Indian Oil Corporation Limited vs Commissioner Of Central Goods And ... on 5 December, 2023

Outcome
The petition filed by Indian Oil Corporation Limited (IOCL) was allowed**. The Delhi High Court directed the concerned authority to process IOCL's refund applications for accumulated Input Tax Credit (ITC) along with applicable interest within six weeks.

2. Core Issue
The core issue was whether the refund of accumulated ITC claimed by IOCL was proscribed by Clause (ii) of the proviso to Section 54(3) of the Central Goods & Service Tax Act, 2017 (CGST Act), given that the rate of tax on its principal input (bulk LPG) and output supply (bottled LPG) was the same (5%), but other essential inputs were taxed at a higher rate (18%).

3. Key Facts
* Petitioner: Indian Oil Corporation Limited (IOCL), a public sector undertaking engaged in bottling and distributing LPG.
* Business Process: IOCL procures bulk LPG (input) from oil refineries, processes it, and bottles it into cylinders for domestic and industrial distribution (output). The Supreme Court previously recognized LPG bottling as "production."
* Tax Rates:
* Bulk LPG (input) and bottled LPG (output) are both taxable at 5% GST.
* Various other essential inputs used in the bottling process (e.g., SC Valves, Safety Caps, Nylon thread, Stainless steel clips, Plastic seals, Lubricants, Dry Chemical for DCP Extinguisher, Nuts and Bolts, Gasket, Water pump, Fuel Filter, Oil, Clamp, etc.) are chargeable to GST at 18%.
* Accumulation of ITC: Due to the higher tax rate on these other inputs (18%) compared to the output bottled LPG (5%), IOCL accumulated unutilized ITC.
* Refund Applications: IOCL filed multiple applications for refund of this accumulated ITC for various tax periods.
* Rejection by Authorities:
* The Adjudicating Authority rejected the claims, arguing that since bulk LPG and bottled LPG are the same product taxable at 5%, it does not constitute an inverted duty structure. It relied on Circular No.135/5/2020-GST dated 31.03.2020.
* The Appellate Authority upheld this rejection, specifically citing the last sentence of paragraph 3.2 of the said Circular, which states that refund of accumulated ITC under Section 54(3)(ii) would not be applicable in cases where the input and the output supplies are the same.
* Current Appeal: IOCL filed a writ petition against the Appellate Authority's order, as the Goods and Services Tax Appellate Tribunal was not yet constituted.

4. Arguments (Taxpayer vs Revenue)
* Taxpayer (IOCL):
* The accumulation of ITC is due to an inverted duty structure because the rate of tax on several essential inputs (18%) is higher than the rate of tax on its output supply (bottled LPG at 5%).
* Refund is permissible under Clause (ii) of the proviso to Section 54(3) of the CGST Act.
* Circular No.135/5/2020-GST is not applicable to their case as it addresses ITC accumulation due to a reduction in tax rate on the same goods over time, not an inverted duty structure arising from different rates on various inputs versus output.
* A Circular issued under Section 168(1) of the CGST Act cannot override or curtail the express provisions of the Act.
* Revenue (Commissioner):
* The primary input (bulk LPG) and the output supply (bottled LPG) are the same product and are taxed at the same rate (5%).
* Therefore, there is no inverted duty structure as contemplated by Section 54(3)(ii).
* Relied on Circular No.135/5/2020-GST, para 3.2, arguing it prohibits refund when input and output supplies are the same.
* Attempted to distinguish cited precedents by arguing that in those cases, the same input/output had different tax rates, which is not the case here for the main product.

5. Court’s Reasoning
* Maintainability: The Court entertained the petition due to the non-constitution of the Appellate Tribunal, which deprived the petitioner of its statutory remedy under Section 112 of the CGST Act.
* Interpretation of Section 54(3) of CGST Act:
* Section 54(3) allows refund of unutilized ITC, with Clause (ii) of its proviso specifically for cases where "the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies."
* The use of the plural "inputs" is crucial, indicating that the refund is not confined to a single input. The overall effect of all inputs' tax rates versus the output's tax rate should be considered.
* The provision does not state that refund is proscribed if the principal input and output are the same or have the same tax rate. The legislative intent is to prevent tax cascading and confine the final tax burden to the output supply rate.
* Disregarding the higher tax rate on other essential inputs (18%) is impermissible.
* Interpretation of Circular No.135/5/2020-GST:
* A Circular issued under Section 168(1) of the CGST Act cannot override, add to, or curtail the statutory provisions of the Act. Its purpose is for uniform implementation. If it conflicts with the Act, it must be disregarded.
* The Court found that paragraph 3.2 of the Circular specifically addresses situations where ITC accumulated due to a reduction in GST rate on the same goods over time, not general inverted duty structures involving multiple inputs. The phrase "input and output being the same" in the Circular must be read in this context.
* Therefore, the Circular is inapplicable to the present facts where accumulation arises from differing tax rates on various inputs (18%) compared to the output (5%).
* Conclusion: The Revenue's denial, based on comparing only the bulk LPG and bottled LPG rates, ignored the higher rates on other essential inputs that undeniably led to ITC accumulation. This accumulation squarely falls under Section 54(3)(ii) as an inverted duty structure.

6. Statutory References
* Central Goods & Service Tax Act, 2017 (CGST Act, 2017):
* Section 54(1)
* Section 54(3) [specifically proviso Clause (ii)]
* Section 54(10)
* Section 112
* Section 168(1)
* Income Tax Act, 1961:
* Section 80-HH
* Section 80-I
* Section 80-IA

7. Precedents Cited
* Supreme Court:
* Commissioner of Income Tax-I, Mumbai v. Hindustan Petroleum Corporation Ltd. (2017) 15 SCC 254 (for whether LPG bottling amounts to 'production')
* Union of India and Ors. v. VKC Footsteps India Pvt. Ltd. (2022) 2 SCC 603 (for authoritative interpretation of Section 54(3) proviso)
* High Courts:
* Shivaco Associates and Anr. v. Joint Commissioner of State Tax, Directorate of Commercial Taxes and Ors. 2022 SCC OnLine Cal 459 (Calcutta High Court - for a similar case of LPG bottling and circular not overriding Act)
* Baker Hughes Asia Pacific Limited v. Union of India 2022 SCC OnLine Raj 1061 (Rajasthan High Court - for refund in inverted duty structure where input/output were same)
* BMG Informatics (P.) Ltd. v. The Union of India and Ors. 2021 SCC OnLine Gau 2570 (Gauhati High Court - for Circular No. 135/05/2020 being unsustainable)