Madras HC Quashes Denial of GST Refund under Inverted Duty Structure

Eveready Spinning Mills Private Limited Vs Assistant Commissioner (Madras High Court)

The Madras High Court in Eveready Spinning Mills Private Limited v. Assistant Commissioner (decided on 2025) set aside the rejection of the company’s Goods and Services Tax (GST) refund claim filed under the inverted duty structure. The Court held that the department had wrongly relied on a circular that has already been declared ultra vires (beyond statutory authority) by multiple High Courts across India. The matter was remitted back to the tax authority for reconsideration in light of those judicial precedents.

Background and Facts

Eveready Spinning Mills Private Limited, engaged in manufacturing cotton and blended yarn, filed a refund claim of ₹1.97 crore for November 2023 under Section 54(3) of the CGST Act, 2017 read with Rule 89(1) of the CGST Rules, 2017. The claim was made on the ground of accumulated Input Tax Credit (ITC) due to an inverted duty structure — a situation where the tax rate on inputs is higher than that on outputs.

The Assistant Commissioner of Central Tax rejected the refund by relying on Para 3.2 of CBIC Circular No.135/05/2020-GST dated 31.03.2020, which stated that refund under the inverted duty structure is not available where the input and output supplies are the same, even if taxed at different rates at different times. The authority held that since both the input (raw cotton) and the output (cotton yarn) attracted GST at 5%, no inverted duty existed.

The department also noted that the petitioner relied on judgments from other High Courts but none from the Madras High Court, and hence rejected the claim.

Court’s Analysis

Justice N. Sathish Kumar of the Madras High Court observed that the reliance on Circular No.135/05/2020-GST was misplaced. The Court noted that this very circular had already been struck down as ultra vires by several High Courts across the country:

1. BMG Informatics Pvt. Ltd. v. Union of India (Gauhati High Court, 02.09.2021);

2. Shivaco Associates v. Joint Commissioner of State Tax (Calcutta High Court, 11.03.2022);

3. Baker Hughes Asia Pacific Ltd. v. Union of India (Rajasthan High Court, 30.06.2022);

4. Indian Oil Corporation Ltd. v. Commissioner of CGST (Delhi High Court, 05.12.2023).

These courts uniformly held that the circular exceeded the scope of Section 54(3) of the CGST Act, which allows refund of accumulated ITC wherever the tax rate on inputs is higher than on output supplies, without any qualification that inputs and outputs must be different. The High Courts had reasoned that administrative circulars cannot impose restrictions or create exceptions not provided under the statute.

The Madras High Court emphasized that GST legislation operates uniformly across India. Therefore, once a circular is declared invalid by High Courts, the department cannot continue to apply it selectively in other states. The Court cited the Supreme Court’s ruling in Kusum Ingots & Alloys Ltd. v. Union of India [2006 (168) ELT 3 (SC)], which held that when a High Court declares a central statute or rule unconstitutional, it operates pan-India, unless stayed or overruled.

Inconsistent Departmental Conduct

The Court also noted inconsistency in the department’s approach toward Eveready Spinning Mills itself. For other periods — July–September 2022 and December 2023–January 2024 — the department had approved refund claims of ₹58.56 lakh and ₹1.81 crore respectively under the same inverted duty structure. This inconsistency, the Court observed, weakened the department’s justification for rejecting the November 2023 claim.

Court’s Decision

Holding that the rejection order was contrary to statutory provisions and judicial precedent, the Madras High Court set aside the impugned order dated 02.01.2024. The Court remitted the matter back to the Assistant Commissioner for fresh consideration, directing that the refund application be re-evaluated in light of the other High Courts’ rulings and the petitioner’s previously sanctioned refunds.

The Court ordered the authority to complete this exercise within three months from receipt of the judgment. No costs were imposed, and connected miscellaneous petitions were closed.

Judicial Significance

This decision aligns the Madras High Court with several other High Courts that have invalidated CBIC Circular No.135/05/2020-GST for exceeding statutory authority. It reinforces that refund of unutilized ITC under Section 54(3) cannot be denied on the ground that inputs and outputs are identical.

By invoking Kusum Ingots & Alloys Ltd., the Court clarified that once a circular is held invalid by multiple High Courts, it cannot be selectively enforced elsewhere in India. The ruling strengthens uniform tax administration and ensures consistent interpretation of the GST refund provisions nationwide.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

Heard learned counsel for the petitioner and learned Senior Penal Counsel for the respondent.

2. The petitioner is a manufacturer of cotton yarn, blended cotton yarn, etc., The petitioner had filed refund claim in Application Reference No.AA330124003736P dated 02.01.2024 under Section 54 (3) of the respective GST enactments read with Rule 89(1) of the GST Rules, 2017.

3. Since the petitioner was under Inverted Duty Structure, the refund claim of the petitioner has been rejected by the respondent by placing reliance on para 3.2 of CBEC Circular No.135/05/2020-GST bearing reference CBEC-20/01/06/2019-GST. Para 3.2 of the above Circular reads as under:

“3.2 It may be noted that the refund of accumulated ITC in terms clause (ii) of sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST Act. It is hereby clarified that refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are the same.”

4. By the impugned order, the respondent has rejected the claim by the petitioner with the following observation:

“9. Further as per Circular No.135/05/2020 GST Dated the 31st March, 2020 in Para No.3.2 of 3 stipulated that refund of accumulated ITC in terms clause (ii) of sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST Act. It is hereby clarified that refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are the same.

10. Whereas it appeared that the tax payer are manufacturing of 100% Cotton yarn, the input raw cotton is used. The rate of tax on input raw cotton which is used in the production of 100% Cotton yarn is 5% IGST or 2.5% CGST and 2.5% SGST and whereas the rate of tax on output goods 100% Cotton yarn is also 5% IGST or 2.5% CGST and 2.5% SGST. Hence it appeared that the output goods 100% cotton yarn does not fall under the Category of inverted duty structure for the purpose of claiming refund. Hence, GST refund of Rs.1,97,62,459/- filed, under the category of “Inverted Duty Structure” for the month of November, 2023 is liable to be rejected.

11. Taxpayer quoted only orders of High Court of other states in their written reply, not even mentioned a single order of High Court of Madras. Hence the matter is not come under the category of Res judicata. Accordingly, I pass the following order.

ORDER

I hereby reject the GST refund of Rs.1,97,62,459/- filed under the category of “Inverted Duty Structure” for the month of November, 2023, online through RFD- 01 vide ARN NO.AA330124003736P dated 02.01.2024 under Section 54 of Central Goods and Services Tax Act, 2017 read with Rule 89 of Central Goods and Services Tax Rules, 2017.”

5. The aforesaid Circular has already been struck down as ultravires of the provisions of the Act by the following Courts:

6. Despite the same, the circular has been applied to the facts of the case to deny the benefit of the refund under Section 54(3) of the respective GST enactments to the petitioner. The decisions of the above mentioned High Courts, which have struck down the Circular as ultravires, have not been reversed so far.

7. The provisions of the GST enactments being applicable pan India, the Department cannot take a different stand and such stand would be contrary to the ratio of the Hon’ble Supreme Court in Kusum Ingot & Alloys Ltd vs. Union of India reported in 2006 (168) ELT.3 (SC). Therefore, the impugned order denying the benefit of the refund on account of the Inverted Duty Structure to the petitioner is unsustainable.

8. That apart, it is noticed that the following orders have also been issued to the petitioner for the refund application for the following period:

9. In view of the above orders, the respondent cannot take a contrary stand regarding the refund claim to the petitioner.

10. Under these circumstances, the impugned order is set aside and the case is remitted back to the respondent to pass a fresh order in the light of the above mentioned orders santioning for the refund to the petitioner. This exercise shall be completed within a period of three months from the date of receipt of a copy of this order.

This Writ Petition is allowed with above directions. No costs. Consequently, connected miscellaneous petition is closed.