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 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, on a case-to-case basis.

2. Core Issue
The core issue was whether a refund of unutilised Input Tax Credit (ITC) on account of an inverted duty structure, as per Section 54(3) of the CGST Act, 2017, could be claimed by a manufacturer with multiple inputs and multiple output supplies, and how the "inverted duty structure" should be interpreted in such a scenario. Specifically, it challenged the authorities' rejection based on restrictive interpretations, "more or less the same" tax rates, and accumulation due to stock rather than rate inversion.

3. Key Facts
* Petitioner: M/s Nahar Industrial Enterprises Limited, a public limited company engaged in manufacturing textiles (spinning, weaving, processing).
* Products: Cotton yarn, cotton blended yarn, polyester/viscose yarn, polyester/viscose blended yarn (output supplies).
* Inputs: Cotton, manmade fibre, packing material, store consumables, spares, and other inputs.
* Tax Rates: GST on inputs varied from 5% to 28%, while GST on output supplies ranged from 0.1% to 12%.
* Claim: The petitioner sought a refund of unutilised ITC, amounting to Rs. 1,31,39,059/- for the period January 2020 to March 2020 (and other periods in connected petitions), contending it was a case of inverted duty structure.
* Authorities' Decisions: The Adjudicating Authority and the Appellate Authority rejected the refund claims, holding that the petitioner's case did not fall under the "inverted duty structure" category. Their grounds included that input and output tax rates were "more or less the same" and that accumulation was due to high input purchases being in stock, not a rate differential.
* Jurisdictional Context: Appeals to the Goods and Service Tax Appellate Tribunal (GSTAT) were not possible due to its non-existence.

4. Arguments (Taxpayer vs Revenue)
* Taxpayer (Petitioner):
* The rejection orders were illegal and misinterpreted Section 54(3) CGST Act and Rule 89(5) CGST Rules.
* The inverted duty structure applies when input tax rates are higher than output tax rates, causing ITC accumulation.
* The law (Rule 89(5) formula) does not require a one-to-one correlation between specific inputs and outputs but considers all inputs and all outputs (GSTIN-wise).
* The "Adjusted Total Turnover" in Rule 89 includes all products, reinforcing the GSTIN-wise calculation.
* The GSTN portal itself only allows GSTIN-wise refund applications for one tax period, making product-wise applications impossible.
* The ground of rejection, "rates being more or less the same," is legally impermissible as the law only requires input rates to be "higher than" output rates.
* Factually, many inputs had rates of 18% and 28%, while no output supply exceeded 12% GST, clearly indicating higher input rates.
* The rejection based on "high input purchases and stock" is irrelevant to Rule 89(5), which refers to output turnover, not stock levels.
* Circular No. 125/44/2019-GST (pertaining to one product and many inputs) was misapplied or inappropriately relied upon as a ground for rejection.
* Section 54(3) uses the plural "output supplies," implying consideration of all output supplies for inversion.
* Revenue (Respondents):
* The petitioner's case did not qualify as an "inverted duty structure."
* 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 permissible only where credit accumulates due to input tax rates being higher than output tax rates.
* Accumulation was mainly due to high input purchases and lower output supplies, not inverted duty structure.
* Refunds are statutory benefits and are confined to the specific situations outlined in the first proviso to Section 54(3) (citing VKC Footsteps).
* Clarificatory circulars stated refunds are only available if ITC remains unutilised after offsetting output tax liability.
* Circular dated 31.12.2018 was not applicable as it addressed situations with a single output rate and multiple input rates, unlike the present case of multiple outputs and inputs with varying rates.

5. Court’s Reasoning
* Literal and Strict Construction: The court emphasized that taxing statutes must be strictly construed. The use of plural words "inputs" and "output supplies" in Section 54(3) means the scheme is applicable even when there are multiple inputs and multiple output supplies, and cannot be restricted to a singular input/output.
* Legislative Intent: Drawing upon the VKC Footsteps judgment, the court reiterated that Section 54(3)(ii) was specifically enacted to address ITC accumulation arising solely from input tax rates being higher than output tax rates, to remove cascading effects. Accumulation due to other reasons (like stock) is intended to be carried forward, not refunded under this provision.
* Rejection of Revenue's Grounds:
* "More or less the same" tax rates: The court found this approach erroneous and contrary to the statutory language of "higher than." It noted that objectively, various inputs were taxed at 18% and 28%, while no output exceeded 12%, which clearly constitutes a higher input tax rate. This ground was deemed legally impermissible and bordering on perversity.
* "High input purchases and stock": The court held that this consideration was extraneous to the refund mechanism prescribed in Rule 89(5). Rule 89(5) is based on "output turnover (adjusted turnover)" during the claim period, not stock, and ensures that ITC claimed for the period is either utilised or refunded, not carried forward if refunded.
* Circulars: The court acknowledged that Circulars No. 79/53/2018-GST and 125/44/2019-GST supported the application of the inverted duty structure scheme even with multiple inputs, aligning with its interpretation, although they did not specifically address multiple outputs.
* Computation of Refund: The court clarified that once the statutory precondition of inverted duty structure (inputs' tax rates being higher than outputs' tax rates) is met, the refund amount must be computed strictly according to the formula provided in Rule 89(5) of the CGST Rules, 2017.
* Conclusion: The court concluded that the impugned orders were based on an erroneous interpretation of the law and impermissible considerations, leading to an incorrect rejection of the refund claims.

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) (Application for refund)
* Section 54(3) (Refund of unutilised input tax credit, including proviso (ii))
* Section 54(10)
* Section 55
* 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)
* Integrated Goods and Services Tax Act (IGST Act)
* United Nations (Privileges and Immunities) Act, 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)