TaxTMI 
TaxTMI 
Rate Inversion, Not Business Identity, Governs GST Refund
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....ate Inversion, Not Business Identity, Governs GST Refund<br>By: - Raj Jaggi<br>Goods and Services Tax - GST<br>Dated:- 28-9-2026<br>Refund disputes under the inverted duty structure often become entangled in questions the statutory scheme does not address. Is the claimant a manufacturer or merely a trader? Do the principal input and finished product fall under the same HSN? Can value addition convert otherwise similar goods into different outputs? These questions may have commercial or classificatory significance, but they cannot displace the conditions expressly prescribed under Section 54(3)(ii) of the Central Goods and Services Tax (CGST) Act, 2017. The decision in The Commissioner of CGST & Central Excise, Kolkata North Commissionerate Versus M/s. HP Cotton Casuals Private Limited. - 2026 (9) TMI 882 - GSTAT KOLKATA returns the statutory inquiry to its proper footing. Refund eligibility depends on whether unutilised input tax credit has accumulated because the rate of tax on inputs is higher than the rate applicable to output supplies. It does not depend on whether the claimant is labelled a manufacturer or trader, nor can it be rejected merely because an input and....
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.... output share an HSN description. At the same time, the decision preserves the computational discipline imposed by Rule 89(5) of the CGST Rules, 2017. The refund must be quantified for the relevant tax period through the statutory formula. Annual figures may support verification of the business model, but they cannot replace period-specific computation. Processing Apparel, Accumulating Credit and the Refund Dispute M/s HP Cotton Casuals Private Limited was engaged in producing wearing apparel. It purchased fabric, readymade garments and raw or semi-finished cotton cloth and subjected them to processes such as bleaching, dyeing, printing, cutting, stitching, branding, labelling and packing. The resulting products included suits, tops, shorts, night suits and joggers. The principal fabric input attracted GST at 5%. However, several other materials used in the processing activity, including dyes, chemicals, printing materials, packaging materials and stores, attracted GST at rates ranging from 12% to 28%. The finished apparel was supplied at 5%. This rate differential resulted in accumulation of input tax credit. The taxpayer claimed refund of Rs.34,47,623 for March 202....
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....4 and Rs.7,86,037 for February 2024 under Section 54(3)(ii) of the CGST Act, 2017. The Original Adjudicating Authority rejected both applications, principally on the ground that the inputs and outputs were the same goods falling under the same HSN and, therefore, refund under the inverted duty structure was unavailable. The First Appellate Authority reversed the rejection orders. It accepted that the taxpayer undertook substantial processing and value addition and used higher-taxed inputs to produce finished goods taxable at 5%. The Department carried the matter to the GST Appellate Tribunal, challenging not only the eligibility for refund but also the appellate authority's verification of invoices, treatment of zero-rated supplies, and use of annual figures. GST Attaches to Supply, Not to the Status of the Supplier The Department's first objection was that the taxpayer was merely a trader and had not proved that it was engaged in manufacturing. However, this distinction is not relevant for claiming a refund under Section 54(3)(ii). Under GST, tax is levied on the supply of goods or services and not on their manufacture. Further, the definition of a "registered per....
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....son" under Section 2(94) does not distinguish between a manufacturer and a trader. Therefore, refund eligibility cannot depend upon whether the taxpayer is classified as a manufacturer or a trader. Section 54(3) permits a registered person to claim refund of unutilised ITC at the end of a tax period, subject to the prescribed conditions. Clause (ii) covers accumulation resulting from the rate of tax on inputs being higher than the rate of tax on output supplies, except for supplies notified by the Government. The statutory language does not require the claimant to manufacture the output or undertake a specified degree of processing. The relevant inquiry is therefore not whether the claimant can satisfy a traditional test of manufacture. It is whether the claimant is a registered person, whether eligible input tax credit has accumulated, and whether that accumulation is attributable to the rate differential contemplated by Section 54(3)(ii). The taxpayer's processing activities were nevertheless relevant to the evidence. Bleaching, dyeing, printing, cutting, stitching, branding, labelling and packing demonstrated that the case did not involve a simple resale of unchange....
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....d goods following a reduction in the applicable rate. But those activities supported the factual origin of the accumulated credit; they were not an additional statutory qualification for refund. This distinction is important. A taxpayer should not be denied refund merely because an officer describes its operations as trading. Equally, refund does not become available merely because the taxpayer calls itself a manufacturer. Entitlement must remain tied to the statutory rate inversion and the computation prescribed under Rule 89(5). HSN Overlap Is Not a Statutory Disqualification The Department also relied on the fact that some inputs and finished products shared the same or overlapping HSN classification. The Department treated this as sufficient to characterise the input and output as the "same goods" and to deny the refund. This approach gives undue importance to the HSN classification, whereas Section 54(3)(ii) focuses on the difference between the tax rates on inputs and output supplies and the resulting accumulation of ITC. A single HSN heading may cover goods at different stages of processing. Therefore, merely because an input and the finished product fall under t....
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....he same broad HSN heading does not mean that the taxpayer purchased and resold the same goods without any processing. Neither Section 54(3)(ii) nor Rule 89(5) denies a refund solely because the principal input and the output share an HSN classification. Denying a refund on this ground would introduce a restriction that the law itself does not contain. In the present case, the accumulation did not arise solely from the tax rate on fabric. The taxpayer used dyes, chemicals, printing ink, packaging material and other inputs attracting rates substantially higher than the 5% applicable to the finished apparel. The refund claim therefore had to be tested by considering all eligible inputs entering the statutory computation, not merely by comparing the HSN and rate of the principal fabric with those of the output. The decision consequently rejects a classification-driven shortcut. An overlapping HSN may invite scrutiny of the transaction, but it cannot substitute the statutory examination of the inputs used, their tax rates, the output supplies and the actual source of accumulated credit. Circular No. 135 Targets Rate Reduction on the Same Goods The Department placed substanti....
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....al reliance on paragraph 3.2 of Circular No. 135/05/2020-GST dated 31.03.2020. That paragraph clarifies that a refund is unavailable where the input and output supplies are the same goods, even if they attract different rates at different points in time. Read in isolation, the expression "input and output supplies are the same" may appear broad. Its meaning, however, becomes clear from the heading, context and illustration in paragraph 3 of the Circular. The clarification addresses accumulation arising from a reduction in the GST rate on the same goods. Its illustration concerns goods purchased at 18% and subsequently sold at 12% after the Government reduces the rate. The critical elements are the identity of the goods and a change in their applicable rate over time. In such a situation, accumulation arises because stock purchased when the rate was higher is sold after the rate has been reduced. The Circular clarifies that this temporal rate change does not constitute an inverted duty structure within Section 54(3)(ii). The HP Cotton Casuals case involved neither element. No intervening reduction in the rate applicable to the finished apparel occurred. The claim was also n....
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....ot based on the resale of unchanged stock. The taxpayer used multiple inputs at different rates and carried out substantial processing before supplying finished products at 5%. Circular No. No. 135/05/2020-GST dated 31.03.2020 could not be extended beyond its stated context to create a general prohibition whenever an input and output shared a tariff description. Such an extension would convert a clarification on rate reduction into a substantive restriction on statutory refund entitlement. Administrative circulars may explain how to implement the law, but they cannot narrow the scope of a refund expressly available under the Act and Rules. Where the statutory requirements are satisfied, a circular must be read consistently with those provisions, not used to introduce an additional disqualification. Every Eligible Input Counts Under Rule 89(5) The Department's argument also assumed that the comparison should be made primarily between the main input and the finished product. On that reasoning, if the fabric and apparel attracted the same rate, higher tax paid on dyes, chemicals, packing materials and other inputs would not produce a refundable inversion. Neither Se....
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....ction 54(3)(ii) nor Rule 89(5) recognises a distinction between principal and ancillary inputs. The formula under Rule 89(5) refers to "Net ITC", subject to the definition and exclusions prescribed by the Rule. It does not direct the officer to identify a single dominant input and disregard the rates borne by other eligible inputs used in making the output supplies. This aspect is supported by the Madras High Court's decision in M/s. Vindhya Spinning Mills Private Limited Versus The Assistant Commissioner of CGST and Central Excise, Thiruthangal - 2026 (7) TMI 1337 - MADRAS HIGH COURT. The High Court rejected an attempt to deny an inverted-duty refund merely because the principal input and output attracted the same rate. Higher-taxed chemicals, packing materials and other inputs remained relevant to the accumulation, and the statutory formula provided the mechanism for determining the refundable amount. The principle is commercially significant. Modern production rarely depends on a single input. A finished product may use raw materials, chemicals, consumables, packing materials and several other goods carrying different tax rates. Restricting the comparison to ....
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....the principal input would leave genuine credit accumulation unaddressed and produce a result inconsistent with Rule 89(5). Hence, the proper approach is to include all eligible inputs within Net ITC, exclude items that the Rule does not permit, and apply the formula to the relevant turnover. The refund may then rise or fall on the statutory calculation, rather than on an ill-defined distinction between major and minor components. Period-Wise Computation Remains Mandatory Although the decision supports the taxpayer's eligibility, it does not permit flexibility in the quantification method. Rule 89(5) requires calculating the refund by applying the prescribed formula to the data for the relevant tax period. The Department argued that the First Appellate Authority had impermissibly relied on annual turnover and annual ITC figures. Had annual figures replaced tax-period data in the actual calculation, the objection would have carried force. The refund for February or March could not be determined merely by aggregating the figures for the entire financial year. The records, however, showed that the Original Adjudicating Authority had verified Net ITC and calculated th....
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....e refund using the data of each relevant period. The taxpayer made two separate claims, quantified for February 2024 and March 2024. The annual figures were used only as corroborative material. They helped determine whether the taxpayer's business model genuinely generated an inverted duty structure and whether variations in monthly accumulation could be explained by fluctuations in purchases and sales. They did not replace the statutory formula or become the operative basis of the refund amount. The distinction between computation and verification is therefore decisive. Period-specific data must control the calculation. Annual data may help test consistency, identify anomalies, or understand commercial patterns, provided it does not alter the refund determined under Rule 89(5). Refund Verification Must Rest on Records, Not Repeated Allegations The Department raised several additional objections concerning capital-goods invoices, alleged personal-use purchases, mismatches with Form GSTR-2B, and ITC attributable to zero-rated supplies. It also described the appellate orders as non-speaking. The record did not support those objections. The taxpayer had stated that ....
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....capital-goods invoices were excluded from Net ITC, and the Original Adjudicating Authority's own speaking orders recorded that ITC on capital goods and input services had not been included in the calculation. The alleged personal-use invoices were issued in the company's name and were explained as business expenditure. The alleged discrepancies between Annexure-B and GSTR-2B had also been reconciled. The First Appellate Authority examined Form GSTR-2A, Form GSTR-2B, Annexure-B, and the relevant invoices, and identified various inputs used in producing the finished goods. The Department did not place contrary documentary evidence before the Tribunal to dislodge those findings. For zero-rated supplies, the taxpayer relied upon the apportionment inherent in the Rule 89(5) formula. Adjusted total turnover forms part of the computation, and the formula determines the proportionate amount attributable to inverted-rated supplies. A separate invoice-wise exclusion cannot be insisted upon merely as an additional administrative requirement unless the statute, Rules, or facts of the claim make it necessary. A departmental appeal cannot succeed by repeating suspicions already ....
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....examined at earlier stages. Where the taxpayer produces reconciliations, and the authorities record documentary verification, the party challenging those findings must identify a concrete computational or evidentiary error. General allegations of non-verification do not establish that a refund was wrongly granted. Inverted-Duty Refund Must Follow the Source of Accumulation The decision confirms that entitlement to an inverted-duty refund must be determined by reference to the actual cause of ITC accumulation and by applying the formula prescribed under Rule 89(5). It cannot be denied merely because the taxpayer is described as a trader or because the principal input and output share an HSN classification. Since the taxpayer established the use of eligible inputs taxed at higher rates and the period-wise computation of the refund and reconciliation of the questioned invoices, the Department's appeals were rightly dismissed. =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....