Inverted duty refunds cover credit accumulated from higher-taxed ancillary inputs despite identical principal input and output tax rates.

Refund of accumulated unutilised input tax credit under an inverted duty structure is available where ancillary inputs attract higher tax rates than output supplies, even if the principal input and output carry the same rate. Section 54(3) does not distinguish between principal and ancillary inputs when determining credit accumulation. Chemicals, packing materials and other higher-taxed inputs may therefore create refundable accumulated credit. Rule 89(5) prescribes the applicable computation where inputs bear differing rates. A circular restricting refund by reference only to the principal input cannot override the statutory entitlement and had been declared unconstitutional. The refund must be processed under Rule 89(5) with applicable statutory interest.

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Issues: Whether refund of accumulated unutilised input tax credit is available under an inverted duty structure where the principal input and output attract the same tax rate but other inputs attract higher rates of tax.

Analysis: Section 54(3) does not distinguish between principal and ancillary inputs for determining whether credit has accumulated because the tax rate on inputs exceeds that on output supplies. The higher tax incidence on chemicals, packing materials and other inputs resulted in accumulated credit, notwithstanding that raw cotton yarn and combed cotton yarn attracted the same rate. The prescribed computation under Rule 89(5) applies where inputs bear different rates. The circular restricting refund by reference to the principal input could not override the statutory entitlement and had already been declared unconstitutional.

Conclusion: Refund of the accumulated unutilised input tax credit is available to the assessee and must be processed under Rule 89(5), with applicable statutory interest.

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