TaxTMI 
TaxTMI 
04 Nov 2026 
The Rate of Tax on All Eligible Inputs Matters in Determining Refund Entitlement
Refunds of accumulated input tax credit under an inverted duty structure continue to generate disputes where the principal input and outward supply attract the same GST rate, while other business inputs are taxed at a higher rate. A key question is whether a refund can be denied merely because the principal commodity remains unchanged, even though higher-rated packing materials contribute to unutilised ITC accumulation.
The Kolkata Bench of the GST Appellate Tribunal examined this controversy in Santosh Jaiswal Versus Madanlal Murarilal - 2026 (10) TMI 1047 - GSTAT KOLKATA. The Tribunal held that packing materials taxed at 18% qualify as inputs for determining refund eligibility, even though bulk tea purchased and packaged tea sold both attract GST at 5%. Upholding the First Appellate Authority's decision, the Tribunal dismissed the Revenue's appeal and directed payment of the sanctioned refund within three months.
The Dispute Arose from Higher Tax on Packing Materials Used for Tea
Madanlal Murarilal, a registered trader dealing in tea under HSN 0902, purchased tea in bulk and supplied it in packaged form. While bulk and packaged tea attracted GST at 5%, packing materials, including PET jars and printed flexible packaging materials, attracted GST at 18%. The difference between the tax rates on these inputs and the outward supplies resulted in the accumulation of unutilised ITC.
The taxpayer filed a refund application on 30.03.2024, claiming Rs. 10,75,233 under SGST for the period April 2022 to September 2022 on account of an inverted duty structure. The Refund Sanctioning Authority rejected the claim, holding that the inward and outward supplies involved the same commodity, namely tea, taxable at the same rate of 5%. According to the authority, such circumstances did not satisfy Section 54(3)(ii) of the CGST Act.
The taxpayer challenged the rejection before the Additional Commissioner (Appeals), Siliguri, who allowed the appeal through Order No. 232/SLG-GST/2024-25 dated 04.09.2024. The Revenue thereafter approached the GST Appellate Tribunal under Section 112(3), disputing the taxpayer's entitlement to refund.
Section 54(3)(ii) Does Not Restrict Refund to the Principal Input
Section 54(3) of the CGST Act permits a refund of unutilised ITC in specified circumstances, including where credit accumulates because the tax rate on inputs exceeds that applicable to output supplies, subject to statutory exclusions and notified restrictions. The provision does not require that refund eligibility be determined exclusively by comparing the tax rate on the principal input with that on the outward supply.
The expression "inputs" is significant because it encompasses eligible goods used or intended to be used in the course or furtherance of business, as defined under Section 2(59). Consequently, where a business uses several inputs attracting different GST rates, the relevant examination cannot be confined to the principal commodity while disregarding other eligible inputs.
In the present case, the Department compared bulk tea, taxable at 5%, with packaged tea, also taxable at 5%, but excluded the effect of packing materials taxable at 18%. This approach overlooked the actual source of the accumulated credit. The Tribunal therefore examined whether the higher-rated packing materials could independently support refund eligibility under Section 54(3)(ii).
The 57th GST Council Meeting Expands the Scope of Refund to Input Services and Capital Goods
An important subsequent development warrants consideration. At its 57th meeting on 08.10.2026, the GST Council recommended extending the scope of refund of accumulated ITC under an inverted duty structure to input services and capital goods. Pursuant to these recommendations, Notification No. 05/2026-Central Tax dated 26.10.2026 amended Rule 89 of the CGST Rules, including the substitution of Rule 89(5). Accordingly, ITC availed on eligible input services on or after 01.11.2026 is included in the refund computation. Further, eligible ITC on capital goods availed on or after 01.04.2027 will be considered for refund proportionately over 60 months, subject to prescribed conditions.
However, the existence of an inverted duty structure must still be established by comparing the tax rate on inputs, meaning goods, with that on outward supplies. A higher tax rate on input services alone does not establish refund eligibility under Section 54(3)(ii). Once the qualifying inverted duty structure exists, eligible ITC on input services and capital goods may be included in the refund computation under the amended provisions. These developments do not affect the Tribunal's decision concerning April 2022 to September 2022 but broaden the scope of refund relief for subsequent periods.
Packing Materials Used for Marketing Tea Qualify as Inputs
Packing materials are often essential to make goods suitable for marketing, storage, transportation and retail sale. In the tea trade, bulk tea is ordinarily packed in containers, packets, pouches or sachets before reaching consumers. These materials are not necessarily incidental purchases unrelated to the business; they may constitute integral inputs used in making taxable outward supplies.
Section 2(59) defines the term "input" as any goods, other than capital goods, used or intended to be used in the course or furtherance of business. The Tribunal recognised that packing materials, cartons and plastic containers used for marketing packaged tea fall within this definition. Their eligibility does not depend on whether they physically become part of the tea or alter its essential character.
The First Appellate Authority also relied on paragraph 62 of CBIC Circular No. 125/44/2019-GST dated 18.11.2019, which clarifies that packing materials and other business-related goods may qualify as inputs, subject to the applicable ITC conditions and restrictions under Section 17(5). This clarification supported the taxpayer's position that eligible ITC on packing materials could not be ignored merely because the principal input and output attracted the same tax rate.
The Department Relied on the Identity of the Principal Input and Output
The Revenue challenged the appellate order principally on the ground that the inward and outward supplies were the same commodity and attracted the same GST rate. It maintained that packing materials taxable at 18% could not independently establish an inverted duty structure when the principal input, bulk tea, and the outward supply, packaged tea, were both taxable at 5%.
The Department also relied upon paragraph 3.2 of Circular No. 135/05/2020-GST dated 31.03.2020 and Circular No. 173/05/2022-GST dated 06.07.2022. According to the Revenue, these circulars restricted refund where the input and output supplies involved the same goods. It further argued that the First Appellate Authority had incorrectly relied upon the Delhi High Court's judgment in Indian Oil Corporation Limited Versus Commissioner of Central Goods And Services Tax & Ors. - 2023 (12) TMI 361 - DELHI HIGH COURT because the facts of that case were distinguishable.
The central weakness in Revenue's approach was its assumption that the principal input must attract a higher tax rate than the outward supply. The Tribunal examined whether this additional condition could be read into Section 54(3)(ii) and whether it was legitimate, particularly when other eligible inputs attracted a higher rate and had contributed to the accumulation of ITC.
Circular No. 135/05/2020 Addresses a Different Situation
Circular No. 135/05/2020-GST dated 31.03.2020 clarified the treatment of refund claims where the same goods attract different tax rates at different points in time because of a reduction in the applicable GST rate. Circular No. 173/05/2022-GST subsequently addressed the same issue. The Department sought to apply these clarifications to deny refund in the present case.
The Tribunal distinguished between a reduction in the GST rate on the same goods over time and simultaneous use of inputs attracting different rates in making outward supplies. In the former situation, accumulation may arise from a change in the rate applicable to the same commodity. In the latter, accumulation results from the higher tax rate on one or more eligible inputs used in the business.
Here, bulk tea and packaged tea both attracted GST at 5%, while packing materials attracted GST at 18%. The Tribunal found no evidence that the claimed accumulation resulted from a reduction in the tax rate on tea during the relevant period. The Tribunal therefore held that the Department's reliance upon the circulars was misplaced because they did not address the factual circumstances giving rise to the taxpayer's claim.
The Earlier Tribunal Decision in Tea Linker Directly Governed the Controversy
The Tribunal placed substantial reliance upon its earlier decision in The Pr. Commissioner CGST & CX, Siliguri Commissionerate Versus M/s. Tea Linker. - 2026 (9) TMI 530 - GSTAT KOLKATA. That case involved a taxpayer purchasing bulk tea and selling packaged tea in containers, packets, pouches and sachets. The Department had raised substantially similar objections concerning the identity of the principal input and output, the tax rates and the applicability of the CBIC circulars.
In Tea Linker, the Tribunal held that packing materials, cartons and plastic containers were indispensable for marketing packaged tea and qualified as inputs under Section 2(59). It further held that Circular No. 135/05/2020-GST concerned reduction in the tax rate on the same goods over time and could not be applied to deny refund where higher-rated packing materials generated accumulated ITC.
The Kolkata Bench found the present dispute squarely covered by that earlier decision. Since the factual circumstances and legal objections were substantially identical, the Tribunal followed the same interpretation of Section 54(3)(ii). This consistency is particularly significant because it demonstrates that refund eligibility must be examined with reference to the actual inputs used and the source of credit accumulation, rather than merely the commercial identity of the principal commodity.
The Calcutta High Court Rejected Restrictions Introduced Through Circulars
The Tribunal also relied upon M/s. Shivaco Associates & Anr. Versus Joint Commissioner of State Tax, Directorate of Commercial Taxes & Ors. - 2022 (4) TMI 118 - CALCUTTA HIGH COURT, wherein the Calcutta High Court examined whether refund under Section 54(3)(ii) could be denied merely because the input and output supplies involved the same goods. The High Court held that the statutory provision did not restrict refund only to cases where the goods at the input and output stages were different.
The Court emphasised that a circular issued under Section 168(1) of the CGST Act is intended to ensure uniformity in implementing the law. Such a circular cannot introduce an additional restriction that is absent from the statute or withdraw a benefit otherwise available under Section 54(3). Accordingly, refund could not be denied merely by relying upon the administrative clarification concerning identical input and output goods.
The principle emerging from this judgment is that statutory eligibility must be determined from the Act itself. Administrative instructions may clarify its implementation, but cannot narrow the scope of a substantive refund provision by imposing conditions the legislature has not prescribed.
The Delhi High Court Clarified the Meaning of Inputs Under Section 54(3)
In Indian Oil Corporation Limited Versus Commissioner of Central Goods And Services Tax & Ors. - 2023 (12) TMI 361 - DELHI HIGH COURT, the Delhi High Court considered refund of accumulated ITC where bulk LPG was purchased and bottled LPG was supplied at the same GST rate of 5%. The Court held that Section 54(3)(ii) did not require a comparison exclusively between the rate applicable to the principal input and the rate applicable to the principal outward supply.
The High Court observed that the statutory expression "inputs", used in the plural, was not confined to a single principal input. Refund eligibility therefore could not be rejected merely because the principal input and outward supply attracted the same rate, when other eligible inputs attracted higher tax and contributed to the credit accumulation.
The Revenue attempted to distinguish this judgment by suggesting that the LPG transaction involved different tax rates. The Tribunal rejected that contention after examining the Delhi High Court's decision, which expressly recorded that both bulk LPG and bottled LPG attracted GST at 5%. The comparison was therefore relevant to the tea dispute, where the principal input and outward supply similarly attracted 5%, while other inputs attracted 18%.
Refund Under an Inverted Duty Structure Cannot Be Denied by Ignoring Higher-Rated Inputs
The Kolkata Bench, relying on its earlier decision in Tea Linker of Siliguri and the judgments of the Calcutta High Court in Shivaco Associates and the Delhi High Court in Indian Oil Corporation Limited, held that the taxpayer was eligible for refund under Section 54(3)(ii) of the CGST Act. It dismissed the Revenue's appeal, upheld the First Appellate Authority's order and directed payment of the sanctioned refund within three months. No costs were awarded.
The decision establishes that refund under an inverted duty structure cannot be denied merely because the principal input and outward supply attract the same GST rate, where other eligible inputs attract a higher rate and cause accumulation of ITC. Refund eligibility must be determined under the statutory provisions, without imposing additional restrictions through administrative circulars.
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