It is not possible to refuse a GST refund for having numerous input and output suppliers
Fact and issue of the case
As the common issue of law arises for consideration in these petitions, this common order shall govern disposal of these writ petitions filed by one and the same petitioner with reference to different tax periods ventilating its grievance on account of rejection of its claim for refund of unutilised input tax credit. For brevity and convenience, the facts stated in D. B. Civil Writ Petition No. 8476/2021 are being referred to.
The petitioner, a public limited company, seeks to assail orders dated 06.10.2020 and 11.05.2021 passed by Respondent No. 3, Additional Commissioner (Appeals), Central Goods and Services Tax, Jaipur, whereby, petitioner’s appeals, against the orders rejecting its claim for refund, have been disposed off.
Facts of the case: Quint essential facts necessary for adjudication of controversy involved in these writ petitions are in narrow encompass and stated infra:
The petitioner-company is engaged in manufacturing of textiles and its operation thereof ranging from spinning, weaving and processing. It is registered under the provisions of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as ‘the CGST Act, 2017’). In the process of manufacturing, the petitioner uses various raw materials. Rate of goods and services tax (hereinafter referred to as ‘GST’) on inputs varies from 5% to 28%. The raw materials used are cotton, manmade fibre and other inputs. The output/manufactured products are cotton yarn, cotton blended yarn, polyester/viscose yarn, polyester/viscose blended yarn. The rate of GST on outputs ranges from 0.1% to 12%. According to the petitioner, as the rates of GST on inputs was higher than the rates of GST on outputs, it is entitled to claim refund of unutilised credit at the end of relevant tax period, it being a case of inverted duty structure, under the statutory scheme of Section 54, sub-section (3) of the CGST Act, 2017.
For the relevant year in question, i.e. January, 2020 to March, 2020, the petitioner filed refund application under Section 54(3) of the CGST Act, 2017, to the tune of Rs. 1,31,39,059/- in respect of the unutilised input tax credit accumulated on account of inverted tax structure. According to the petitioner, application was filed on the GSTN portal of the petitioner in the form and manner prescribed under Rule 89 of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as ‘the CGST Rules, 2017’).
A show cause notice was issued proposing rejection of claim for refund on the statement that the petitioner’s case does not fall under the category of “inverted duty structure”. Vide order dated 24.08.2020, the adjudication proceedings eventually culminated in rejection of petitioner’s claim for refund on the ground that the petitioner’s case does not fall in the category of inverted duty structure.
Observation of the court
The impugned orders proceed on erroneous assumptions and presumptions. The premise on which the claim for refund has been outrightly rejected is that the output sales is to the extent of 80% of goods having 5% duty only and input too is majorly of 5% rate. On that basis, it has been concluded that the rate is more or less the same. This approach that “rate is more of less the same”, runs contrary to the statutory scheme. This patently violates not only the letter but also the spirit of the law. The statutory prescription being that where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies is sought to be substituted on the consideration that where the rate of tax is more or less the same. That would amount to altering the legislative scheme. Once all the inputs and output supplies on comparative basis lead to a situation where the rate of tax on inputs is higher than the rate of tax on output supplies, the scheme of refund is required to be given full effect to and it cannot be denied on such considerations that rate of tax, on comparative analysis, is more or less the same. This, at the same time, perilously boarders perversity because the rate of tax on many inputs is much higher than the rate of tax on output supplies. While rate of tax on certain inputs is 18% and 28%, none of the output supplies attracts rate of tax beyond 12%. Then, how the rate of tax could be said to be more or less the same. Further, on facts also, it is found that 100% cotton goods are only 50% of the total goods and the rest is cotton dominated blends for which other inputs have rates of 18% whereas output rate is 5%. Balance outputs are synthetic dominated blends and 100% polyester/viscose for which inputs bear rates of 12%, 18% and 28%. The factual assertions made in this regard in the writ petitions have not been denied by the respondents. Therefore, we have to accept the submission of learned counsel for the petitioner that even if the overall rate of all inputs is marginally higher than rate of output supplies, the accumulation of unutilised input tax credit on such account will bring it within the net of inverted duty structure.
The other ground of rejection of claim of refund is equally unsustainable in law as it proceeds on the ground that the claim of refund is mainly due to high input purchases and they were in stock during the claim period(tax period). The authorities, while examining the claim of refund of the petitioner, were not only obliged to apply the statutory scheme as contained in Section 54(3) of the CGST Act, 2017, in its true spirit, but also to keep in view the law providing for refund mechanism as contained in Rule 89(5) of the CGST Rules, 2017, which does not talk of the stock, but refers to output turnover (adjusted turnover) during the claim period. Rule 89(5) of the CGST Rules, 2017 envisages that total ITC claimed on inputs during the claim period gets consumed in respect of the turnover of the claim period. Obviously, once refund is sanctioned, the ITC claimed for the relevant tax period cannot be carried forward to the subsequent claim periods (tax periods). Thus, determining factor for applicability of Section 54(3) of the CGST Act, 2017 read with Rule 89(5) of the CGST Rules, 2017 is rate of tax and quantum of ITC content and not the value/quantum of individual inputs (going into an output) and the outputs. The stock based approach, therefore, violates the statutory scheme of refund.
At this stage, we may usefully refer refer to Circular No. 79/53/2018-GST dated 31.12.2018 and Circular No. 125/44/2019-GST dated 18.11.2019 both issued by the Central Board of Indirect Taxes and Customs, GST Policy Wing, Minister of Finance, Department of Revenue, Government of India, wherein scheme of inverted duty structure has been held applicable in a situation where there are multiple inputs having rate of tax higher than the rate of tax on output supplies. Though the aforesaid circulars do not provide necessary guidelines in dealing with claims for refund where there are multiple outputs, it is clear that the competent authority has issued clear guidelines for application of refund mechanism even in those cases where there are multiple inputs which are in line with the statutory scheme of refund engrafted under Section 54(3) of the CGST Act, 2017. However, the situation as to how the refund scheme would be applied in cases of more than one output supplies has not been dealt with in any of the aforesaid circulars. In view of our detailed considerations hereinabove, where the rates of tax on some of the inputs are higher than the rates of tax on output supplies, where the outputs are more than one, the statutory scheme of refund based on inverted duty structure shall become applicable.
As to how the refund would be computed in case the conditions and limitations provided under Section 54(3) of the CGST Act, 2017 are fulfilled, is provided under Rule 89(5) of the CGST Rules, 2017 which provides for a formula for making such computation. In a case of accumulation of unutilised input tax credit on account of rate of tax on inputs being higher than the rate of tax on output supplies, the refund mechanism is governed by the said formula providing for maximum limit of refund and therefore, refund claim is to be determined on the basis of computation based on statutory formula prescribed in Rule 89(5) of the CGST Rules, 2017 and not on the basis of any other mode of computation and determination of actual amount of refund payment under the law.
During the course of arguments and in the written submissions filed by the parties, facts and figures of relevant tax periods (giving rise to more than one petition) have been placed before this Court. In some of the cases, learned counsel for the respondents highlighted that in respect of certain tax periods, there is no accumulation of unutilised input tax credit. Learned counsel for the petitioner referred to some of the figures to submit that even if it is assumed that in respect of certain tax periods, there was no accumulation of unutilised input tax credit, in many cases such position obtains on record. Since the orders impugned in these writ petitions are not based on such factual premises but the rejection of claim of refund is based on erroneous interpretation of law and on considerations, we find such factual premises to be untenable in law. Therefore, we would not enter into those factual aspects. However, since in all the cases, the legal premise on which claim of refund has been rejected is contrary to the letter and spirit of the scheme of refund as provided under Section 54(3) of the CGST Act, 2017 read with Rule 89(5) of the CGST Rules, 2017, we are inclined to set aside all the orders, impugned in these writ petitions, passed by the Adjudicating Authority and the Appellate Authority with a direction to the Adjudicating Authority to undertake fresh exercise of consideration of claim of refund in the light of the observations made by this Court in this order applying the same on case to case basis. It, however, goes without saying that where there is no accumulation of unutilised input tax credit, claim of refund would not arise at all.
Writ petitions are, accordingly, allowed in the manner and to the extent as indicated hereinabove. Impugned orders are set aside.
Office is directed to place a copy of this order on record of each connected writ petition.
No orders as to costs.
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