Facts of the Case

The petitioner, a public limited company engaged in manufacturing cotton yarn, cotton blended yarn, polyester/viscose yarn and polyester/viscose blended yarn, is registered under the CGST Act, 2017. Its inputs — cotton, manmade fibre, packing material and other consumables — attract GST ranging from 5% to 28%, while its outputs attract GST from 0.1% to 12%. For the tax period January-March 2020, the petitioner filed a refund application under Section 54(3) for Rs.1,31,39,059 towards unutilised ITC accumulated on account of an inverted duty structure, and connected applications for other periods across a batch of seven writ petitions. The Adjudicating Authority rejected the claims by order dated 24.08.2020, holding the case did not fall within “inverted duty structure,” a finding affirmed by the Appellate Authority in two common orders dated 06.10.2020 and 11.05.2021. As no GST Appellate Tribunal was then constituted, the petitioner approached the High Court directly.

Issues Involved

  1. Whether refund of accumulated ITC under Section 54(3)(ii) read with Rule 89(5) of the CGST Rules is available where a manufacturer uses multiple inputs at varying rates to produce multiple outputs at varying rates, rather than a single input-single output.
  2. Whether rejection of the claim on the ground that input and output rates were “more or less the same,” or that accumulation arose from stock/high input purchases, was legally sustainable.

Petitioner's Arguments

  • Section 54(3) and Rule 89(5) do not require a one-to-one correlation between specific inputs and outputs; the refund formula applies GSTIN-wise across all inputs and outputs, not product-wise.
  • Even where the overall input rate is only marginally higher than the output rate, resulting accumulation qualifies for refund; the statute does not recognise a “more or less” equivalence.
  • Rejection on the ground of stock accumulation has no basis in Rule 89(5), which looks only to output turnover during the claim period, not stock levels.
  • Circular No.125/44/2019-GST, relied on by the department, applies to single-output/multi-input cases and was not even a ground taken by the Adjudicating Authority.

Respondent's Arguments

  • Refund under Section 54(3) requires accumulation specifically attributable to input rates exceeding output rates, not merely to procuring more inputs than were consumed.
  • The major input (cotton) and major outputs (cotton yarn/cotton blended yarn) both attracted 5% GST — rates were at par, so this was not genuinely an inverted duty structure case.
  • Relying on the Supreme Court's ruling in Union of India vs VKC Footsteps India Pvt. Ltd, the first proviso to Section 54(3) is restrictive and confines refund strictly to the two specified situations; refund is not a fundamental or constitutional right.

Court Order-Findings

  • Applying VKC Footsteps and the principle of strict construction of taxing statutes, held that the statute's use of the plural “inputs” and “output supplies” cannot be read to restrict the refund scheme to a single-input, single-output scenario; the inverted duty structure refund applies irrespective of the number of inputs or outputs, so long as accumulation results from inputs being taxed higher than outputs.
  • Found the authorities’ “more or less the same” rate approach contrary to the statutory scheme, since several inputs (18%, 28%) clearly exceeded the outputs' rates (up to 12%).
  • Held rejection on the ground of stock/high input purchases equally unsustainable, since Rule 89(5) looks to output turnover during the claim period, not stock.
  • Set aside the orders of both the Adjudicating and Appellate Authorities and remanded the matter for fresh consideration on a case-to-case basis, clarifying that where there is genuinely no ITC accumulation for a given period, no refund would arise for that period.
  • Writ petitions allowed; no costs.

Important Clarification

  • Refund of unutilised ITC under Section 54(3)(ii) of the CGST Act read with Rule 89(5) of the CGST Rules is not confined to single-input/single-output scenarios; it applies wherever the rate of tax on inputs, taken collectively, exceeds the rate of tax on output supplies, and cannot be denied merely because the rates are “more or less” similar or because accumulation coincides with high stock or input purchases.

Sections Involved

  • Section 54(3), CGST Act, 2017 — refund of unutilised input tax credit on account of inverted duty structure.
  • Rule 89(5), CGST Rules, 2017 — formula for computing refund on inverted duty structure.
  • Section 16, CGST Act, 2017 — eligibility and conditions for taking input tax credit.

Decision-In Favour of

Assessee — the rejection orders of both authorities were set aside and the matter remanded for fresh consideration applying the correct legal interpretation; a substantive win on the point of law, though the final quantum of refund awaits fresh adjudication.

Related Case Laws

No directly on-point case notes are currently published on this site.

Case Details

  • Court: High Court of Judicature for Rajasthan, Bench at Jaipur
  • Case No.: D.B. Civil Writ Petition No.8476/2021 and batch (connected with CW-7664/2021, CW-8487/2021, CW-8489/2021, CW-8490/2021, CW-8491/2021, CW-8492/2021)
  • CNR: Not available
  • Coram: Hon'ble Mr Justice Manindra Mohan Shrivastava and Hon'ble Mr Justice Anil Kumar Upman
  • Decision Date: 31-10-2023

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