Unutilised input tax credit refund for inverted duty structure u/s 54(3) and Rule 89(5) to be recalculated

Refund of unutilised ITC under proviso (ii) to Section 54(3) CGST Act was rejected on the premise that input and output tax rates were "more or less the same" and that credit accumulation was due to high purchases remaining in stock. The HC held that Section 54(3) must be strictly construed: "inputs" and "output supplies" are consciously plural, and refund is available where accumulated credit is attributable to inputs taxed higher than output supplies, even if the differential is marginal. It further held that Rule 89(5) governs computation through the statutory formula based on adjusted turnover, not stock position. The rejection orders were set aside and refund claim directed to be reconsidered per Rule 89(5).

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Issues Involved:
1. Rejection of refund claims for unutilized input tax credit (ITC) under the inverted duty structure.
2. Interpretation of Section 54(3) of the CGST Act, 2017 and Rule 89(5) of the CGST Rules, 2017.
3. Applicability of Circulars No. 79/53/2018-GST and No. 125/44/2019-GST.

Summary:

1. Rejection of Refund Claims:
The petitioner, a public limited company engaged in textile manufacturing, challenged the rejection of its refund claims for unutilized ITC accumulated due to an inverted duty structure. The refund claims were rejected by the Adjudicating Authority and affirmed by the Appellate Authority on the grounds that the petitioner's case did not fall under the inverted duty structure as the rate of tax on inputs and outputs was considered "more or less the same."

2. Interpretation of Section 54(3) and Rule 89(5):
The court analyzed Section 54(3) of the CGST Act, 2017, which allows for refund claims of unutilized ITC when the rate of tax on inputs is higher than the rate of tax on output supplies. The court emphasized the importance of the terms "inputs" and "output supplies," noting that the statute uses these terms in plural, indicating multiple inputs and outputs. The court held that the statutory scheme of refund applies irrespective of the number of inputs and outputs, provided the rate of tax on inputs exceeds the rate of tax on outputs.

3. Applicability of Circulars:
The court referred to Circulars No. 79/53/2018-GST and No. 125/44/2019-GST, which clarify the refund mechanism for inverted duty structures. The court noted that these circulars support the statutory scheme of refund for cases with multiple inputs and outputs. The court found that the authorities' reliance on these circulars to reject the refund claims was misplaced, as the circulars did not restrict the refund mechanism to cases with a single input and output.

Conclusion:
The court concluded that the rejection of the refund claims was based on erroneous assumptions and misinterpretations of the statutory provisions. The court set aside the impugned orders and directed the Adjudicating Authority to reconsider the refund claims in light of the correct interpretation of Section 54(3) and Rule 89(5) of the CGST Act and Rules, respectively. The court emphasized that the refund mechanism should be applied based on the statutory formula and not on any other considerations.

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