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

Outcome
The Writ Petitions are allowed. The impugned orders passed by the Adjudicating Authority and the Appellate Authority, which rejected the petitioner's refund claims, are set aside. The Adjudicating Authority is directed to undertake a fresh consideration of the refund claims in light of the High Court's observations, applying the statutory scheme on a case-to-case basis.

Core Issue
The core issue is whether a manufacturer, having multiple inputs and multiple output supplies with varying GST rates, is entitled to a refund of unutilised Input Tax Credit (ITC) under an "inverted duty structure" as per Section 54(3)(ii) of the CGST Act, 2017, and how such claims should be interpreted and processed by tax authorities, particularly when the authorities deny refund on grounds such as "rates being more or less the same" or accumulation due to stock rather than rate difference.

Key Facts

• M/s Nahar Industrial Enterprises Limited (Petitioner) is a public limited company engaged in textile manufacturing (spinning, weaving, processing), registered under the CGST Act, 2017.
• The petitioner uses various raw materials (inputs) like cotton, manmade fibre, packing material, store consumables, and spares, with GST rates ranging from 5% to 28%.
• Its output products include cotton yarn, cotton blended yarn, polyester/viscose yarn, and polyester/viscose blended yarn, with GST rates ranging from 0.1% to 12%.
• The petitioner contended that the GST rates on inputs were higher than on output supplies, leading to an inverted duty structure and accumulation of unutilised ITC.
• For the period January-March 2020, the petitioner filed refund applications totaling Rs. 1,31,39,059/- under Section 54(3) for accumulated ITC due to inverted duty structure.
• The Adjudicating Authority rejected the claims, asserting that the case did not fall under the "inverted duty structure" category.
• The Appellate Authority upheld the rejection through common orders, affirming the Adjudicating Authority's findings.
• Due to the non-existence of the Goods and Service Tax Appellate Tribunal (GSTAT), the petitioner filed these writ petitions challenging the rejection orders.

Arguments (Taxpayer vs Revenue)

• Taxpayer (M/S Nahar Industrial Enterprises Ltd.)

  • The rejection orders misinterpret Section 54(3) of the CGST Act, 2017, which allows refund where ITC accumulates due to input tax rates being higher than output tax rates.
  • Section 54(3) and Rule 89(5) do not require a one-to-one correlation between inputs and outputs; the formula considers 'Net ITC' and 'Adjusted Total Turnover' GSTIN-wise.
  • For multiple taxable outputs, the determination of inverted duty structure should involve comparing the average rate of inputs with the rates of outputs, considering all inputs and all outputs.
  • The GSTN portal itself allows only one GSTIN-wise application per tax period, making product-wise claims impossible.
  • The argument that input and output rates are "more or less the same" (e.g., 80% goods at 5% duty, major inputs at 5%) is legally impermissible. Even a marginal difference should qualify for refund.
  • Factual data shows many inputs carry 18% and 28% GST, while no output exceeds 12%, proving an inverted duty structure.
  • Rejecting the claim because of "high input purchases and stock during the claim period" is incorrect as Rule 89(5) refers to output turnover, not stock, and ITC claimed for a period gets consumed if refund is sanctioned.
  • Circular No. 125/44/2019-GST is inapplicable as it pertains to one output and many inputs, not many inputs and many outputs.

• Revenue (Union of India)

  • The petitioner's claim was scrutinised and rejected because it did not qualify as an "inverted duty structure."
  • The authorities found input and output GST rates to be "more or less" the same (5%, 12%, 18%), with negligible ITC on 28% inputs.
  • Refund under Section 54(3) is only allowed when ITC accumulates solely because input tax rates are higher than output tax rates.
  • The accumulation of ITC was mainly due to the petitioner procuring more inputs and affecting fewer output supplies during the relevant period, not due to a rate difference.
  • Relied on clarificatory Circulars dated 31.12.2018 and 18.11.2019, which clarify that refund of unutilised ITC is available only after setting off available ITC against output tax liability. The petitioner had utilised ITC.
  • Circular dated 31.12.2018 is inapplicable as it deals with a single output and multiple inputs, not the petitioner's case of multiple outputs and inputs.
  • Citing Union of India & Others Vs. VKC Footsteps India Private Limited, it was argued that Section 54(3) is restrictive, and refund is not a fundamental right, thus confined to the two specific situations in the proviso.

Court’s Reasoning

• Interpretation of Statutory Language: The High Court emphasized the plain and literal reading of Section 54(3)(ii), which uses the plural expressions "inputs" and "output supplies." This signifies that the inverted duty structure provision applies to situations involving multiple inputs and multiple output supplies, not just a singular input-output pair. The court stressed that taxing statutes must be strictly construed, giving full effect to the legislative language.
• Legislative Intent and Fiscal Philosophy: Referring to Union of India & Others Vs. VKC Footsteps India Private Limited, the court reiterated that the legislative intent behind Section 54(3) is to remove the cascading effect of taxes and allow refunds where ITC accumulates directly due to input tax rates exceeding output tax rates. This objective supports a broader interpretation covering multiple inputs and outputs.
• Rejection of Revenue's Grounds:
  • The court found the Adjudicating and Appellate Authorities' reasoning that input and output rates were "more or less the same" to be legally impermissible and perverse. A comparative analysis of the petitioner's inputs (up to 28% GST) and outputs (maximum 12% GST) clearly showed a higher rate on many inputs.
  • The argument that accumulation was due to high stock/purchases rather than rate difference was rejected. Rule 89(5) governs refund computation based on 'Adjusted Total Turnover' for the claim period, not stock. Once refunded, ITC for that period is consumed and cannot be carried forward.
  • The court noted that while circulars covered multiple inputs, they were silent on multiple outputs. However, based on statutory interpretation and legislative intent, the refund scheme extends to cases with multiple output supplies where input tax rates exceed output tax rates.
• Compliance with Formula: The court affirmed that if the statutory conditions of Section 54(3) are met, the refund amount must be computed strictly according to the formula prescribed under Rule 89(5) of the CGST Rules, 2017.

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 Input Tax Credit)
  • Section 49(6) (Refund from electronic cash ledger)
  • Section 54 (Refund of tax)
  • Section 54(1) (Application for refund)
  • Section 54(3) (Claim of refund of unutilised Input Tax Credit)
    • First Proviso (i) (Zero-rated supplies)
    • First Proviso (ii) (Inverted duty structure)
  • Section 54(10)
  • Section 55
  • Section 112 (Appeal to Goods and Service Tax 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)
• Circulars by Central Board of Indirect Taxes and Customs (CBIC):
  • Circular No. 79/53/2018-GST dated 31.12.2018
  • Circular No. 125/44/2019-GST dated 18.11.2019
• United Nations (Privileges and Immunities) Act, 1947 (mentioned in Section 54(2))

Precedents Cited

• Union of India & Others Vs. VKC Footsteps India Private Limited (2022) 2 SCC 603 (Supreme Court of India)
• 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)