GST refund petition allowed on remand due to supplier's HSN classification error under Rule 36(4) CGST Rules

Delhi HC allowed petition by remand in GST refund case involving unutilized Input Tax Credit under inverted duty structure. Petitioner's refund was denied due to supplier's incorrect HSN classification (6404 instead of 6406) despite correct 18% GST rate on PVC straps and supplier's acknowledgment certificate. Court noted inconsistent treatment by authorities - accepting one supplier's classification while rejecting others despite all charging correct GST rates. Matter remanded to Adjudicating Authority to reconsider petitioner's claim regarding ITC excess under Rule 36(4) CGST Rules, with liberty to produce supporting documents.

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Issues Involved:

1. Refund of unutilized Input Tax Credit (ITC) due to the inverted duty structure.
2. Mismatch of figures in ITC claims.
3. Ineligible ITC under Rule 36(4) of the CGST Rules.
4. Incorrect classification of supplies by one of the suppliers.

Summary:

Issue 1: Refund of Unutilized ITC Due to Inverted Duty Structure

The petitioner, engaged in the business of selling footwear, sought a refund of Rs. 5,47,894/- for the period of July 2020 to December 2020, citing the inverted duty structure where inputs were taxed at a higher rate than outputs. The application for refund was submitted in FORM GST RFD-01 and acknowledged by the respondents in FORM GST RFD-02. However, a show cause notice in FORM GST RFD-08 was issued, flagging four issues.

Issue 2: Mismatch of Figures in ITC Claims

The first two issues in the show cause notice pertained to mismatches in figures relating to eligible ITC between RFD-01, GSTR-3B, Annexure B, and GSTR-2A. The petitioner provided explanations which were accepted by the Adjudicating Authority, making these issues irrelevant for the present appeal.

Issue 3: Ineligible ITC Under Rule 36(4) of the CGST Rules

The third issue concerned the violation of Rule 36(4) of the CGST Rules, which restricts ITC claims to not more than 20% of the eligible credit for invoices and debit notes not uploaded by the supplier. The petitioner was found to have availed excess ITC of Rs. 1,03,210.09/- for October and November 2020. The petitioner argued that this excess was due to suppliers filing quarterly returns, causing a mismatch in ITC claims for different months. The Adjudicating Authority rejected this explanation, citing the lack of supporting documents.

Issue 4: Incorrect Classification of Supplies by One Supplier

The fourth issue related to one supplier, M/s V.K. Polymers, who erroneously classified PVC straps under HSN 6404 (finished products) instead of HSN 6406, despite charging the correct GST rate of 18%. The Adjudicating Authority rejected the petitioner's explanation and the supplier's certificate acknowledging the error, suspecting the petitioner of attempting to gain a cash refund through incorrect declarations.

Court's Decision:

The court found the Adjudicating Authority's suspicion-based rejection of the petitioner's explanation unsubstantiated. It emphasized that the correct GST rate charged by the supplier was a material factor and accepted the petitioner's explanation regarding the misclassification of goods. The court also noted that the claim for refund should not be denied solely due to the mismatch caused by quarterly returns of suppliers.

Remand for Fresh Consideration:

The court set aside the impugned orders dated 05.04.2021 and 18.02.2022, remanding the matter to the Adjudicating Authority for fresh consideration. The petitioner was given the liberty to submit all relevant documents to substantiate its claims. The Adjudicating Authority was directed to pass a fresh order within eight weeks.

Conclusion:

The petition was disposed of with directions for the Adjudicating Authority to reconsider the petitioner's claims regarding the excess ITC and incorrect classification issues, ensuring a fair reassessment based on the provided documents.

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