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 matter was remanded to the Adjudicating Authority for fresh consideration of the refund claims in light of the Court's observations.

2. Core Issue
The core issue was the interpretation and applicability of the "inverted duty structure" provisions under Section 54(3) of the CGST Act, 2017, read with Rule 89(5) of the CGST Rules, 2017, for refund of unutilised Input Tax Credit (ITC) in cases involving multiple inputs and multiple output supplies with varying GST rates.

3. Key Facts
* Petitioner: M/s Nahar Industrial Enterprises Limited, a public limited company engaged in manufacturing textiles (spinning, weaving, processing).
* Business Profile: Manufactures cotton yarn, cotton blended yarn, polyester/viscose yarn, and polyester/viscose blended yarn.
* Tax Rates:
* Inputs: Cotton, manmade fibre, packing material, store consumables, spares, and other inputs, with GST rates varying from 5% to 28%.
* Outputs: Cotton yarn, cotton blended yarn (5% GST), Polyester/Viscose blended yarn, Polyester/Viscose yarn (12% GST), and other outward supplies (0.1% GST).
* Claim: The petitioner claimed a refund of unutilised ITC, accumulating due to an inverted duty structure where the rate of GST on inputs was higher than on output supplies.
* Rejection: The Adjudicating Authority and Appellate Authority rejected the refund claims for various tax periods, stating that the petitioner's case did not fall under the "inverted duty structure" category. The grounds for rejection included:
1. Output sales were predominantly (80%) goods with 5% duty, and inputs were also majorly at 5%, leading to the conclusion that rates were "more or less the same."
2. Refund was mainly due to high input purchases that remained in stock during the claim period, not due to inverted duty structure.
3. Reference to Circular No. 125/44/2019-GST (though not a primary ground for the Adjudicating Authority).
* Appeal Route: Due to the absence of the Goods and Service Tax Appellate Tribunal (GSTAT), the petitioner challenged the appellate orders directly before the High Court via writ petitions.

4. Arguments (Taxpayer vs Revenue)
* Taxpayer (Petitioner):
* The impugned orders misinterpreted Section 54(3) and Rule 89(5), which envision a refund where input tax rates are higher than output tax rates.
* The statutory language uses "inputs" and "output supplies" in plural, implying that the scheme applies to multiple inputs and multiple outputs, not just a one-to-one correlation.
* The formula in Rule 89(5) considers "Net ITC" (all inputs) and "Adjusted Total Turnover" (all outputs), indicating a holistic, GSTIN-wise application, not product-wise.
* The GSTN portal itself allows only one refund application per tax period, making product-wise claims impossible.
* The ground of rejection that "rates are more or less the same" is legally impermissible and contrary to the specific statutory condition of "inputs being higher than output supplies."
* The ground of rejection regarding high input purchases being "in stock" is invalid, as Rule 89(5) refers to output turnover during the claim period, not stock.
* Circular No. 125/44/2019-GST was wrongly applied or misconstrued.
* Even a marginal difference in overall rates (inputs higher than outputs) should trigger the refund under Section 54(3).
* Revenue (Respondents):
* Refund under Section 54(3) is only allowed if ITC accumulates specifically because input tax rates are higher than output tax rates.
* In this case, input and output tax rates were "more or less" the same (5%, 12%, 18%), and ITC on 28% inputs was negligible. Thus, it was not a true inverted duty structure.
* Accumulation of ITC was primarily due to high input purchases remaining in stock and less output supplies during the relevant period, not due to an inversion of tax rates.
* The authorities rightly concluded that the inverted duty structure scenario was absent, hence no occasion to apply the Rule 89(5) formula.
* Reliance on clarificatory circulars (31.12.2018 and 18.11.2019) to argue that refund is available only when ITC remains unutilised after set-off and not for transitional credit (TRAN-1).
* Circular dated 31.12.2018 is inapplicable as it deals with single output and multiple inputs, whereas this case involves multiple outputs and multiple inputs.
* Refund is not a fundamental right and must strictly adhere to the statutory scheme, as held in VKC Footsteps, which emphasizes the restrictive nature of Section 54(3) proviso.

5. Court’s Reasoning
* Literal Interpretation of Section 54(3): The Court emphasized the strict and literal interpretation of taxing statutes. It noted that Section 54(3) uses the plural terms "inputs" and "output supplies," indicating that the inverted duty structure applies even when there are multiple inputs and multiple output supplies. Restricting it to single input/output scenarios would contradict the plain language and legislative intent.
* Rejection of "More or Less the Same" Argument: The Court found the Revenue's argument that "rates are more or less the same" to be legally impermissible and contrary to the statutory requirement that the rate of tax on inputs must be "higher" than the rate of tax on output supplies. This amounts to altering the legislative scheme. The Court's analysis of the petitioner's input (5%, 12%, 18%, 28%) and output (0.1%, 5%, 12%) rates confirmed that input rates were indeed higher for several components, thus establishing an inverted duty structure.
* Rejection of "Stock Accumulation" Argument: The Court held that the ground for rejection based on high input purchases being in stock was unsustainable. Rule 89(5) for refund computation refers to "Turnover of inverted rated supply of goods and services" and "Adjusted Total Turnover" during the claim period, not physical stock. The formula envisages that total ITC on inputs claimed during the period is consumed by the turnover of that period.
* Legislative Intent (as per VKC Footsteps): The Court referred extensively to Union of India & Others Vs. VKC Footsteps India Private Limited, reiterating that Parliament specifically provided for refund of ITC accumulation due to inverted duty structure (inputs > outputs), recognizing it as one specific reason for accumulation. Other reasons like stock accumulation or capital goods accumulation might have different mechanisms (e.g., carrying forward ITC).
* Applicability of Circulars: The Court acknowledged that Circulars 79/53/2018-GST and 125/44/2019-GST support the application of the inverted duty structure scheme even with multiple inputs, aligning with the statutory scheme. While these circulars did not explicitly cover multiple outputs, the Court concluded that the statutory scheme’s plain language extends to such situations.
* Conclusion on Inversion: The Court concluded that the factual analysis clearly indicated that the rate of tax on various inputs was indeed higher than the rate of tax on output supplies, fulfilling the statutory precondition for an inverted duty structure refund.

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): Balance in electronic cash/credit ledger
* Section 54(1): Application for refund
* Section 54(3) & its provisos (i) and (ii): Refund of unutilised input tax credit (specifically inverted duty structure)
* Section 54(10): Subject to its provisions
* Section 55: Persons entitled to refund
* Section 112: Appeal to Appellate Tribunal
* Section 164: Rule-making power
* Central Goods and Services Tax Rules, 2017 (CGST Rules, 2017):
* Rule 89: Application for refund
* Rule 89(5): Formula for refund in case of inverted duty structure, and Explanation (a) "Net ITC," (b) "Adjusted Total Turnover" and "relevant period"
* 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 (mentioned as 25.11.2019 by petitioner, 18.11.2019 by court/respondent)

7. Precedents Cited
1. Union of India & Others Vs. VKC Footsteps India Private Limited (2022) 2 SCC 603 (Supreme Court) - Extensively relied upon for interpreting Section 54(3) and the legislative intent behind the inverted duty structure refund.
2. Commissioner of Income Tax, Madras Vs. Kasturi & Sons Ltd., (1999) 3 SCC 346 (Supreme Court) - On strict construction of taxing statutes.
3. State of Jharkhand & Others Vs. Tata Steel Limited & Others, (2016) 11 SCC 147 (Supreme Court) - On literal construction of taxing statutes and exemptions.
4. Commissioner of Central Excise, Pondicherry Vs. Acer India Ltd., (2004) 8 SCC 173 (Supreme Court) - On purposive construction when literal construction leads to absurdity in taxing statutes.
5. The Controller of Estate Duty, Gujarat Vs. Shri Kantilal Trikamlal, (1976) 4 SCC 643 (Supreme Court) - On understanding the fiscal philosophy of a taxing statute.
6. Assistant Commissioner of Commercial Taxes (Asst.) Dharwar & Others Vs. Dharmendra Trading Company & Others (1988) 3 SCC 570 (Supreme Court) - Cited in VKC Footsteps regarding principles for refund of tax analogous to exemptions.