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

Here's a summary of the judgment:

1. Outcome
The High Court allowed the writ petitions, setting aside the orders passed by the Adjudicating Authority and the Appellate Authority. The Adjudicating Authority was directed to undertake a fresh consideration of the refund claims in light of the High Court's observations.

2. Core Issue
The core issue was whether the refund of unutilised Input Tax Credit (ITC) on account of an "inverted duty structure" (where the rate of tax on inputs is higher than on output supplies) is permissible under Section 54(3) of the CGST Act, 2017, read with Rule 89(5) of the CGST Rules, 2017, in a scenario involving multiple inputs and multiple output supplies. The legality of the reasons provided by the revenue authorities for rejecting the refund claims (e.g., "more or less the same rate" of tax on inputs and outputs, or accumulation due to high stock) was also a central point of contention.

3. Key Facts
* M/s Nahar Industrial Enterprises Limited (Petitioner) is a public limited company engaged in manufacturing textiles, producing cotton yarn, cotton blended yarn, polyester/viscose yarn, and polyester/viscose blended yarn.
* The GST rates on the petitioner's inputs (e.g., cotton, manmade fibre, packing material, spares) varied from 5% to 28%.
* The GST rates on the petitioner's output products varied from 0.1% to 12%.
* The petitioner claimed a refund of unutilised ITC, accumulating to over Rs. 1.31 Crore for the period January-March 2020 (and other periods), asserting it was a case of inverted duty structure.
* The Adjudicating Authority and Appellate Authority rejected the refund claims.
* The rejection was primarily based on the finding that:
* The rates of tax on inputs and outputs were "more or less the same" (e.g., 80% of goods and major inputs at 5% duty).
* The accumulation of ITC was mainly due to high input purchases being in stock, rather than an inverted duty structure.
* The petitioner filed writ petitions as the Goods and Service Tax Appellate Tribunal (GSTAT) was not in existence.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer (Petitioner):

  • Argued that the rejection orders misinterpreted Section 54(3) CGST Act and Rule 89(5) CGST Rules.
  • The statutory scheme applies when the rate of tax on "inputs" (plural) is higher than on "output supplies" (plural), allowing for multiple inputs and outputs.
  • Rule 89(5) and the GSTN portal support a GSTIN-wise (company-wise) calculation, not a product-wise correlation.
  • The authorities' argument of "more or less the same rate" is legally unsustainable and alters the statutory intent. Even a marginal difference should qualify.
  • The "stock accumulation" argument is also flawed as Rule 89(5) considers "Adjusted Total Turnover" during the claim period, not stock.
  • Circular No. 125/44/2019-GST, cited by the Appellate Authority, was not applicable to the petitioner's scenario of multiple inputs and outputs.

• Revenue (Respondents):

  • Contended that refund under Section 54(3) is permissible only if ITC accumulated due to input tax rates being higher than output tax rates.
  • In the petitioner's case, major inputs and outputs were found to be at "more or less" the same rate (e.g., 5%), with negligible 28% GST inputs.
  • The accumulation was attributed to high input purchases relative to output supplies, not a genuine inverted duty structure.
  • Since no inverted duty structure was present, the formula under Rule 89(5) was not applicable.
  • Referred to clarificatory circulars (31.12.2018, 18.11.2019) to assert that refunds are restricted to specific conditions.
  • Emphasized that refund is a statutory benefit, not a right, and must strictly adhere to the provisions, citing the Supreme Court's VKC Footsteps judgment.

5. Court’s Reasoning
* Interpretation of Statutory Language: The High Court held that the plain reading of "inputs" and "output supplies" in Section 54(3) proviso (ii) signifies plurality. The conscious use of plural words by the legislature must be given full effect, meaning the scheme of refund applies irrespective of the number of inputs and output supplies, as long as the condition of input tax rate being higher than output tax rate is met.
* Adherence to Legislative Intent: Relying heavily on the Supreme Court's decision in Union of India & Others Vs. VKC Footsteps India Private Limited, the court reiterated that Section 54(3) is restrictive, allowing refund only in cases where ITC accumulated specifically due to an inverted duty structure (input tax rate > output tax rate), and not for other reasons like stock accumulation.
* Rejection of Revenue's Grounds:
* The court found the revenue's argument of "more or less the same rate" to be contrary to the statutory scheme and bordering on perversity, as factual analysis showed several inputs (18%, 28%) attracting higher GST rates than any of the outputs (max 12%). This approach illegally alters the legislative scheme.
* The court also rejected the "stock-based approach" for denying refund, stating that Rule 89(5) of the CGST Rules, 2017, refers to "output turnover (adjusted turnover)" during the claim period, not stock. The determining factors are the rate of tax and the quantum of ITC content, not the value/quantum of individual inputs or outputs.
* Applicability of Circulars: The court noted that Circulars 79/53/2018-GST and 125/44/2019-GST support the applicability of the inverted duty structure scheme even with multiple inputs. While not explicitly covering multiple outputs, the court inferred that the statutory scheme would apply in such scenarios based on its interpretation of Section 54(3).
* Computation: If conditions are met, the refund must be computed strictly as per the formula in Rule 89(5).
* The court concluded that the lower authorities' rejection was based on an erroneous interpretation of the law and considerations not legally permissible.

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 (Payment of tax, interest, penalty, and other amounts)
* Section 54(1), (2), (3) [including provisos (i) and (ii)], (6), (10) (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 (Application for refund of tax, interest, penalty, fees or any other amount)
* Rule 89(5) (Formula for refund on account of inverted duty structure)
* United Nations (Privileges and Immunities) Act, 1947 (46 of 1947)

7. Precedents Cited
* Union of India & Others Vs. VKC Footsteps India Private Limited (2022) 2 SCC 603 (Supreme Court)
* Commissioner of Income Tax, Madras Vs. Kasturi & Sons Ltd., (1999) 3 SCC 346 (Supreme Court)
* State of Jharkhand & Others Vs. Tata Steel Limited & Others, (2016) 11 SCC 147 (Supreme Court)
* Commissioner of Central Excise, Pondicherry Vs. Acer India Ltd., (2004) 8 SCC 173 (Supreme Court)
* The Controller of Estate Duty, Gujarat Vs. Shri Kantilal Trikamlal, (1976) 4 SCC 643 (Supreme Court)
* Assistant Commissioner of Commercial Taxes (Asst.) Dharwar & Others Vs. Dharmendra Trading Company & Others (1988) 3 SCC 570 (Supreme Court)