Facts of the Case

The petitioner procures various edible oils (sunflower, rice bran, cottonseed, palm, etc.), falling under HSN Code 15, on payment of GST at 5%, and repacks them in bulk tankers into retail containers of 250 ml to 5 litres for sale under the same HSN code, also at 5%. Since certain inputs used were taxed at rates higher than 5%, the petitioner accumulated unutilised Input Tax Credit and sought refund under Section 54(3)(ii), CGST Act, 2017 for an inverted duty structure. The department rejected the refund claims, relying on paragraph 3.2 of Circular No.135/05/2020-GST, on the ground that since the input (bulk edible oil) and the output (packed edible oil) attracted the same 5% rate, the case did not fall within Section 54(3)(ii); the appeals against the rejection were also dismissed.

Issues Involved

  1. Whether refund of accumulated ITC under Section 54(3)(ii) of the CGST Act can be denied merely because the principal input and the principal output supply attract the same rate of tax.
  2. Whether Circular No.135/05/2020-GST, as it stood, could restrict the statutory refund entitlement under Section 54(3)(ii).

Petitioner's Arguments

  • Section 54(3)(ii) does not compare the rate of tax on the principal input with the rate on the principal output; it only requires that the credit has accumulated because the rate of tax on inputs (in the aggregate) is higher than the rate on output supplies.
  • Circular No.135/05/2020's restriction that input and output being the same defeats refund was, by its own text and the illustration in paragraph 3.1, meant to address accumulation caused by a change in GST rate over time on the same goods, not a genuine inverted-duty case involving multiple inputs at higher ancillary rates.
  • The restrictive language of paragraph 3.2 was in any event deleted by Circular No.173/05/2022-GST, which being beneficial and clarificatory, applies retrospectively, relying on Suchitra Components and K.P. Varghese.
  • The Delhi High Court's decision in the petitioner's sister concern, Indian Oil Corporation Ltd vs Commissioner of CGST, decided the identical issue in the taxpayer's favour, as did Shivaco Associates (Calcutta), BMG Informatics (Gauhati), Baker Hughes (Rajasthan), Malabar Fuel Corporation (Kerala) and others.

Respondent's Arguments

  • The adjudicating and appellate authorities relied on paragraph 3.2 of Circular No.135/05/2020-GST to hold that since input and output were taxed at the same 5% rate, the case was not one of inverted duty structure, and refund was rightly denied.

Court Order / Findings

  • Section 168(1) of the CGST Act empowers the Board to issue circulars only for uniformity of implementation; a circular cannot add to or curtail the plain language of the statute. Section 54(3)(ii) does not proscribe refund merely because the principal input and principal output are the same commodity -- it turns on whether the rate of tax on inputs (which may be multiple) exceeds the rate on outputs.
  • Paragraph 3.2 of Circular No.135/05/2020, properly read with its illustration in paragraph 3.1, was intended only for cases where accumulation arose from a rate reduction on the same goods over time -- not for cases where several ancillary inputs (packaging, safety accessories, repair materials) are taxed higher than the output.
  • In any event, the restrictive text of paragraph 3.2 stood deleted by Circular No.173/05/2022-GST, which, being clarificatory and beneficial, applies retrospectively.
  • Following the Delhi High Court's detailed reasoning in the petitioner's own group company's case (Indian Oil Corporation Ltd vs Commissioner of CGST) and a consistent line of authority from the Calcutta, Gauhati, Rajasthan, Kerala and Madras High Courts, the impugned orders rejecting refund were quashed, and the respondents were directed to refund the amounts claimed together with applicable interest under Section 56 within a stipulated period.

Important Clarification

  • Refund of accumulated Input Tax Credit under Section 54(3)(ii) of the CGST Act cannot be denied merely because the principal input and the principal output supply happen to bear the same GST rate; what the provision examines is whether the rate of tax on inputs (which may include multiple ancillary inputs) exceeds the rate on output supplies.
  • A CBIC circular issued under Section 168(1) cannot supplant or curtail an express statutory entitlement; where a circular's restriction is later deleted as clarificatory, the deletion operates retrospectively and cannot be used to deny refunds even for periods before the deletion.
  • Interest on delayed refund of accumulated ITC under Section 56 is automatic and follows once the underlying refund entitlement is upheld, running from 60 days after the original refund application.

Sections Involved

  • Section 54(3)(ii), CGST Act, 2017 -- refund of unutilised ITC accumulated due to inverted duty structure.
  • Section 56, CGST Act, 2017 -- interest on delayed refunds.
  • Section 168(1), CGST Act, 2017 -- power of the Board to issue circulars for uniform implementation.
  • Circular No.135/05/2020-GST and Circular No.173/05/2022-GST -- clarifications on refund of accumulated ITC where input and output are the same commodity.

Decision – In Favour of

Assessee. Refund of accumulated ITC on account of inverted duty structure was allowed in full, together with interest.

Case Details

High Court of Karnataka at Bengaluru; Writ Petition No. 22068 of 2024 (T-RES); Coram: Justice S.R. Krishna Kumar; Order dated 12.12.2025.

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