M/S Nahar Industrial Enterprises ... vs Union Of India on 31 October, 2023

1. Outcome
The High Court allowed the writ petitions, setting aside the impugned orders of the Adjudicating Authority and the Appellate Authority. The Adjudicating Authority was directed to undertake a fresh exercise of considering the refund claims in light of the High Court's observations and apply the statutory provisions on a case-to-case basis.

2. Core Issue
The core issue was whether a refund of unutilised Input Tax Credit (ITC) on account of an "inverted duty structure" under Section 54(3)(ii) of the CGST Act, 2017, can be denied when a taxpayer has multiple inputs and multiple output supplies, and the rate of tax on some inputs is higher than the rate of tax on output supplies. It involved the interpretation of the terms "inputs" and "output supplies" in the said provision and the applicability of the refund mechanism prescribed under Rule 89(5) of the CGST Rules, 2017.

3. Key Facts
* The petitioner, M/s Nahar Industrial Enterprises Limited, is a public limited company engaged in manufacturing textiles (spinning, weaving, processing).
* It manufactures various products like cotton yarn, cotton blended yarn, polyester/viscose yarn, and polyester/viscose blended yarn.
* The GST rates on its inputs (e.g., cotton, manmade fibre, packing material, spares) vary from 5% to 28%.
* The GST rates on its output/manufactured products vary from 0.1% to 12%.
* Specifically, for output products taxed at 5% (cotton yarn, cotton blended yarn), some inputs were taxed at 12%, 18%, and 28%. For output products taxed at 12% (polyester/viscose blends), some inputs were taxed at 18% and 28%. For "other outward supply" taxed at 0.1%, all inputs were taxed at higher rates (5%, 12%, 18%, 28%).
* The petitioner filed refund applications for unutilised ITC, claiming accumulation due to the inverted duty structure (inputs taxed higher than outputs) for relevant tax periods (e.g., January-March 2020), amounting to Rs. 1,31,39,059/-.
* The Adjudicating Authority rejected the claims, holding that the case did not fall under the category of an inverted duty structure.
* The Appellate Authority upheld the rejection, affirming the findings of the Adjudicating Authority.
* The petitioner filed writ petitions before the High Court due to the non-existence of the Goods and Service Tax Appellate Tribunal (GSTAT).

4. Arguments

Taxpayer (M/s Nahar Industrial Enterprises Limited):
* The refund claim is legitimate under Section 54(3) of the CGST Act, as the rate of GST on inputs is higher than on output supplies, creating an inverted duty structure.
* Section 54(3) and Rule 89(5) do not mandate a one-to-one correlation between inputs and outputs. The formula in Rule 89(5) operates GSTIN-wise, considering "Net ITC" (all inputs) and "Adjusted Total Turnover" (all outputs).
* In cases of multiple inputs and outputs, a rational interpretation implies comparing the average input duty rate with the output duty rate.
* The GSTN portal itself only allows GSTIN-wise refund applications for a single tax period, preventing product-wise multiple applications.
* The rejection grounds by authorities are flawed:
* The "more or less the same rate" argument is legally unsound; even a marginal difference leading to accumulation qualifies for refund. The factual matrix clearly shows significant differences in rates.
* The "high input purchases and stock" argument is irrelevant, as Rule 89(5) refers to "output turnover (adjusted turnover)" during the claim period, not stock.
* Circular No. 125/44/2019-GST pertains to one product and many inputs, not the present case of many inputs and many outputs, and was not an initial ground for rejection.
* The use of plural terms "inputs" and "output supplies" in Section 54(3)(ii) reflects legislative intent to include all relevant inputs and outputs.

Revenue (Union of India & Others):
* The petitioner's case does not qualify as an inverted duty structure because the rates of tax on inputs and outputs were "more or less" the same (e.g., 5%, 12%, 18%). ITC on 28% GST inputs was negligible.
* The accumulation of ITC was primarily due to high input procurement and low output supplies, not due to higher input tax rates, which is a prerequisite for refund under Section 54(3).
* Since there was no inverted duty structure, the formula under Rule 89(5) was not applicable.
* Cited Union of India & Others Vs. VKC Footsteps India Private Limited (2022) 2 SCC 603 to assert that refund is a statutory benefit confined to specific situations under Section 54(3) proviso (i) and (ii), and cannot be claimed outside the statutory scheme.
* Referred to clarificatory circulars (31.12.2018 and 18.11.2019) to argue that refund is available only when ITC remains unutilised after setting off output tax liability. The circular dated 31.12.2018 was argued not to be applicable to cases with multiple output supplies.

5. Court’s Reasoning
* Interpretation of Section 54(3)(ii): The Court emphasized the strict construction of taxing statutes while acknowledging the shift to purposive construction for clarity. It relied on Union of India & Others Vs. VKC Footsteps India Private Limited to interpret the legislative intent behind Section 54(3)(ii). The use of plural terms "inputs" and "output supplies" indicates that the provision applies even with multiple inputs and multiple output supplies. The scheme of refund is attracted whenever there is an accumulation of unutilised ITC as a direct result of the rate of tax on inputs exceeding the rate of tax on output supplies.
* Factual Analysis: The Court found from the comparative table of input and output GST rates that the rate of GST on many inputs was indeed higher than on output supplies. For instance, inputs taxed at 18% and 28% were used for outputs taxed at 5%, 12%, and 0.1%.
* Rejection of Revenue's Arguments:
* The argument that input and output rates were "more or less the same" was held to be factually incorrect and legally unsustainable, violating the letter and spirit of the law. This approach would amount to altering the legislative scheme.
* The ground of rejection based on "high input purchases and stock" was deemed legally impermissible. Rule 89(5) specifically refers to "output turnover (adjusted turnover)" for computation, not stock. The determining factor is the rate of tax and ITC content, not the value/quantum of individual inputs or stock.
* The Court noted that Circulars 79/53/2018-GST and 125/44/2019-GST indicate the applicability of the inverted duty structure even with multiple inputs. Although these circulars did not explicitly address multiple outputs, the Court concluded that the statutory scheme of refund would still apply given the explicit language of Section 54(3).
* Conclusion: The High Court found that the impugned orders were based on erroneous interpretation of the law and considerations not permissible under the statutory scheme and legislative object of Section 54(3) read with Rule 89(5).

6. Statutory References
* Central Goods and Services Tax Act, 2017 (CGST Act, 2017):
* Section 2(59) - Definition of "input"
* Section 2(106) - Definition of "tax period"
* Section 16 - Eligibility and conditions for taking ITC
* Section 49(6) - Utilisation of electronic cash and credit ledger
* Section 54(1), (2), (3) [with first, second, and third provisos], (10), Explanation 1 - Refund of tax
* Section 55 - Refund of tax to certain persons
* Section 112 - Appeals to Appellate Tribunal
* Section 164 - Power to make rules
* Central Goods and Services Tax Rules, 2017 (CGST Rules, 2017):
* Rule 89(5) and Explanation (a), (b) - Application for refund (specifically for inverted duty structure)
* Integrated Goods and Services Tax Act, 2017 (IGST Act, 2017)
* United Nations (Privileges and Immunities) Act, 1947

7. Precedents Cited
* By the Court (and also by Revenue in part):
* Union of India & Others Vs. VKC Footsteps India Private Limited, (2022) 2 SCC 603 (Supreme Court of India)
* By the Court:
* Commissioner of Income Tax, Madras Vs. Kasturi & Sons Ltd., (1999) 3 SCC 346 (Supreme Court of India)
* State of Jharkhand & Others Vs. Tata Steel Limited & Others, (2016) 11 SCC 147 (Supreme Court of India)
* Commissioner of Central Excise, Pondicherry Vs. Acer India Ltd., (2004) 8 SCC 173 (Supreme Court of India)
* The Controller of Estate Duty, Gujarat Vs. Shri Kantilal Trikamlal, (1976) 4 SCC 643 (Supreme Court of India)
* Assistant Commissioner of Commercial Taxes (Asst.) Dharwar & Others Vs. Dharmendra Trading Company & Others, (1988) 3 SCC 570 (Supreme Court of India)
* Circulars (referred to by both parties):
* Circular No. 79/53/2018-GST dated 31.12.2018
* Circular No. 125/44/2019-GST dated 18.11.2019