Facts of the Case

The petitioner, engaged in the business of manufacturing and selling footwear, filed a refund claim for ₹5,47,894/- on account of accumulated unutilized Input Tax Credit (ITC) arising due to an inverted duty structure.

The inputs (PVC straps) attracted GST at 18%, whereas the finished goods (footwear) were taxed at 5% or 12%.

The refund claim was partly rejected by the Adjudicating Authority on two primary grounds:

  1. Excess ITC availed in violation of Rule 36(4) for certain months.
  2. Incorrect classification of goods by a supplier (HSN 6404 instead of 6406).

The rejection was upheld by the Appellate Authority, leading to the filing of the writ petition.

Issues Involved

  1. Whether refund of ITC can be denied due to incorrect HSN classification by the supplier despite correct tax payment.
  2. Whether ITC refund can be denied due to mismatch under Rule 36(4) when such mismatch arises from timing differences in return filings (monthly vs quarterly).
  3. Whether refund should be evaluated for individual months or the “relevant period” under Rule 89.

Petitioner’s Arguments

  • The incorrect HSN classification was a bona fide error by the supplier, supported by a certificate.
  • GST was correctly charged at 18%, proving the nature of goods as inputs (PVC straps).
  • ITC mismatch arose due to suppliers filing quarterly returns, while the petitioner filed monthly returns.
  • Refund should be assessed for the “relevant period” and not on a month-to-month basis.
  • Even if excess ITC was temporarily availed, only interest may be applicable—not denial of refund.

Respondent’s Arguments

  • The petitioner availed excess ITC in violation of Rule 36(4).
  • Proper supporting documents were not furnished to justify mismatch.
  • Supplier classification under HSN 6404 indicated supply of finished goods, disqualifying inverted duty benefit.
  • Refund claim was correctly rejected due to procedural and substantive non-compliance.

Court Findings / Order

  • The Court held that denial of refund based on mere suspicion regarding supplier classification is unsustainable.
  • It emphasized that correct tax rate (18%) charged by the supplier is a crucial factor, supporting the petitioner’s claim.
  • The Court rejected the approach of denying the entire refund due to errors in a few invoices.
  • On Rule 36(4), the Court acknowledged that mismatch may arise due to timing differences (monthly vs quarterly filings).
  • The Court set aside the orders dated 05.04.2021 and 18.02.2022.
  • The matter was remanded to the Adjudicating Authority for fresh consideration with liberty to the petitioner to submit documents.

Important Clarifications by the Court

  • ITC refund cannot be denied solely due to supplier’s clerical or classification error.
  • Substance over form: Actual nature of transaction and tax paid is more important than invoice classification mistakes.
  • Refund under inverted duty structure must consider the “relevant period”, not isolated months.
  • Procedural lapses (like mismatch in GSTR-2A vs GSTR-3B) should not defeat substantive entitlement if justified.

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/VIB06102023CW81642022_172459.pdf

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