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 of the Adjudicating Authority and the Appellate Authority that rejected the petitioner's refund claims. The Adjudicating Authority has been directed to undertake a fresh exercise of considering the refund claims in light of the High Court's observations, applying the statutory formula on a case-to-case basis.

2. Core Issue
The core issue was whether the petitioner (M/s Nahar Industrial Enterprises Limited) was entitled to a refund of unutilised Input Tax Credit (ITC) under an "inverted duty structure" as per Section 54(3) of the Central Goods and Services Tax Act, 2017 (CGST Act), when there are multiple inputs and multiple output supplies, and the tax authorities had rejected the claim on the grounds that the input and output tax rates were "more or less the same" or due to high stock.

3. Key Facts
* The petitioner, M/s Nahar Industrial Enterprises Limited, is a public limited company engaged in manufacturing textiles, including cotton yarn, cotton blended yarn, polyester/viscose yarn, and polyester/viscose blended yarn.
* Input materials (cotton, manmade fibre, packing material, store consumables, spares, etc.) have GST rates ranging from 5% to 28%.
* Output products have GST rates ranging from 0.1% to 12%.
* The petitioner claimed a refund of unutilised ITC, amounting to Rs. 1,31,39,059/- for the period January to March 2020 (and other periods in connected petitions), contending it was a case of inverted duty structure where input GST rates were higher than output GST rates.
* The Adjudicating Authority and the Appellate Authority rejected the refund claims, primarily stating that the petitioner's case did not fall under the "inverted duty structure" category because input and output tax rates were "more or less the same." Another ground for rejection was that accumulation was due to high input purchases being in stock.
* The petitioner filed writ petitions directly with the High Court because the Goods and Services Tax Appellate Tribunal (GSTAT) was not in existence.

4. Arguments

• Taxpayer (M/s Nahar Industrial Enterprises Ltd.):

  • The rejection orders misinterpreted Section 54(3) of the CGST Act and Rule 89(5) of the CGST Rules.
  • The refund scheme applies when input tax rates are higher than output tax rates, causing ITC accumulation.
  • The law (Section 54(3) and Rule 89(5)) does not require a one-to-one correlation of inputs to outputs but considers all inputs and all outputs at the GSTIN level. The GSTN portal also operates GSTIN-wise.
  • The argument that rates are "more or less the same" is legally unsound; even a marginal difference leading to accumulation warrants a refund.
  • The argument based on "high stock" is contrary to Rule 89(5), which focuses on "output turnover (adjusted turnover)" during the claim period, not stock.
  • The legislative use of plural terms "inputs" and "output supplies" in Section 54(3) indicates that the scheme applies to situations involving multiple inputs and multiple outputs.
  • Circular No. 125/44/2019-GST, if invoked, was not applicable to the case's facts and was not an original ground for rejection by the Adjudicating Authority.

• Revenue (Union of India):

  • The authorities correctly rejected the refund claims.
  • For an inverted duty structure claim, it must be established that input tax rates are higher than output tax rates, and ITC accumulated only on that account.
  • In this case, input and output rates were found to be "more or less" the same (5%, 12%, 18%), with 28% inputs being negligible.
  • The accumulation of ITC was attributed to high input purchases and lower output supplies during the period, not an actual inverted duty structure.
  • Therefore, Section 54(3) was not attracted, and Rule 89(5) formula was not applicable.
  • Cited Union of India & Others Vs. VKC Footsteps India Private Limited to argue that Section 54(3) is a restrictive provision, and refund is only permissible in the two specific situations outlined. Refund is not a fundamental right.
  • Circular dated 31.12.2018 was stated to be inapplicable as it dealt with a single output with multiple inputs, unlike the petitioner's scenario of multiple outputs and inputs.

5. Court’s Reasoning
* Interpretation of Statutory Language: The High Court emphasized a literal and strict construction of Section 54(3) proviso (ii), noting the deliberate use of the plural words "inputs" and "output supplies." This indicates legislative intent for the refund mechanism to apply where there are multiple inputs and multiple output supplies, not restricted to a singular input/output scenario.
* Rejection of "More or Less the Same": The court found the authorities' rationale that input and output rates were "more or less the same" to be erroneous and contrary to the statutory scheme and legislative object. It stated that even a marginal difference, where input rates are higher than output rates, leading to ITC accumulation, would qualify for refund under the inverted duty structure.
* Factual Discrepancy: The court's analysis of the petitioner's input and output GST rates (e.g., inputs at 18%, 28% vs. outputs at 0.1%, 5%, 12%) demonstrated that input rates were indeed higher than output rates for a significant portion of the supplies. This rendered the authorities' "more or less the same" premise factually incorrect and unsustainable.
* Rejection of "High Stock" Argument: The court held that the ground for rejection based on high input purchases being "in stock" was legally unsustainable. Rule 89(5) for refund computation refers to "output turnover (adjusted turnover)" during the claim period, not the stock of inputs. Once a refund is granted for a period, the ITC is considered consumed and cannot be carried forward.
* Purpose of Section 54(3): The court reiterated, citing VKC Footsteps, that the legislative intent behind Section 54(3) was to provide a refund specifically where ITC accumulated due to an inverted duty structure (inputs GST > outputs GST), to remove cascading effects. Other reasons for ITC accumulation (like stock) are to be carried forward, not refunded.
* Applicability of Circulars: The court noted that clarificatory circulars (31.12.2018, 18.11.2019) from the CBIC confirmed the applicability of the inverted duty structure scheme even with multiple inputs, which aligns with the court's interpretation of Section 54(3). While these circulars did not explicitly cover multiple outputs, the court extended the principle.
* Computation Method: The court affirmed that if the conditions for inverted duty structure are met, the refund must be computed strictly according to the formula prescribed in Rule 89(5) of the CGST Rules, 2017.
* Remand: Since the rejection was based on erroneous legal interpretations, the court remanded the matter to the Adjudicating Authority for fresh consideration consistent with its observations, clarifying that refund would not arise if there was no accumulation of unutilised ITC.

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)
* Section 54 (Refund of tax) - particularly sub-section (3) and its provisos (i) and (ii)
* Section 55
* Section 112 (Appeal before GSTAT)
* Section 164 (Rule-making power)
* Central Goods and Services Tax Rules, 2017 (CGST Rules, 2017):
* Rule 89 (Application for refund) - particularly sub-rule (5)
* United Nations (Privileges and Immunities) Act, 1947

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