy involved in these petitions, is extract below:
“54. Refund of tax
(1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed:
PROVIDED that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49, may claim such refund in [such from and] manner as may be prescribed.
(2) A specialised agency of the United Nations Organisation or any Multilateral Financial Institution and Organisation notified under the United Nations (Privileges and Immunities) Act, 1947 (46 of 1947), Consulate or Embassy of foreign countries or any other person or class of persons, as notified under section 55, entitled to a refund of tax paid by it on inward supplies of goods or services or both, may make an application for such refund, in such form and manner as may be prescribed, before the expiry of [two years] from the last day of the quarter in which such supply was received.
(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:
PROVIDED that no refund of unutilised input tax credit shall be allowed in cases other than–
(i) zero-rated supplies made without payment of tax;
(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:
PROVIDED FURTHER that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:
PROVIDED ALSO that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.
(4) XXXXXX
(5) XXXXXX
(6) XXXXXX”
6.2 Rule 89 of the CGST Rules, 2017 contains detailed provisions with regard to application for refund of tax, interest, penalty, fees or any other amount. Rule 89(5) of the CGST Rules, 2017 specifically deals with refund on account of inverted duty structure by providing a specific formula which, for ready reference, is extracted as below:
“89. Application for refund of tax, interest, penalty, fees or any other amount
(1) xxxxxx
(2) xxxxxx
(3) xxxxxx
(4) xxxxxx
(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:-
Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} – [{tax payable on such inverted rated supply of goods and services x (Net ITC ÷ ITC availed on inputs and input services)}].
Explanation: For the purposes of this sub-rule, the expression-
(a) Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rule (4A) or (4B) or both; and
[(b) “Adjusted Total turnover” and “relevant period” shall have the same meaning as assigned to them in sub-rule (4).]]]”
6.3 Thus, under the statutory scheme of the CGST Act, 2017 and CGST Rules, 2017, claim of refund of any unutilised input tax credit at the end of any tax period can be allowed subject to fulfillment of statutory limitations and in accordance with the formula as provided in Rule 89(5) of the CGST Rules, 2017.
6.4 The statutory scheme of refund of tax under Section 54(3) of the CGST Act, 2017 came up for consideration before the Hon’ble Supreme Court in its authoritative pronouncement in the case of Union of India & Others Vs. VKC Footsteps India Private Limited (supra). The divergence between the views of two High Courts in the matter of challenge to constitutional validity of Rule 89(5) of the CGST Rules, 2017 on the ground that it is ultra vires Section 54, sub-section (3)(ii) of the CGST Act, 2017 formed subject matter of consideration of the Hon’ble Supreme Court. The background which led to enactment of Section 54(3) of the CGST Act, 2017 providing for refund of accumulated credit due to inverted duty structure was noted by the Hon’ble Supreme Court as below:
“2. While envisaging a refund in the latter of the above two situations, Parliament was cognizant of the fact that ITC may accumulate due to a variety of reasons. However, Parliament envisaged a specific situation where the credit has accumulated due to an inverted duty structure, that is where the accumulation of ITC is because the rate of tax on inputs is higher than the rate of tax on output supplies. Taking legislative note of this situation, a provision for refund has been provided for in Section 54(3). The Central Goods and Services Tax Rules 2017 (“the CGST Rules”) have been formulated in pursuance of the rule-making power conferred by Section 164 of the CGST Act. Rule 89(5) provides a formula for the refund of ITC, in “a case of refund on account of inverted duty structure”. The said formula uses the term “net ITC”. In defining the expression “net ITC”, Rule 89(5) speaks of “input tax credit availed on inputs.”
After having dealt with the constitutional scheme of GST and adverting to some of the key definitions contained in the CGST Act, 2017 defining “goods”, “services”, “input”, “input service”, “input tax”, “input tax credit”, “output tax” and “outward supply” as also the provisions contained in Section 16 and 49 of the CGST Act, 2017 providing for eligibility and conditions for taking ITC, legal position was analysed as below:
“73. The provisions of Section 16 and Section 49 indicate the following position:
73.1. The ITC in the electronic credit ledger may be availed of for making any payment towards output tax under the CGST Act or under the IGST Act.
73.2. The amount available in the electronic cash ledger may be used for making any payment towards tax, interest, penalty, fees or any other amount payable under the CGST Act or its Rules.
73.3. The balance in the electronic cash ledger or electronic credit ledger after the payment of tax, interest, penalty, fees or any other amount payable under the Act or Rules may be refunded in accordance with the provisions of Section 54.
73.4. Sub-section (6) of Section 49, in other words contemplates a refund of the balance which remains in the electronic cash ledger or electronic credit ledger in the manner stipulated by the provisions of Section 54.”
The Hon’ble Supreme Court analysed and interpreted Section 54(3) of the CGST Act, 2017 as below:
“76. The crux of the dispute in the present case pertains to how sub-section (3) to Section 54 and Explanation 1 to sub-section (1) of Section 54 are to be understood and interpreted. For convenience of analysis, the interpretation of sub-section (3) of Section 54 can be distributed in its main tier and the three provisos. The main part of sub-section (3) provides that a registered person may claim refund of any unutilised ITC at the end of any tax period. Tax period is defined in Section 2(106) as the period for which the return is required to be furnished. While enacting Section 54(3), Parliament has envisaged a claim for the refund of unutilised ITC by a registered person at the end of the tax period. The first tier is the main provision of Section 54(3) which lays down four conditions:
(i) A claim of refund;
(ii) By a registered tax person;
(iii)Of any unutilised ITC; and
(iv) At the end of any tax period, subject to the provisions of sub-section (10).
77. The second tier is the first proviso. The first proviso begins with the expression “no refund of unutilised ITC shall be allowed in cases other than” which is followed by clauses (i) and (ii). The opening line of the first proviso contains two expressions of significance, namely, “no refund shall be allowed” and “in cases other than”. The expression “allowed” in the proviso must be contrasted with the expression “claim” in the substantive part of subsection (3). A refund can be allowed only in the eventualities envisaged in clauses (i) and (ii). The expression “other than” operates as a limitation or restriction.
78. The third tier of sub-section 54(3) consists of the two clauses of the first proviso which deal with two distinct cases: clause (i) deals with zero-rated supplies made without payment of tax, while clause (ii) deals with credit which has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. Proviso (ii) embodies the concept of an inverted duty structure. Proviso (ii) states that the refund of unutilised ITC shall be allowed only when the credit has accumulated because the rate of tax of inputs is higher than the rate of tax on output supplies. Input, as we have already noted, is defined in Section 2(59) to mean goods other than the capital goods. “Output supplies” is not defined in the statute. As seen above, Section 16 stipulates the eligibility and conditions for availing ITC. ITC accumulates when the credit cannot be utilised either partly or in whole and this may occur for a variety of reasons. The credit of ITC may accumulate for several reasons. Without spelling out an exhaustive list of circumstances, the accumulation may be due to: (a) an inverted duty structure when the GST on output supplies is less than the GST on inputs; (b) stock accumulation; (c) capital goods; and (d) partial reverse mechanism for certain services. There could be other reasons as well, such as excessive discounts or predatory pricing.”
The legislative intent behind enacting clause (ii) of the first proviso to Section 54(3) of the CGST Act, 2017 was noted by the Hon’ble Supreme Court as below:
“82. While enacting clause (ii) of the first proviso to Section 54(3) in the CGST Act, Parliament, took legislative notice of a specific eventuality, namely, “where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies”. Parliament would be cognizant of the fact that ITC may accumulate for a variety of reasons, of which an inverted duty structure is one situation. Parliament was legislating to provide for a refund and therefore restricted it to the two situations spelt out in clauses (i) and (ii) of the first proviso. The opening words of the substantive part of Section 54(3) contemplate a claim of refund of “any unutilised input tax credit”. Undoubtedly, any unutilised ITC would include credit on account of tax charged on any supply of goods or services or both. The opening sentence of Section 54(3) provides for (i) a claim of refund by a registered person; (ii) of any unutilised input tax credit; (iii) at the end of any tax period. But the impact of the first proviso, as its opening words indicate, is that:
82.1. “No refund” of unutilised ITC “shall be allowed” “in cases other than” (i) and (ii).
82.2. The expression “claim” in the substantive part must be distinguished from the phrase “shall be allowed” in the opening sentence of the first proviso. Likewise, the expression “may claim refund” in the opening part must be distinguished from “no refund” in the opening part of the first proviso.
82.3. The impact of the first proviso is that a refund of unutilised ITC shall be allowed only in cases falling under (i) and (ii). The expression “only” in the previous sentence is not a judicial addition to statutory language but follows plainly from the expressions “no refund” of unutilised ITC shall be allowed “in cases other than”.
82.4. The expression “in cases other than” is a clear indicator that clauses (i) and (ii) are restrictive and not conditions of eligibility. A refund, in other words, can be allowed in the two contingencies spelt out in clauses (i) and (ii) of the first proviso.
82.5. There is a clear distinction between clause (i) and clause (ii) of the first proviso: (a) in the case of exports, the contingency is zero-rated supplies without any distinction between input goods or input services; (b) in contrast for domestic supplies, clause (ii) relates to the accumulation of credit on account of rate of tax on inputs being higher than the rate of tax on output supplies.
82.6. The legislative draftsperson has made a clear distinction between clause (i) and clause (ii) of the first proviso and it was in this context that the opening words of Section 54(3) have used the expression “may claim refund of any unutilised ITC”.
82.7. Explanation 1 to Section 54, while defining the expression “refund” for the purposes of the section adopts an inclusive definition covering (a) refund of tax paid on zero-rated supplies of goods or services or both; (b)
82.8. Explanation 1 indicates that with reference to exports, the legislature has brought within its fold ITC on input goods and input services. In contrast, in the case of domestic supplies it has contemplated refund of unutilised ITC “as provided under sub-section(3)”. The Explanation is a clear indicator that in respect of domestic supplies, it is only unutilised credit which has accumulated on the rate of tax on input goods being higher than the rate of output supplies of which a refund can be allowed. Clause (ii) of the first proviso in other words is a restriction and not a mere condition of eligibility.”
7. Analysis and Conclusion:
7.1 The petitioner-company manufactures cotton yarn, cotton blended yarn, polyester/viscose yarn, polyester/viscose blended yarn. The rate of GST on these output supplies varies from 0.1% to 12%. Raw material used for manufacturing of aforesaid goods is cotton, manmade fibre, packing material, store consumables and spares and other inputs on which rate of GST varies from 5% to 28%. The description of inputs and output supplies and respective rate of tax on each of the inputs and output supplies would be clear from following table:
