TaxTMI 
TaxTMI 
The Refund Survives; Only the Arithmetic Returns
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....he Refund Survives; Only the Arithmetic Returns<br>By: - Raj Jaggi<br>Goods and Services Tax - GST<br>Dated:- 30-9-2026<br>Where Refund Entitlement Meets Appellate Finality A refund claim under the inverted duty structure must be examined by determining why input tax credit has accumulated. If a taxpayer uses chemicals, dyes and consumables taxed at 12% or 18% to make an outward supply taxed at 5%, the resulting accumulation cannot be rejected merely because the input and output are said to fall under the same broad HSN classification. The decision in The Commissioner of CGST & Central Excise, Kolkata North Commissionerate Versus M/s. Amrit Crafts Private Limited. - 2026 (9) TMI 1416 - GSTAT KOLKATA reinforces this statutory approach. Circular No. 135/05/2020-GST, dated 31.03.2020 applies to a different situation: the purchase and subsequent supply of the same goods at different rates due to an intervening rate reduction. It does not govern a genuine inverted duty structure arising from the use of multiple higher-taxed inputs in producing a lower-taxed outward supply. The decision is equally important for its interpretation of the appellate power under Section 107(11)....
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.... of the CGST Act, 2017. Once the First Appellate Authority conclusively decides refund eligibility, a direction to the Original Adjudicating Authority to calculate the precise amount does not amount to a prohibited remand. Reopening the merits is remand; implementing settled findings through arithmetic is not. Higher-Taxed Processing Inputs Created the Inversion M/s Amrit Crafts Private Limited engaged in scouring, dyeing and washing grey fabric on a job-work basis, as per specifications supplied by its principal manufacturers or buyers. Ordinarily, the principal supplied the grey fabric, although in some cases the respondent procured it on the principal's behalf. The processing activity required chemicals, dyes, reagents and other consumables, which attracted GST at 12% or 18%. The outward supply of processed fabric attracted GST at 5%. This difference between the rates applicable to inputs and outward supplies led to the regular accumulation of unutilised input tax credit. The respondent filed three refund claims under Section 54(3)(ii), read with Rule 89(5), for different tax periods. These comprised Rs.26,43,139 for October to December 2023 Rs.15,66,368 for Janu....
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....ary to March 2024 and Rs.40,90,492 for July to September 2024. The aggregate amount involved was approximately Rs.83 lakh. The Original Adjudicating Authority rejected the claims after issuing show cause notices. The rejection largely rested on the view that the input and output supplies were the same and that paragraph 3.2 of Circular No. 135/05/2020-GST, dated 31.03.2020 barred refund in such circumstances. The First Appellate Authority set aside the rejection orders. It accepted the respondent's eligibility and directed the Original Adjudicating Authority to review the calculations and determine the refund amounts in accordance with the appellate findings. The Department challenged those orders primarily on the ground that the direction for recalculation amounted to remanding the matters, although Section 107(11) does not permit the First Appellate Authority to send a case back for fresh adjudication. Section 54(3)(ii) Looks to the Cause of Credit Accumulation Section 54(3) permits a registered person to claim a refund of unutilised ITC at the end of a tax period, subject to the prescribed conditions. Clause (ii) covers cases where credit accumulates because t....
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....he rate of tax on inputs exceeds the rate applicable to output supplies, except for supplies notified by the Government. The statutory inquiry focuses on the cause of accumulation. The officer must identify the eligible inputs, the rates applicable to them, the output supplies and the rate applicable to those supplies. If the accumulated credit results from inputs being taxed at higher rates than the output supplies, the case falls within the basic structure of Section 54(3)(ii). The provision does not require every principal input to attract a higher rate than the output. It also does not distinguish between major and minor inputs or make a refund conditional upon the input and output carrying different HSN classifications. In a processing industry, several goods may contribute to the outward supply. Grey fabric may be the material undergoing processing, but chemicals, dyes, reagents and consumables are also inputs used in making the processed fabric. Their tax rates cannot be ignored merely because they are not the principal physical component of the finished product. The respondent's accumulated credit arose from such higher-taxed processing inputs. Its claim the....
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....refore had to be examined under Section 54(3)(ii) and quantified under Rule 89(5), rather than rejected by a general statement that the input and output were the same. Circular No. 135 Addresses a Rate Reduction on the Same Goods The Department's reliance on Circular No. 135/05/2020-GST, dated 31.03.2020 required careful attention to the context in which paragraph 3.2 appears. Paragraph 3 is titled "Refund of accumulated input tax credit on account of reduction in GST rate." Its illustration concerns goods purchased at 18% and subsequently sold at 12% because the Government reduced the applicable rate after the purchase. In that situation, the goods remain identical. The accumulation does not arise from one set of inputs being taxed more heavily than a separately supplied output. It arises because the same goods attract different rates at different points in time due to a rate change. Paragraph 3.2 consequently clarifies that where the input and output are the same goods, though taxed at different rates at different points in time, the resulting accumulation is not covered by Section 54(3)(ii). The words "at different points in time" are central to the scope of the ....
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....clarification. Amrit Crafts did not purchase particular goods at a higher rate and resell those identical goods at a lower rate following a rate reduction. It used chemicals, dyes and consumables taxed at 12% or 18% in carrying out processing, while its outward supply remained taxable at 5%. No intervening reduction in the GST rate on processed fabric had occurred. The factual basis of the taxpayer's claim was therefore fundamentally different from the rate-reduction scenario addressed by the Circular. Extending paragraph 3.2 to a genuine multi-input processing activity would detach the clarification from its heading, illustration and express reference to different rates applying at different points in time. A Common HSN Cannot Replace the Statutory Test The Department also referred to the input and output supplies falling under the same HSN. However, tariff classification and inverted-duty refund serve different statutory purposes. An HSN heading may cover a broad family of goods or goods at different stages of processing. The fact that an input and an output fall within the same general classification does not necessarily establish that the taxpayer bought and ....
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....sold identical goods without any transformation or additional inputs. More importantly, Section 54(3)(ii) does not prescribe different HSN classifications as a condition for refund. Rule 89(5) also contains no such restriction. Importing this requirement through an administrative circular would add a disqualification that the legislation does not contain. The HSN may remain relevant for factual verification, particularly where the officer suspects that the claimant merely traded in the same goods after a rate reduction. It cannot, however, conclude the inquiry without examining the actual business activity and the source of credit accumulation. Here, the use of higher-taxed chemicals, dyes and consumables was integral to the scouring, dyeing and washing processes. The accumulation was linked to those inputs and not to a temporal reduction in the rate applicable to the same goods. A common or overlapping classification could not erase that commercial and tax reality. Major and Minor Inputs Receive No Separate Treatment The decision draws support from M/s. Vindhya Spinning Mills Private Limited Versus The Assistant Commissioner of CGST and Central Excise, Thiruthangal&....
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....nbsp;- 2026 (7) TMI 1337 - MADRAS HIGH COURT. In that case, the Madras High Court rejected an attempt to deny an inverted-duty refund merely because the principal input and output attracted the same rate. It recognised that Section 54(3)(ii) does not distinguish between major and minor components. Chemicals, packing materials and other higher-taxed inputs remain relevant to determining whether the statutory rate inversion exists. That principle is important because manufacturing and processing activities rarely depend on a single input. Concentrating exclusively on the principal material may produce a distorted comparison. It can conceal accumulated credit generated by other goods essential to the production or processing activity and carrying substantially higher rates. Rule 89(5) resolves the matter through a formula based on eligible Net ITC and the relevant turnover. It does not invite the officer to select one principal input, compare its rate with the output and disregard all other eligible inputs. The entitlement must accordingly be determined from the complete input structure. Where higher-taxed inputs contribute to making lower-taxed output supplies and the r....
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....esulting credit remains unutilised, the claim must be processed under the statutory formula. Section 107(11) Prohibits Fresh Adjudication, Not Consequential Arithmetic The Department's principal ground before the Tribunal was the First Appellate Authority's direction to "review" or "recalculate" the refund amount. Section 107(11) authorises the appellate authority to confirm, modify or annul the decision or order under appeal. Unlike certain earlier indirect-tax provisions, it does not confer a general power to refer the matter back to the adjudicating authority for a fresh decision. The absence of a remand power ensures that the First Appellate Authority decides the dispute before it, rather than returning the parties to the beginning of the adjudication process. However, not every direction requiring an officer to take consequential action constitutes a remand. The decisive question is whether the merits remain open. If the original authority is permitted to reconsider eligibility, revisit the legal issue, receive a new case from the parties and independently decide the dispute again, the direction amounts to remand. If eligibility and the governing legal para....
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....meters have already been conclusively decided and only a mathematical exercise remains, the direction merely implements the appellate order. In the present case, the First Appellate Authority set aside the rejection orders and accepted the legal entitlement to refund. The Original Adjudicating Authority was not authorised to reconsider whether Circular No. 135/05/2020-GST, dated 31.03.2020 applied or whether the rate structure qualified under Section 54(3)(ii). The remaining task was to identify the verified figures, apply Rule 89(5), make the necessary exclusions and calculate the precise amount payable. That exercise was consequential and ministerial. It did not restore adjudicatory freedom over issues already settled in appeal. Re-Quantification Does Not Make an Appellate Order Indeterminate Refund entitlement and refund quantum are connected but distinct. An appellate authority may conclusively decide the legal basis of entitlement while directing the jurisdictional officer, who holds the returns, invoices and electronic credit records, to carry out the final computation. Such an order is not indeterminate merely because it does not state the final rupee amount. ....
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....Its certainty depends on whether it fixes the legal conclusion and the parameters governing calculation. In an inverted-duty refund, the exact amount depends on verified inverted-rated turnover, adjusted total turnover, admissible Net ITC, relevant exclusions and the application of the formula under Rule 89(5). These figures may require reconciliation with returns and supporting records. Once the appellate findings bind the original authority, computing the amount from verified data does not involve fresh adjudication. It resembles giving effect to an appellate modification rather than deciding the claim anew. A contrary interpretation would require the First Appellate Authority to personally reproduce every arithmetical and portal-based function of the refund officer, even after deciding all contested legal and factual issues. Section 107(11) does not demand such duplication. The distinction nevertheless requires precision in drafting appellate orders. A permissible direction should clearly state that the merits stand concluded, identify the governing findings and confine the original authority to verification and computation. An open-ended direction to reconsider the cla....
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....im "in accordance with law" may cross into prohibited remand if it leaves substantive issues unresolved. Departmental Implementation Confirmed the Order Was Workable The subsequent events served as a practical test of the appellate orders. The Department acted on them, recalculated the amounts in accordance with the findings, and sanctioned and paid the refunds in all three cases. This implementation demonstrated that the orders provided sufficient legal and computational guidance. The Original Adjudicating Authority was able to determine the payable amounts without reopening the respondent's substantive eligibility. The fact of payment did not, in itself, create jurisdiction in the First Appellate Authority. Jurisdiction must arise from the statute and the nature of the directions. It did, however, weaken the Department's factual contention that the appellate orders were uncertain or necessarily required fresh adjudication. An order that can be implemented by inserting verified figures into the statutory formula, without revisiting its legal conclusions, bears the character of consequential computation. The Department's own implementation confirmed that thi....
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....s was precisely what had occurred. Refund Administration Must Distinguish Rate Reduction from Rate Inversion The ruling provides a clear method for handling similar claims. First, determine whether the accumulation arises from a change in the rate on the same goods over time or from using higher-taxed inputs to make a lower-taxed outward supply. Circular No. 135/05/2020-GST, dated 31.03.2020 governs the former situation. Section 54(3)(ii), subject to its exceptions, and Rule 89(5) govern the latter. The two cannot be merged merely because the input and output share a common HSN description. The next step is to examine all eligible inputs, not just the principal material. Chemicals, dyes, packing materials and consumables cannot be disregarded if they contribute to the outward supply and bear higher tax rates. Finally, where the appellate authority reverses an erroneous rejection, it must decide the substantive dispute finally. The original autho rity may thereafter verify the figures and perform the statutory computation, but it cannot reopen the merits already concluded in appeal. The Merits Must Be Final, While the Arithmetic May Follow The three departmental....
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.... appeals were dismissed because the respondent's claims arose from a genuine inverted duty structure, Circular No. 135/05/2020-GST, dated 31.03.2020 addressed a different rate-reduction situation, and the First Appellate Authority had conclusively settled refund eligibility. The direction for re-quantification did not amount to remand because no substantive issue was returned for fresh decision. Only the mechanical implementation of the appellate findings remained, and the Department had already completed that exercise by recalculating and paying the refunds. The governing principles are therefore complementary. A refund cannot be denied by replacing the statutory rate-inversion test with an HSN-based shortcut. Equally, the prohibition against remand cannot be expanded to prevent the original authority from performing consequential arithmetic after the appellate authority has finally decided the merits. *** =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....