2023 (12) TMI 361 - HC - GST

Refund of unutilised ITC allowed u/s 54(3) despite Circular 135/05/2020; department directed to pay interest

HC held that refund of unutilised ITC under Section 54(3) of the CGST Act is permissible where credit accumulates due to a higher rate of tax on inputs ... Refund of accumulated Input Tax Credit - inverted duty structure - denial on the ground that the rate of tax on input supply and output supply are the same - whether in the given facts refund of accumulated ITC is proscribed by virtue of Clause (ii) of the proviso to Section 54(3) of the CGST Act? - HELD THAT:- In terms of Section 54(1) of the CGST Act, any person claiming refund of tax and interest paid on such tax or any amount paid by him, is entitled to make an application for refund before expiry of two years from the relevant date, which is defined under Explanation (2) to Section 54 of the CGST Act. Sub-section (3) of Section 54 of the CGST Act provides that subject to provisions of Sub-section (10) of Section 54 of the CGST Act, a person may claim refund of unutilised ITC at the end of any tax period. However, the proviso to Sub-section (3) to Section 54 of the CGST Act restricts the entitlement to refund of unutilised ITC. It expressly provides that no refund of unutilised ITC would be allowed except in cases covered under Clauses (i) and (ii) of the proviso to Section 54(3) of the CGST Act. Under Clause (i) of the proviso to Section 54(3) of the CGST Act, refund of ITC is available in cases of zero rated supplies made without payment of tax. In terms of Clause (ii) of the proviso to Section 54(3) of the CGST Act, refund is admissible, where the credit is accumulated on account of rate of tax on inputs being higher than the rate of tax of output supplies. The Supreme Court had considered the proviso to sub-section (3) to Section 54 in UNION OF INDIA & ORS. VERSUS VKC FOOTSTEPS INDIA PVT LTD. [2021 (9) TMI 626 - SUPREME COURT] had authoritatively held that the refund of unutilised ITC was confined to two categories as spelt out in Clauses (i) and (ii) of the proviso to Sub-section (3) of Section 54 of the CGST Act - petitioner’s claim for refund is founded on Clause (ii) of the proviso to Section 54(3) of the CGST Act. According to the petitioner, the rate of tax on certain inputs is higher than the tax paid on outputs (bottled LPG). Resultantly, the petitioner has been unable to fully utilise the ITC on its inputs. It is also relevant to note that the Appellate Authority had, inter alia, found that the petitioner’s claim for refund would not be admissible by virtue of the Circular No. 135/05/2020 as in terms of the paragraph 3.2 of the said Circular refund of accumulated ITC was not available, where the input and output supplies were the same. It is implicit in the contentions advanced on behalf of the Revenue before us that, this ground stands virtually abandoned. The concerned authority is directed to process the petitioner’s applications for refund along with applicable interest in accordance with law as expeditiously as possible and in any event, within a period of six weeks from date - Petition allowed. Issues Involved:1. Whether the refund of accumulated Input Tax Credit (ITC) is proscribed by Clause (ii) of the proviso to Section 54(3) of the Central Goods & Service Tax Act, 2017 (CGST Act).2. The applicability of Circular No. 135/5/2020-GST dated 31.03.2020 in denying the refund.3. The interpretation of Section 54(3) of the CGST Act regarding the rate of tax on inputs and outputs.Summary:Issue 1: Proscription of Refund of Accumulated ITCThe petitioner, a public sector undertaking engaged in bottling and distributing LPG, claimed that it accumulates unutilized ITC due to the higher tax rate on certain inputs compared to the tax rate on bottled LPG (output supply). The principal question was whether the refund of accumulated ITC is proscribed by Clause (ii) of the proviso to Section 54(3) of the CGST Act. The court noted that Clause (ii) allows refund where the credit accumulates due to the rate of tax on inputs being higher than the rate of tax on output supplies. The court concluded that the refund of accumulated ITC is not confined to cases where the rate on the main input is higher than the rate on the principal output and must consider all inputs and outputs.Issue 2: Applicability of Circular No. 135/5/2020-GSTThe Adjudicating Authority and the Appellate Authority denied the refund based on Circular No. 135/5/2020-GST, which stated that refund is not applicable where input and output supplies are the same. The court held that the Circular, issued under Section 168(1) of the CGST Act, cannot override the provisions of the Act. The Circular's intent was to address cases where ITC accumulates due to changes in tax rates over time, not where the input and output supplies are the same but the tax rates differ. The court found that the Circular does not apply to the petitioner's case as the ITC accumulated due to higher tax rates on various inputs used in producing bottled LPG.Issue 3: Interpretation of Section 54(3) of the CGST ActThe court examined the legislative intent behind Section 54(3), which aims to address the cascading effect of taxes and ensure that tax on output supplies is confined to the fixed rate. The court emphasized that the refund of unutilized ITC is admissible if the accumulation is due to the rate of tax on inputs being higher than the rate of tax on output supplies. The court rejected the Revenue's contention that the refund is not permissible because the rate of tax on bulk LPG and bottled LPG is the same, stating that it is impermissible to disregard the rate of tax on other inputs.Conclusion:The court allowed the petition, directing the concerned authority to process the petitioner's refund applications along with applicable interest within six weeks. The court clarified that Circular No. 135/5/2020-GST cannot restrict the statutory provisions of the CGST Act, and the refund of accumulated ITC is permissible where the rate of tax on inputs exceeds the rate of tax on output supplies.