Facts of the Case

The petitioner, Micro Systems and Services, a sole proprietorship engaged in assembling and supplying computers and computer parts, supplied goods to Defence Research & Development Organisation (DRDO) under a concessional GST rate of 5%. While procuring inputs, the petitioner paid GST at a higher rate, resulting in accumulation of Input Tax Credit (ITC). Accordingly, the petitioner filed a refund application claiming ₹77,91,857 under the inverted duty structure for the period April 2019 to March 2020 under Section 54 of the CGST Act. The refund claim was rejected by the Assistant Commissioner and the rejection was affirmed in appeal on the basis of CBIC Circular No. 135/05/2020-GST dated 31.03.2020, which stated that refund was not available where the input and output supplies were the same. Aggrieved by the rejection, the petitioner approached the Telangana High Court under Article 226 of the Constitution of India.

Issues Involved

  • Whether refund of accumulated Input Tax Credit under Section 54(3)(ii) of the CGST Act can be denied merely because the input and output goods are the same.
  • Whether CBIC Circular No. 135/05/2020-GST dated 31.03.2020 was contrary to Section 54(3)(ii) of the CGST Act.
  • Whether CBIC Circular No. 173/05/2022-GST dated 06.07.2022 is clarificatory in nature and applicable retrospectively to pending refund claims.

Petitioner’s Arguments

The petitioner contended that the denial of refund was contrary to Section 54(3)(ii) of the CGST Act because the accumulation of ITC occurred due to procurement of inputs at a higher tax rate while making supplies to DRDO at a concessional rate notified by the Government. It was argued that the subsequent CBIC Circular dated 06.07.2022 clarified that refund is admissible even where the input and output goods are the same, provided the lower output tax rate arises because of a concessional notification. Therefore, the petitioner sought reconsideration of the refund claim in light of the later clarification.

Respondent’s Arguments

The respondents submitted that the refund application had been rejected strictly in accordance with the CBIC Circular dated 31.03.2020, which was in force when the refund claim and appeal were decided. It was further argued that the subsequent Circular dated 06.07.2022 could not be applied retrospectively and therefore could not affect the validity of the earlier refund rejection orders.

Court Order / Findings

The Telangana High Court observed that the CBIC issued Circular No. 173/05/2022-GST dated 06.07.2022 after receiving representations seeking clarification regarding refund eligibility where supplies were made under concessional notifications. The Court held that the later circular merely clarified the intent of the earlier Circular dated 31.03.2020 and specifically recognised that refund of accumulated ITC is available where the lower output tax rate arises because of a concessional notification, even though the input and output goods remain the same.

The Court held that the Circular dated 06.07.2022 is clarificatory in nature and therefore operates from the date on which the original Circular dated 31.03.2020 came into effect. Consequently, the rejection orders dated 04.01.2021 and 09.04.2021 were set aside. The matter was remanded to the Assistant Commissioner for fresh consideration in accordance with the clarificatory circular dated 06.07.2022 within eight weeks. The writ petition was accordingly allowed without costs.

Important Clarification

This judgment establishes that where the Government grants a concessional GST rate through a notification, resulting in output tax being lower than input tax, refund of accumulated ITC under the inverted duty structure cannot be denied merely because the input and output goods are identical. The Court further clarified that CBIC Circular No. 173/05/2022-GST is explanatory in nature and has retrospective application, requiring pending and earlier refund claims to be examined in accordance with the clarified legal position.

Sections Involved

  • Article 226 of the Constitution of India
  • Section 54(3)(ii) of the Central Goods and Services Tax Act, 2017
  • Section 107 of the Central Goods and Services Tax Act, 2017
  • Section 168(1) of the Central Goods and Services Tax Act, 2017
  • Rules 89(4) and 89(5) of the Central Goods and Services Tax Rules, 2017

Link to Download the Order

https://www.mytaxexpert.co.in/uploads/1785395289_2330compressed.pdf

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