Practical Problem: Refund of Accumulated ITC under GST (Inverted Duty Structure)
M/s South Indian Oils Corporation, a registered taxable person under the GST Act, is engaged in the business of procuring various edible oils such as sunflower oil, rice bran oil, cottonseed oil, and palm oil, classified under HSN Code 15. The company purchases these edible oils in bulk tankers from suppliers on payment of GST at 5%.
After procurement, the company carries out repacking and packaging activities at its premises. The bulk edible oil is packed into smaller consumer containers of 250 ml, 500 ml, 1 litre, and 5 litres for sale in the market. These packaged edible oils are supplied both Business-to-Business (B2B) and Business-to-Consumer (B2C) and are also taxed at 5% GST under the same HSN Code 15.
During several tax periods, the company accumulated Input Tax Credit (ITC). As the company claimed that the rate of tax on certain inputs used in the packing and processing activities was higher than the rate of tax on the outward supply of packed edible oil, it applied for refund of the accumulated and unutilised ITC under Section 54 of the CGST Act on account of an inverted duty structure.
The proper officer issued show cause notices proposing to reject the refund applications. The company submitted detailed replies explaining its eligibility for refund. However, the proper officer rejected the refund claims through separate orders.
Solution to the Practical Problem – Refund of Accumulated ITC under GST
1. Eligibility of refund under Section 54(3)(ii) of the CGST Act
M/s South Indian Oils Corporation is eligible to claim refund of accumulated and unutilised ITC under CGST Act. The Section 54 of the CGST Act, 2017 allows a registered person to claim refund of unutilised ITC where the credit accumulates due to inverted duty structure, i.e., where the rate of tax on inputs is higher than the rate of tax on output supplies.
The High Court held that Section 54(3)(ii) does not prohibit refund merely because the input and output goods are the same or fall under the same HSN code. The law also does not require comparison only between the principal input and the principal output supply. Therefore, refund cannot be denied simply because the main input and output are taxed at the same rate.
2. Effect of repacking activity
The activity of repacking edible oil from bulk tankers into smaller containers (250 ml, 500 ml, 1 litre, and 5 litres) does not disqualify the taxpayer from claiming refund.
The Court clarified that the key factor for refund under Section 54(3) is accumulation of ITC due to higher tax on certain inputs, not whether the taxpayer undertakes manufacturing or merely repacking. As long as taxable supplies are made and ITC accumulates because of the rate structure, refund is permissible.
3. Applicability of Circular No. 135/05/2020-GST
The tax authorities relied on Circular No. 135/05/2020-GST to reject the refund claim. However, the Court held that reliance on this circular was misplaced because the circular applies only to situations where ITC accumulates due to different tax rates at different points of time (for example, when tax rates change).
In the present case, the accumulation of ITC was not due to rate changes over time, but due to higher tax on certain inputs used in the packaging and supply process. Therefore, the circular had no application, and the rejection of refund based on it was legally incorrect.
4. Validity of the orders passed by the authorities
The Court observed that the original orders rejecting the refund claims as well as the appellate order were:
- Illegal and arbitrary, and Contrary to the provisions of the CGST Act and judicial precedents.
Accordingly, the Court quashed the orders of the proper officer and the appellate authority and directed the tax department to grant refund of the accumulated ITC to the petitioner.
5. Interest on delayed refund
The Court further held that the taxpayer is entitled to interest on delayed refund under Section 56 of the CGST Act, 2017. Interest becomes automatically payable after 60 days from the date of filing the refund application. Therefore, once the refund applications were wrongly rejected and later allowed by the Court, the department became liable to pay interest from the expiry of 60 days after the refund application date until the date of actual payment.
The Court relied on important judicial precedents, including:
- Ranbaxy Laboratories Ltd vs UOI – 2012 (27) STR 193 (SC);
- Raghav Ventures vs Commissioner of Delhi – GST 2024 (16) Cen 69 (Del);
- Panaji Engineering P Ltd vs UOI – 2023 (9) Cen 419 (Guj).
These cases affirm that payment of interest on delayed refund is automatic and mandatory once the statutory period expires.
6. Judicial precedent on identical issue
The issue regarding entitlement of refund under similar circumstances has also been considered by the Karnataka High Court in the case of Indian Oil Corporation Ltd. v. Assistant Commissioner of Central Tax, decided on 20.08.2024.
In that case, the Court examined whether refund of accumulated ITC could be denied merely because the input and output goods were identical. The High Court held that Section 54(3)(ii) does not restrict refund in such circumstances, and refund cannot be denied solely on that basis.
The Court reiterated that the provision does not mandate comparison only between the principal input and the principal output supply, and refund of unutilised ITC cannot be confined only to cases where the rate on the main input is higher than the rate of tax on the output supply.
Conclusion:
- M/s South Indian Oils Corporation is entitled to refund of accumulated ITC under Section 54(3) of the CGST Act.
- Refund cannot be denied merely because the input and output goods are the same or taxed at the same rate.
- Reliance on Circular No. 135/05/2020-GST by the department was incorrect.
- The rejection orders and appellate order were set aside, and the department was directed to grant refund along with statutory interest.
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