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

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 petitioner's refund claims in light of the High Court's observations and legal interpretations, applying them on a case-to-case basis.

2. Core Issue
The core issue was the interpretation and application of the "inverted duty structure" provisions under Section 54(3) of the Central Goods and Services Tax Act, 2017 (CGST Act, 2017) read with Rule 89(5) of the Central Goods and Services Tax Rules, 2017 (CGST Rules, 2017), specifically:
* Whether the refund of unutilised input tax credit (ITC) due to an inverted duty structure is applicable in cases involving multiple inputs and multiple output supplies.
* Whether refund claims can be rejected on the grounds that input and output tax rates are "more or less the same" or due to high input purchases being held in stock during the claim period.

3. Key Facts
* M/s Nahar Industrial Enterprises Limited (petitioner) is a public limited company engaged in manufacturing textiles (spinning, weaving, processing).
* The petitioner is registered under the CGST Act, 2017.
* The GST rates on its various inputs (cotton, manmade fibre, packing material, store consumables, spares, etc.) range from 5% to 28%.
* The GST rates on its various output/manufactured products (cotton yarn, cotton blended yarn, polyester/viscose yarn, polyester/viscose blended yarn) range from 0.1% to 12%.
* The petitioner claimed a refund of Rs. 1,31,39,059/- for unutilised ITC accumulated due to an inverted tax structure for the period January-March 2020.
* The Adjudicating Authority rejected the claim, stating the case did not fall under the "inverted duty structure" category.
* The Appellate Authority affirmed the rejection orders via two common orders dated 06.10.2020 and 11.05.2021.
* Due to the non-existence of the Goods and Service Tax Appellate Tribunal (GSTAT), the petitioner filed writ petitions directly before the High Court.

4. Arguments
Taxpayer (M/s Nahar Industrial Enterprises Limited):
* The impugned orders were illegal, based on a misinterpretation of Section 54(3) of the CGST Act and Rule 89(5) of the CGST Rules.
* The refund scheme applies when the rate of tax on inputs is higher than on output supplies, leading to unutilised ITC.
* "Inputs" (Section 2(59) CGST Act) includes all raw materials, packing materials, consumables, etc.
* Rule 89(5) formula (Net ITC, Adjusted Total Turnover) considers all inputs and all outputs GSTIN-wise, not product-wise or one-to-one correlation. For multiple outputs, an average input rate vs. output rate comparison should be used.
* The GSTN portal itself only allows GSTIN-wise refund applications for a tax period, not product-wise.
* The rejection ground that output sales are largely at 5% and inputs are "majorly" at 5%, leading to "more or less the same rate," is legally impermissible and contrary to the statute. Even a marginal difference warrants refund.
* The rejection ground related to "high input purchases in stock" is irrelevant as Rule 89(5) refers to "output turnover" (adjusted turnover) during the claim period, not stock levels. ITC claimed for a period is considered consumed for that period's turnover.
* Circular No. 125/44/2019-GST, dealing with one product and many inputs, was misapplied and was not the original ground for rejection by the Adjudicating Authority.
* The use of plural terms "inputs" and "output supplies" in Section 54(3) signifies legislative intent to include all such items, not restrict to singular input/output.

Revenue (Union of India):
* The petitioner's claim was scrutinised and correctly rejected as it did not fall under the "inverted duty structure."
* Input and output GST rates were found to be "more or less the same" (5%, 12%, 18%), with negligible ITC on 28% inputs. Therefore, there was no accumulation of credit due to rate difference.
* Section 54(3) allows refund only where credit has accumulated specifically because input tax rates are higher than output tax rates. If rates are similar, this condition is not met.
* The refund is only allowable by applying the formula in Rule 89(5), which becomes irrelevant if the inverted duty structure scenario is absent.
* The petitioner had utilised ITC for payment of output tax liability, thus no actual accumulation as claimed.
* Accumulation was primarily due to the petitioner procuring more inputs and effecting fewer output supplies during the period, not due to rate inversion.
* Circular dated 31.12.2018 is not applicable as it pertains to a single output rate with multiple input rates, whereas this case involves multiple output rates and multiple input rates.
* Relied on Union of India & Others Vs. VKC Footsteps India Private Limited (2022) 2 SCC 603, arguing that the first proviso to Section 54(3) is restrictive, allowing refund only in two specific situations, and refund is not a fundamental right.

5. Court’s Reasoning
* The Court analyzed the input and output GST rates, noting that while some rates matched, many input rates (e.g., 18%, 28%) were demonstrably higher than output rates (max 12%). This factually established an inverted duty structure.
* The Court emphasized that taxing statutes must be strictly construed. The plain language of proviso (ii) to Section 54(3) uses "inputs" and "output supplies" in plural, signifying legislative intent to cover situations with multiple inputs and outputs. Restricting it to a single input/output would violate this intent.
* The Court extensively relied on the Supreme Court's decision in Union of India & Others Vs. VKC Footsteps India Private Limited (supra), which clarified that Section 54(3) provides for a refund where ITC has accumulated specifically due to the rate of tax on inputs being higher than on output supplies, distinguishing it from other reasons for ITC accumulation (e.g., stock).
* The Court found the lower authorities' rejection grounds legally unsustainable:
* The "rate is more or less the same" approach was contrary to the statutory scheme and factually incorrect given the significant rate differences. The Court called this approach one that "perilously borders perversity."
* The rejection based on "high input purchases in stock" was also flawed. Rule 89(5) for refund computation refers to "output turnover (adjusted turnover)," not stock. ITC claimed in a tax period is deemed consumed within that period for turnover purposes, not to be carried forward if refunded.
* The Court noted that CBIC Circulars (79/53/2018-GST and 125/44/2019-GST) acknowledge the applicability of the inverted duty structure refund even with multiple inputs. The Court extended this logic to multiple outputs, consistent with the plural wording in Section 54(3).
* The Court concluded that where the statutory conditions for an inverted duty structure are met (i.e., input tax rates are higher than output tax rates), the refund must be allowed, and the computation should follow the formula prescribed in 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 input tax credit)
* Section 49(6) (Balance in electronic cash ledger)
* Section 54(1) (Application for refund)
* Section 54(3) and Proviso (ii) (Refund of unutilised input tax credit due to inverted duty structure)
* Section 55 (Refund to specialized agencies)
* Section 112 (Appeal before GSTAT)
* 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, explanation of "Net ITC" and "Adjusted Total turnover")
* Other Statutes:
* United Nations (Privileges and Immunities) Act, 1947
* Circulars:
* Circular No. 79/53/2018-GST dated 31.12.2018
* Circular No. 125/44/2019-GST dated 18.11.2019

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) (cited within VKC Footsteps)