M/S Nahar Industrial Enterprises ... vs Union Of India on 31 October, 2023

[Cites 12, Cited by 0]

Rajasthan High Court - Jaipur

M/S Nahar Industrial Enterprises ... vs Union Of India on 31 October, 2023

Bench: Manindra Mohan Shrivastava, Anil Kumar Upman

[2023:RJ-JP:30569-DB]

HIGH COURT OF JUDICATURE FOR RAJASTHAN
BENCH AT JAIPUR

(1) D. B. Civil Writ Petition No. 8476/2021

M/s Nahar Industrial Enterprises Limited, Having its office at 6 th
Mile Stone, Bhiwadi-Alwar Road, P.O. Khijuriwas, Bhiwandi-
301018, Distt. Alwar Rajasthan through the Authorized Signatory
Mr. Daljeet Singh Virdi S/o Late Sh. Kirpa Singh R/o 2116,
Phase-1, Urban Estate, Dugri, Ludhiana, 141013 aged about 66.
----Petitioner
Versus
1. Union of India, through the Secretary, Department of
Revenue, Ministry of Finance, North Block, New Delhi-
110001
2. Principal Commissioner of Central Goods and Services
Tax, NCR Building, Statue Circle, Jaipur.
3. Additional Commissioner (Appeals), Central Goods and
Services Tax, Jaipur NCR Building Statue Circle, Jaipur.
4. Assistant Commissioner, Central Goods and Services Tax,
Division-D, Bhiwadi, Distt- Alwar.
5. State of Rajasthan, through Principal Secretary Finance,
Government of Rajasthan, Government Secretariat,
Janpath, Jaipur
----Respondents
Connected With
(2) D. B. Civil Writ Petition No. 7664/2021

----Petitioner
Versus
1. Union of India, through The Secretary, Department of
Revenue, Ministry of Finance, North Block, New Delhi-
110001.
2. Principal Commissioner of Central Goods and Services
Tax, NCR Building, Statue Circle, Jaipur.

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3. Additional Commissioner (Appeals), Central Goods and
Services Tax, Jaipur, NCR Building Statue Circle, Jaipur.
4. Assistant Commissioner, Central Goods and Services Tax,
Division-D, Bhiwadi, Distt-Alwar.
5. State of Rajasthan, through Principal Secretary Finance,
Government of Rajasthan, Government Secretariat,
Janpath, Jaipur
----Respondents
(3) D. B. Civil Writ Petition No. 8487/2021

----Petitioner
Versus
1. Union of India, through the Secretary, Department of
Revenue, Ministry of Finance, North Block, New Delhi-
110001
2. Principal Commissioner of Central Goods and Services
Tax, NCR Building, Statue Circle, Jaipur.
3. Additional Commissioner (Appeals), Central Goods and
Services Tax, Jaipur NCR Building Statue Circle, Jaipur.
4. Assistant Commissioner, Central Goods and Services Tax,
Division-D, Bhiwadi, Distt- Alwar.
5. State of Rajasthan, through Principal Secretary Finance,
Government of Rajasthan, Government Secretariat,
Janpath, Jaipur
----Respondents
(4) D. B. Civil Writ Petition No. 8489/2021

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(6) D. B. Civil Writ Petition No. 8491/2021

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Services Tax, Jaipur NCR Building Statue Circle, Jaipur.
4. Assistant Commissioner, Central Goods and Services Tax,
Division-D, Bhiwadi, Distt- Alwar.
5. State of Rajasthan, through Principal Secretary Finance,
Government of Rajasthan, Government Secretariat,
Janpath, Jaipur
----Respondents

For Petitioners : Mr. M.P. Devnath Advocate through
Video Conferencing assisted by Mr.
Pranav Malik Advocate.
For Respondents : Mr. Kinshuk Jain Advocate assisted by
Mr. Jay Updhayay Advocate & Mr.
Saurabh Jain Advocate.

HON'BLE MR. JUSTICE MANINDRA MOHAN SHRIVASTAVA
HON'BLE MR. JUSTICE ANIL KUMAR UPMAN

Order

REPORTABLE

31/10/2023
(Per Manindra Mohan Shrivastava,J.)

1. As the common issue of law arises for consideration in these

petitions, this common order shall govern disposal of these writ

petitions filed by one and the same petitioner with reference to

different tax periods ventilating its grievance on account of

rejection of its claim for refund of unutilised input tax credit. For

brevity and convenience, the facts stated in D. B. Civil Writ

Petition No. 8476/2021 are being referred to.

2. The petitioner, a public limited company, seeks to assail

orders dated 06.10.2020 and 11.05.2021 passed by Respondent

No. 3, Additional Commissioner (Appeals), Central Goods and

Services Tax, Jaipur, whereby, petitioner's appeals, against the

orders rejecting its claim for refund, have been disposed off.

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3. Facts of the case:

Quint essential facts necessary for adjudication of

controversy involved in these writ petitions are in narrow

encompass and stated infra:

3.1 The petitioner-company is engaged in manufacturing of

textiles and its operation thereof ranging from spinning, weaving

and processing. It is registered under the provisions of the Central

Goods and Services Tax Act, 2017 (hereinafter referred to as 'the

CGST Act, 2017'). In the process of manufacturing, the petitioner

uses various raw materials. Rate of goods and services tax

(hereinafter referred to as 'GST') on inputs varies from 5% to

28%. The raw materials used are cotton, manmade fibre and

other inputs. The output/manufactured products are cotton yarn,

cotton blended yarn, polyester/viscose yarn, polyester/viscose

blended yarn. The rate of GST on outputs ranges from 0.1% to

12%. According to the petitioner, as the rates of GST on inputs

was higher than the rates of GST on outputs, it is entitled to claim

refund of unutilised credit at the end of relevant tax period, it

being a case of inverted duty structure, under the statutory

scheme of Section 54, sub-section (3) of the CGST Act, 2017.

3.2 For the relevant year in question, i.e. January, 2020 to

March, 2020, the petitioner filed refund application under Section

54(3) of the CGST Act, 2017, to the tune of Rs. 1,31,39,059/- in

respect of the unutilised input tax credit accumulated on account

of inverted tax structure. According to the petitioner, application

was filed on the GSTN portal of the petitioner in the form and

manner prescribed under Rule 89 of the Central Goods and

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Services Tax Rules, 2017 (hereinafter referred to as 'the CGST

Rules, 2017').

3.3 A show cause notice was issued proposing rejection of claim

for refund on the statement that the petitioner's case does not fall

under the category of "inverted duty structure". Vide order dated

24.08.2020, the adjudication proceedings eventually culminated in

rejection of petitioner's claim for refund on the ground that the

petitioner's case does not fall in the category of inverted duty

structure.

3.4 Feeling aggrieved, the petitioner preferred separate appeals

against rejection of claim for refund for different tax periods

before the Commissioner (Appeals), Central Excise and CGST,

Jaipur (hereinafter referred to as 'the Appellate Authority'). Those

appeals came to be disposed off by the learned Appellate

Authority vide two common orders dated 06.10.2020 and

11.05.2021, affirming the findings recorded by the Adjudicating

Authority that the petitioner's case does not fall in the category of

inverted duty structure and it is not entitled to refund of unutilised

ITC through invocation of the provisions contained in Section

54(3) of the CGST Act, 2017.

3.5 Though Section 112 of the CGST Act, 2017 provides for

further appeal before Goods and Service Tax Appellate Tribunal

(GSTAT), there being no Appellate Tribunal in existence, rejection

of petitioner's claim by the Adjudicating Authority and its

affirmation by the Appellate Authority is under challenge in these

writ petitions.

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4. Submissions on behalf of the petitioner:

4.1 Learned counsel appearing on behalf of the petitioner

contended that the impugned order of rejection of its claim for

refund of unutilised input tax credit is illegal and based on

complete misinterpretation and misconstruction of not only

against the letter, but also the spirit of the statutory scheme of

refund engrafted under Section 54, sub-section(3) of the CGST

Act, 2017. According to him, the scheme of refund under Section

54(3) of the CGST Act, 2017 is attracted where the credit, as

input tax credit, has accumulated on account of rate of tax on

inputs being higher than the rate of tax on output supplies. This

gives rise to a situation of inverted duty structure during a

particular tax period and, therefore, the credit accumulated due to

inverted duty structure entitled the petitioner to claim refund as

per the mechanism of refund specified under Rule 89 of the CGST

Rules, 2017 through application of a specified formula applied for

relevant tax period.

4.2 Further submission is that there being no dispute that

packing material, consumables, spares etc. used as raw material

are qualified as input in terms of provisions contained in Section

16 of the CGST Act, 2017 read with definition of "input" under

Section 2(59) of the CGST Act, 2017, petitioner's claim for refund

was required to be considered by applying the principle that

Section 54(3) of the CGST Act, 2017 and Rule 89(5) of the CGST

Rules, 2017 do not stipulate one-to-one correlation between all

inputs or outputs. Referring to the formula specified under Rule

89(5) of the CGST Rules, 2017, it is contended that net ITC

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claimed during the claim period is to be considered relating to all

inputs. Further contention is that since ITC and adjusted total

turnover is taken GSTIN wise, therefore, the inverted rated

supplies will also be taken GSTIN wise, i.e., turnover of all input

supplies which are taxed at a rate lower than the rate of tax on

inputs.

It is also argued that in case of multi taxable output supplies,

the scheme of Section 54(3) of the CGST Act, 2017 read with Rule

89(5) of the CGST Rules, 2017 requires a rational construction

implying a workable formula that the determination of inverted

duty supplies will be done by comparing the average rate of duty

of inputs with the rate of duty of outputs and when the formula is

logically interpreted, the same envisages consideration of all

inputs and all outputs.

4.3 Next submission of learned counsel for the petitioner is that

denominator "Adjusted Total Turnover" as contained in under Rule

89 of the CGST Rules, 2017, expressly provides for inclusion of all

products quantified under the expression "sum total of the value

of". Thus, it is contended, law provides for refund calculation

GSTIN wise and not productwise.

4.4 The formula as specified in Rule 89(5) of the CGST Rules,

2017 envisages that the output liability on all inverted rated

supplies is deducted from the input tax credit apportioned to such

inverted rated supplies and when such ITC is more than the

output liability, refund amount will be positive and would give rise

to a claim for refund.

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It is also contended that GSTN portal, which itself only allows

filing of refund application GSTIN wise and the portal only allows

the claimant to file a refund application for one tax period only

once, it is neither permissible, nor possible to claim refund by

filing multiple refund applications product wise for the same tax

period.

It is further contended that ground of rejection is not

referable to any of the provisions of the law. It is based only on

the consideration that the output sales is to the extent of 80% of

goods having 5% duty only and input too is majorly of 5% rate.

Hence, the rate being more or less the same, it is not a case of

inverted duty structure, which consideration is not permissible

while examining as to whether it is a case of inverted duty

structure. The submission is that 100% cotton goods are only

50% of the total goods and the rest is cotton dominated blends for

which other inputs have rates of 18% whereas output rate is 5%.

Further, rest of the outputs are synthetic dominated blends and

100% polyester/viscose for which inputs bear rate of 12%, 18%

and 28%. Legal submission is that the law does not recognise the

words, "more or less". Even if overall rate of all inputs is

marginally higher than the rate of output, credit accumulations

would entitle refund under "inverted rated structure" as provided

under Section 54(3) of the CGST Act, 2017.

4.5 Further submission is that other ground of rejection is that

refund is mainly due to high input purchases and they are in stock

during the claim period is again not referable to the scheme of

Section 54(3) of the CGST Act, 2017 or the formula under Rule

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89(5) of the CGST Rules, 2017 as it does not talk of stock, but

only refers to output turnover (adjusted turnover) during the claim

period. Rule 89(5) of the CGST Rules, 2017 envisages that total

ITC claim of inputs during the claim period gets consumed in

respect of the turnover of the claim. In other words, if refund is

sanctioned, ITC claimed for the relevant period cannot be carried

forward to the subsequent periods. The usages finishes in a

particular claim period only. Even if tax period is taken as one

year, there is accumulation of credit, thus, nullifying stock impact

and refund accrues by application of formula envisaged in Rule

89(5) of the CGST Rules, 2017.

Further contention is that determining factor for applicability

of Section 54(3) of the CGST Act, 2017 read with Rule 89(5) of

the CGST Rules, 2017 is rate of tax and quantum of ITC content

and not value/quantum of individual inputs (going into an output)

and the outputs.

4.6 The third ground of rejection of petitioner's claim for refund

is Circular No. 125/44/2019-GST dated 25.11.2019 which is not

applicable to the present case as it only pertains to one product

and many inputs whereas present being a case of many inputs

and many outputs, is also not based on correct understanding and

import of the aforesaid circular. In any case, that was not a

ground for rejection of the claim of the petitioner by the

Adjudicating Authority. Therefore, the affirmation of rejection of

the claim of the petitioner by the Appellate Authority on such

ground was not available.

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4.7 Further submission is that reference to table presented by

the department to buttress the submission that there is no

accumulation in two quarters in the financial year 2019-20 was

not the basis for the order passed by the Commissioner (Appeals).

There is no challenge to the computation of inverted rated

supplies but the claim is denied on the ground that present is not

a case of inverted duty structure. Computation of accumulated

credit on account of inverted rated supplies has to be only in

accordance with the provisions contained in Section 54 of the

CGST Act, 2017 by applying the formula prescribed in Rule 89 of

the CGST Rules, 2017 and not otherwise. Deduction of total

output liability from total ITC (as contained in the chart) is not the

correct way of arriving at the refund amount. The formula

envisages that the ITC gets apportioned on the basis of the

turnover, i.e., it gets allocated to inverted duty supplies and to

supplies other than inverted. Assuming, though not admitting,

that the method used by the department is correct, there is

accumulation in various periods. Referring to the language

narrated in Section 54 of the CGST Act, 2017, it is contended that

the term "output supplies" has been used in plural form which is

indicative of legislative intention that all output supplies are to be

included for ascertaining inversion and not just one output.

Rejection of claim of the petitioner is based on misinterpretation of

the words, "output supplies" as only output whereas the definition

as well as the formula prescribed under Rule 89(5) of the CGST

Rules, 2017 will only include supplies where the rate of tax on

output is lower than rate of tax on inputs.

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5. Submissions on behalf of the respondents:

5.1 Referring to the pleadings in the reply, learned counsel for

the respondents would submit that the petitioner's claim for

refund was scrutinised and after due application of mind to various

grounds and the facts obtaining on record as also taking into

consideration the spirit of provisions with regard to refund based

on inverted duty structure, the Adjudicating Authority rejected the

claim. The Appellate Authority affirmed the order of the

Adjudicating Authority after detailed consideration of the

contentions and having found that the refund claim filed by the

petitioner-taxpayer was not fit to be categorised under inverted

duty structure and claim of the petitioner was rejected. The

authorities, i.e., Adjudicating Authority and the Appellate Authority

both found that inputs and outputs both were attracting same rate

of GST of 5%, 12% and 18%.

5.2 Further submission of learned counsel for the respondents is

that under Section 54(3) of the CGST Act, 2017, a registered

person may claim refund of any unutilised input tax credit at the

end of any tax period meaning thereby that refund of unutilised

input tax credit shall be allowed only in cases where credit has

accumulated on account of rate of tax of inputs being higher than

the rate of tax of output supplies. Therefore, it is contended, in

order that a claim for refund is allowed under inverted duty

structure, it is not only required to be established that rate of tax

on inputs is higher than the rate of tax on output supplies, but

also that the credit has accumulated on that count only. He would

further submit that refund is allowable only by application of the

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formula specified in Rule 89(5) of the CGST Rules, 2017. In the

present case, rate of tax of inputs was found to be more or less

5%, 12% and 18% whereas the tax rate on output supply was

also 5%, 12% and 18%. ITC availed on the inputs procured at the

rate of 28% GST was very negligible. Taking into consideration

these peculiar facts obtaining on record, the Adjudicating

Authority as well as the Appellate Authority were of the view that

tax rate on the inputs and outputs are more or less the same and

thus, the petitioner does not qualify for refund and, therefore,

present is not a case covered under inverted duty structure. As

the authorities were of the opinion that inverted duty structure

scenario is not present, there was no occasion to apply the

formula mentioned in Rule 89(5) of the CGST Rules, 2017.

5.3 Learned counsel for the respondents also places reliance

upon the clarificatory circulars issued by the Central Government

on 31.12.2018 and 18.11.2019 wherein it has been clarified that

the refund of unutilised ITC in case of inverted duty structure, as

provided in Section 54(3) of the CGST Act, 2017, is available only

where ITC remains unutilised even after setting off of available ITC

for payment of output tax liability. He would further submit that

the petitioner, having availed input tax credit for the particular tax

period, utilised the same for payment of output tax liability and,

therefore, there was, in fact, no accumulation of tax as claimed by

the petitioner. Relying upon clarificatory circular dated

18.11.2019, it is submitted that no refund is available in respect

of unutilised transitional credit which is of earlier tax regime

(TRAN-1). A chart has been annexed with the written submissions

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to demonstrate that there was no accumulation of ITC. The

authorities found that the petitioner was engaged in the

manufacturing of cotton yarn, cotton blended yarn,

polyester/viscose yarn, polyester/viscose blended yarn and the

major inputs of the taxpayer was cotton, manmade fibre which

constituted 75% to 85% of total inputs of taxable value received

during the relevant period at the rate of 5% GST whereas during

the relevant period more than 75% of the total output supply of

the taxpayer is 100% cotton yarn and cotton blended yarn

(consisting of more than 50% cotton) which attracts rate of 5%

GST. Thus, the inward supply and outward supply was found to be

equal and at par, i.e., at the rate of 5% GST. The accumulation

during the relevant tax period was mainly because the petitioner

during the relevant period procured more inputs and affected less

output supplies. Therefore, it is contended, the accumulation was

not due to rate of tax of inputs being higher than the rate of tax

on output supplies. In such a situation, Section 54(3) of the CGST

Act, 2017 is not attracted as there is no accumulation on account

of input tax rates being higher than the output supply tax rates.

Learned counsel would further submit that Circular dated

31.12.2018 is not applicable because the said circular deals with

those cases where output supplies attract the single rate of GST

and multiple inputs are used attracting different rates of GST. As

in the present case, there are multiple output supplies attracting

different rate of GST (5%, 12% and 18%) and multiple input

supplies attracting same rate of GST (5%, 12% and 18%), the

petitioner is not entitled to refund by relying upon Circular dated

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31.12.2018. Relying upon the decision of the Hon'ble Supreme

Court in the case of Union of India & Others Vs. VKC

Footsteps India Private Limited (2022) 2 SCC 603, it is

submitted that stipulation in the first proviso to Section 54(3) of

the CGST Act, 2017, namely, "no refund shall be allowed", and "in

cases other than", operate as limitation on the expression "claim"

used in substantive part of Section 54(3) of the CGST Act, 2017.

Therefore, the provision is couched in negative language which

manifests intention of the legislature to confine refund only to two

specific situations as stipulated in sub-clause (i) and (ii) of first

proviso to Section 54(3) of the CGST Act, 2017. He would further

submit that refund, not being a fundamental right or constitutional

right, cannot be claimed de hors the statutory scheme.

6. Statutory provisions:

6.1 Section 54 of the CGST Act, 2017 provides for refund of tax.

Under sub-section (1) of Section 54 of the CGST Act, 2017, a

person claiming refund of "any tax and interest", if any, paid on

such tax or any other amount paid, is required to make an

application within a period of two years of the relevant date.

Further, Section 54(3) of the CGST Act, 2017 provides for a claim

of refund of unutilised ITC. The provision contained in sub-sections

(1), (2) and (3) of Section 54 of the CGST Act, 2017, being

relevant for adjudication of controversy involved in these petitions,

is extract below:

"54. Refund of tax
(1) Any person claiming refund of any tax and interest,
if any, paid on such tax or any other amount paid by
him, may make an application before the expiry of two

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years from the relevant date in such form and manner
as may be prescribed:

PROVIDED that a registered person, claiming
refund of any balance in the electronic cash ledger in
accordance with the provisions of sub-section (6) of
section 49, may claim such refund in [such from and]
manner as may be prescribed.

(2) A specialised agency of the United Nations
Organisation or any Multilateral Financial Institution and
Organisation notified under the United Nations
(Privileges and Immunities) Act, 1947 (46 of 1947),
Consulate or Embassy of foreign countries or any other
person or class of persons, as notified under section 55,
entitled to a refund of tax paid by it on inward supplies
of goods or services or both, may make an application
for such refund, in such form and manner as may be
prescribed, before the expiry of [two years] from the
last day of the quarter in which such supply was
received.

(3) Subject to the provisions of sub-section (10), a
registered person may claim refund of any unutilised
input tax credit at the end of any tax period:

PROVIDED that no refund of unutilised input tax
credit shall be allowed in cases other than-

(i) zero-rated supplies made without payment of
tax;

(ii) where the credit has accumulated on account of rate
of tax on inputs being higher than the rate of tax on
output supplies (other than nil rated or fully exempt
supplies), except supplies of goods or services or both
as may be notified by the Government on the
recommendations of the Council:

PROVIDED FURTHER that no refund of unutilised
input tax credit shall be allowed in cases where the
goods exported out of India are subjected to export
duty:

PROVIDED ALSO that no refund of input tax credit
shall be allowed, if the supplier of goods or services or
both avails of drawback in respect of central tax or
claims refund of the integrated tax paid on such
supplies.

(4) XXXXXX
(5) XXXXXX
(6) XXXXXX"

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6.2 Rule 89 of the CGST Rules, 2017 contains detailed provisions

with regard to application for refund of tax, interest, penalty, fees

or any other amount. Rule 89(5) of the CGST Rules, 2017

specifically deals with refund on account of inverted duty structure

by providing a specific formula which, for ready reference, is

extracted as below:

"89. Application for refund of tax, interest, penalty,
fees or any other amount

(1) xxxxxx
(2) xxxxxx
(3) xxxxxx
(4) xxxxxx

(5) In the case of refund on account of inverted duty
structure, refund of input tax credit shall be granted as
per the following formula:-

Maximum Refund Amount = {(Turnover of inverted rated
supply of goods and services) x Net ITC ÷ Adjusted Total
Turnover} - [{tax payable on such inverted rated supply
of goods and services x (Net ITC ÷ ITC availed on inputs
and input services)}].

Explanation: For the purposes of this sub-rule, the
expression-

(a) Net ITC shall mean input tax credit availed on
inputs during the relevant period other than the input
tax credit availed for which refund is claimed under sub-
rule (4A) or (4B) or both; and

[(b) "Adjusted Total turnover" and "relevant period"
shall have the same meaning as assigned to them in
sub-rule (4).]]]"

6.3 Thus, under the statutory scheme of the CGST Act, 2017 and

CGST Rules, 2017, claim of refund of any unutilised input tax

credit at the end of any tax period can be allowed subject to

fulfillment of statutory limitations and in accordance with the

formula as provided in Rule 89(5) of the CGST Rules, 2017.

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6.4 The statutory scheme of refund of tax under Section 54(3) of

the CGST Act, 2017 came up for consideration before the Hon'ble

Supreme Court in its authoritative pronouncement in the case of

Union of India & Others Vs. VKC Footsteps India Private

Limited (supra). The divergence between the views of two High

Courts in the matter of challenge to constitutional validity of Rule

89(5) of the CGST Rules, 2017 on the ground that it is ultra vires

Section 54, sub-section (3)(ii) of the CGST Act, 2017 formed

subject matter of consideration of the Hon'ble Supreme Court. The

background which led to enactment of Section 54(3) of the CGST

Act, 2017 providing for refund of accumulated credit due to

inverted duty structure was noted by the Hon'ble Supreme Court

as below:

"2. While envisaging a refund in the latter of the above
two situations, Parliament was cognizant of the fact that
ITC may accumulate due to a variety of reasons.
However, Parliament envisaged a specific situation where
the credit has accumulated due to an inverted duty
structure, that is where the accumulation of ITC is
because the rate of tax on inputs is higher than the rate
of tax on output supplies. Taking legislative note of this
situation, a provision for refund has been provided for in
Section 54(3). The Central Goods and Services Tax Rules
2017 ("the CGST Rules") have been formulated in
pursuance of the rule-making power conferred by Section
164 of the CGST Act. Rule 89(5) provides a formula for
the refund of ITC, in "a case of refund on account of
inverted duty structure". The said formula uses the term
"net ITC". In defining the expression "net ITC", Rule
89(5) speaks of "input tax credit availed on inputs."

After having dealt with the constitutional scheme of GST and

adverting to some of the key definitions contained in the CGST

Act, 2017 defining "goods", "services", "input", "input service",

"input tax", "input tax credit", "output tax" and "outward supply"

as also the provisions contained in Section 16 and 49 of the CGST

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Act, 2017 providing for eligibility and conditions for taking ITC,

legal position was analysed as below:

"73. The provisions of Section 16 and Section 49 indicate
the following position:

73.1. The ITC in the electronic credit ledger may be
availed of for making any payment towards output tax
under the CGST Act or under the IGST Act.

73.2. The amount available in the electronic cash ledger
may be used for making any payment towards tax,
interest, penalty, fees or any other amount payable under
the CGST Act or its Rules.

73.3. The balance in the electronic cash ledger or
electronic credit ledger after the payment of tax, interest,
penalty, fees or any other amount payable under the Act
or Rules may be refunded in accordance with the
provisions of Section 54.

73.4. Sub-section (6) of Section 49, in other words
contemplates a refund of the balance which remains in
the electronic cash ledger or electronic credit ledger in
the manner stipulated by the provisions of Section 54."

The Hon'ble Supreme Court analysed and interpreted Section

54(3) of the CGST Act, 2017 as below:

"76. The crux of the dispute in the present case pertains
to how sub-section (3) to Section 54 and Explanation 1 to
sub-section (1) of Section 54 are to be understood and
interpreted. For convenience of analysis, the
interpretation of sub-section (3) of Section 54 can be
distributed in its main tier and the three provisos. The
main part of sub-section (3) provides that a registered
person may claim refund of any unutilised ITC at the end
of any tax period. Tax period is defined in Section 2(106)
as the period for which the return is required to be
furnished. While enacting Section 54(3), Parliament has
envisaged a claim for the refund of unutilised ITC by a
registered person at the end of the tax period. The first
tier is the main provision of Section 54(3) which lays
down four conditions:

(i) A claim of refund;
(ii) By a registered tax person;
(iii) Of any unutilised ITC; and
(iv) At the end of any tax period, subject to the provisions
of sub-section (10).

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77. The second tier is the first proviso. The first proviso
begins with the expression "no refund of unutilised ITC
shall be allowed in cases other than" which is followed by
clauses (i) and (ii). The opening line of the first proviso
contains two expressions of significance, namely, "no
refund shall be allowed" and "in cases other than". The
expression "allowed" in the proviso must be contrasted
with the expression "claim" in the substantive part of sub-
section (3). A refund can be allowed only in the
eventualities envisaged in clauses (i) and (ii). The
expression "other than" operates as a limitation or
restriction.

78. The third tier of sub-section 54(3) consists of the two
clauses of the first proviso which deal with two distinct
cases: clause (i) deals with zero-rated supplies made
without payment of tax, while clause (ii) deals with credit
which has accumulated on account of the rate of tax on
inputs being higher than the rate of tax on output
supplies. Proviso (ii) embodies the concept of an inverted
duty structure. Proviso (ii) states that the refund of
unutilised ITC shall be allowed only when the credit has
accumulated because the rate of tax of inputs is higher
than the rate of tax on output supplies. Input, as we have
already noted, is defined in Section 2(59) to mean goods
other than the capital goods. "Output supplies" is not
defined in the statute. As seen above, Section 16
stipulates the eligibility and conditions for availing ITC.
ITC accumulates when the credit cannot be utilised either
partly or in whole and this may occur for a variety of
reasons. The credit of ITC may accumulate for several
reasons. Without spelling out an exhaustive list of
circumstances, the accumulation may be due to: (a) an
inverted duty structure when the GST on output supplies
is less than the GST on inputs; (b) stock accumulation;
(c) capital goods; and (d) partial reverse mechanism for
certain services. There could be other reasons as well,
such as excessive discounts or predatory pricing."

The legislative intent behind enacting clause (ii) of the first

proviso to Section 54(3) of the CGST Act, 2017 was noted by the

Hon'ble Supreme Court as below:

"82. While enacting clause (ii) of the first proviso to
Section 54(3) in the CGST Act, Parliament, took legislative
notice of a specific eventuality, namely, "where the credit
has accumulated on account of the rate of tax on inputs
being higher than the rate of tax on output supplies".
Parliament would be cognizant of the fact that ITC may
accumulate for a variety of reasons, of which an inverted
duty structure is one situation. Parliament was legislating

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to provide for a refund and therefore restricted it to the
two situations spelt out in clauses (i) and (ii) of the first
proviso. The opening words of the substantive part of
Section 54(3) contemplate a claim of refund of "any
unutilised input tax credit". Undoubtedly, any unutilised
ITC would include credit on account of tax charged on any
supply of goods or services or both. The opening sentence
of Section 54(3) provides for (i) a claim of refund by a
registered person; (ii) of any unutilised input tax credit;
(iii) at the end of any tax period. But the impact of the
first proviso, as its opening words indicate, is that:

82.1. "No refund" of unutilised ITC "shall be allowed" "in
cases other than" (i) and (ii).

82.2. The expression "claim" in the substantive part must
be distinguished from the phrase "shall be allowed" in the
opening sentence of the first proviso. Likewise, the
expression "may claim refund" in the opening part must
be distinguished from "no refund" in the opening part of
the first proviso.

82.3. The impact of the first proviso is that a refund of
unutilised ITC shall be allowed only in cases falling under
(i) and (ii). The expression "only" in the previous sentence
is not a judicial addition to statutory language but follows
plainly from the expressions "no refund" of unutilised ITC
shall be allowed "in cases other than".

82.4. The expression "in cases other than" is a clear
indicator that clauses (i) and (ii) are restrictive and not
conditions of eligibility. A refund, in other words, can be
allowed in the two contingencies spelt out in clauses (i)
and (ii) of the first proviso.

82.5. There is a clear distinction between clause (i) and
clause (ii) of the first proviso: (a) in the case of exports,
the contingency is zero-rated supplies without any
distinction between input goods or input services; (b) in
contrast for domestic supplies, clause (ii) relates to the
accumulation of credit on account of rate of tax on inputs
being higher than the rate of tax on output supplies.

82.6. The legislative draftsperson has made a clear
distinction between clause (i) and clause (ii) of the first
proviso and it was in this context that the opening words
of Section 54(3) have used the expression "may claim
refund of any unutilised ITC".

82.7. Explanation 1 to Section 54, while defining the
expression "refund" for the purposes of the section adopts
an inclusive definition covering (a) refund of tax paid on
zero-rated supplies of goods or services or both; (b)

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refund of tax paid on input goods or inputs services used
in making such zero-rated supplies; (c) refund of tax on
supply of goods regarded as deemed exports; and (d)
refund of unutilised ITC as provided under sub-section(3)
of Section 54.

82.8. Explanation 1 indicates that with reference to
exports, the legislature has brought within its fold ITC on
input goods and input services. In contrast, in the case of
domestic supplies it has contemplated refund of unutilised
ITC "as provided under sub-section(3)". The Explanation is
a clear indicator that in respect of domestic supplies, it is
only unutilised credit which has accumulated on the rate
of tax on input goods being higher than the rate of output
supplies of which a refund can be allowed. Clause (ii) of
the first proviso in other words is a restriction and not a
mere condition of eligibility."

7. Analysis and Conclusion:

7.1 The petitioner-company manufactures cotton yarn, cotton

blended yarn, polyester/viscose yarn, polyester/viscose blended

yarn. The rate of GST on these output supplies varies from 0.1%

to 12%. Raw material used for manufacturing of aforesaid goods

is cotton, manmade fibre, packing material, store consumables

and spares and other inputs on which rate of GST varies from 5%

to 28%. The description of inputs and output supplies and

respective rate of tax on each of the inputs and output supplies

would be clear from following table:

Description of Rate of GST on Inputs utilised in Rate of GST
output output manufacture of applicable
output on inputs
Cotton yarn Cotton 5%
5% Packing material 12%
Other inputs 28%
Store consumables 18%
and spares
Cotton blended Cotton 5%
yarn Manmade fibre 18%
5% Packing material 12%
Other inputs 28%

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Store consumables 18%
and spares
Polyester/Viscose Cotton 5%
blended yarn Manmade fibre 18%
12%
Packing material 12%
Other inputs 28%
Store consumables 18%
and spares
Polyester/viscose Manmade fibre 18%
Yarn 12% Packing material 12%
Other inputs 28%
Store consumables 18%
and spares
Other outward Cotton 5%
supply Manmade fibre 18%
0.1%
Packing material 12%
Other inputs 28%

7.2 From perusal of the aforesaid table, it is clear that while rate

of GST on many inputs and output supplies are the same, yet,

rate of GST on various inputs (raw materials) is higher than the

rate of GST on output supplies. It is further discernible that while

two output supplies namely cotton yarn and cotton blended yarn

are taxable at the rate of 5%, the rate of GST on inputs, except

cotton, is more than the rate of tax on output supplies. One of

the input (raw material) namely cotton attracts 5% GST, but all

other inputs namely packing material, store consumables and

spares, manmade fibre and other inputs carry higher rate of tax,

i.e., 12%, 18% and 28%.

As far as other two output supplies namely polyester/viscose

blended yarn and polyester/viscose yarn are concerned, rate of

GST on these output supplies is 12% on each goods. For

manufacturing of polyester/viscose blended yarn, as many as five

inputs (raw materials) are utilised, namely cotton, manmade fibre,
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backing material, store consumables and spares and other inputs.

Cotton alone is taxable at the rate of 5% which is lower than the

rate of GST on output supply. Other input, namely, packing

material carries 12% rate of GST which is equal to the rate of GST

on such output supply. However, three other inputs, namely,

manmade fiber, store consumables and spares and other inputs

attract higher rate of GST which is 18% and 28%.

Similarly, polyester/viscose yarn is also taxable @ 12% and

out of four inputs, the rate of GST on packing material alone being

12% is equal to the rate of tax on such output supply. However,

remaining inputs, namely, manmade fibre, store consumables and

spares as also other inputs carry rate of tax higher than the rate

of tax on such output supply.

Under the heading "other outward supply", the rate of GST is

only 0.1% whereas all the inputs (raw materials) used to

manufacture carry higher rate of GST, i.e. 5%, 12%, 18% and

28%.

7.3 The above comparative analysis clearly shows that all the

inputs taken together and utilised through the process of

manufacturing, the output supplies would carry higher rate of GST

as compared to the rate of GST on such inputs, either taken

individually or collectively both. The rate of tax on output is

ranging from 0.1% to 5% or 12% whereas rate of tax applicable

on some inputs may be 5% or 12%, but on remaining inputs, rate

of GST is certainly higher than 5% or 12%.

7.4 The provision contained in proviso (ii) to Section 54(3) of the

CGST Act, 2017, as it stands and on its plain reading, uses the

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expression, "where the credit has accumulated on account of rate

of tax on inputs being higher than the rate of tax on output

supplies". The language of the aforesaid provision is plain and

simple signifying the plurality of both inputs and output supplies.

The statute purposely uses the words, "inputs" and "output

supplies".

7.5 It is well settled that a taxing statute is to be strictly

construed. Conscious use of the plural words, "inputs" and "output

supplies" by the legislature has to be given full effect to. Use of

the word, "inputs" signifies a situation where there may be more

than one input and it is not possible to read "inputs" as "input"

alone, so as to restrict its meaning. In other words, one of the

basic principles of interpretation of statute is to read the statute

as it is.

7.6 The Hon'ble Supreme Court in the case of Commissioner of

Income Tax, Madras Vs. Kasturi & Sons Ltd., (1999) 3 SCC

346, while explaining the principle of strict construction of taxing

statute and relying upon its various earlier decisions, propounded

that in a taxing Act, one has to only look fairly at the language

used therein.

The Hon'ble Supreme Court in the case of State of

Jharkhand & Others Vs. Tata Steel Limited & Others, (2016)

11 SCC 147, while applying the rule of literal construction to a

taxing statute, held thus:

"22. Thus, the aforesaid decision makes it quite
clear that in a taxing statute there is no room for
any intendment but regard must be had to the
clear meaning of the words. The entire matter is
governed wholly by the language of the

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notification. It has also been held by the
Constitution Bench, if the taxpayer is within the
plain terms of the exemption, it cannot be denied
its benefits by calling in aid any supposed
intention of the exempting authority. That apart,
it has also been stated therein that if different
intention can be gathered from the construction
of the words of the notification or by necessary
implication therefrom, the matter is different.
The larger Bench has not applied the said
principle to the case involved therein."

At the same time, the shift from literal to purposive

construction has not left the taxing statutes untouched leaving

them "as some island of literal interpretation". The principle of

purposive construction will be applied when the literal construction

leads to absurdity as has been held by the Hon'ble Supreme Court

in the case of Commissioner of Central Excise, Pondicherry

Vs. Acer India Ltd., (2004) 8 SCC 173. The context, scheme

of the relevant Act as a whole and its purpose are as relevant in

construing a taxing Act as in construing any other Act.

7.7 In the case of The Controller of Estate Duty, Gujarat Vs.

Shri Kantilal Trikamlal, (1976) 4 SCC 643, it has been held

that every taxing statute has a fiscal philosophy-a feel of which is

necessary to gather the intent and effect of its different clauses.

Fiscal philosophy and legislative intent behind enacting and

introducing refund clause in the case of inverted duty structure, as

discerned and analysed by the Hon'ble Supreme Court in the case

of Union of India & Others Vs. VKC Footsteps India Private

Limited (supra), extensively relied upon and quoted

hereinabove, provides a beacon light in placing appropriate

interpretation and construction of clause (ii) of proviso to Section

54, sub-section (3) of the CGST Act, 2017. With regard to the

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objective behind the scheme of refund of unutilised input tax

credit on inverted duty structure, the words "inputs" and "output

supplies" need to be given full effect to without placing any

restriction on these words, much less restricting the same to a

situation of singular input and singular output supply. In other

words, the scheme of refund of unutilised input tax credit which

has accumulated on account of rate of tax on inputs being higher

than the rate of tax on output supplies cannot be restricted only to

those cases where there is single input and single output supply.

Taking into consideration the legislative intendment, objective of

the scheme of refund, the literal interpretation has to be given full

effect to. Consequently, the scheme of refund in case of inverted

duty structure will continue to apply irrespective of the number of

inputs and number of output supplies. At this stage, it would be

apposite to refer to pertinent observations made in this regard by

the Hon'ble Supreme Court in the case of Union of India &

Others Vs. VKC Footsteps India Private Limited (supra) as

below:

"86. ............... In an ideal tax regime, with a
uniform rate of taxes on inputs goods, input
services and outward supplies, the chance of
accumulating unutilised ITC as a result of an
inverted rate structure would be minimal. An
inverted duty structure arises where the rate of
tax on inputs exceeds the rate of tax on output
supplies as a result of which the unutilised ITC
may get accumulated. .............."

Therefore, in a case where there is accumulation of

unutilised ITC as a direct result of rate of tax on inputs exceeding

the rate of tax on output supplies, the scheme of refund as

embodied in Section 54(3) of the CGST Act, 2017 gets attracted.

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The Hon'ble Supreme Court in the aforesaid decision, having

analysed the report of the Joint Committee, Empowered

Committee of State Finance Ministers on Business Process for GST

and on Refund Process published in August, 2015, noted that

under the proposed GST law, ITC will be allowed, so as to remove

the cascading effect of taxes and it is the ultimate customer who

should bear the burden of taxes. It was also noticed by the

Hon'ble Supreme Court that there can be cases where there is an

accumulation of credit due to inverted duty structure. It was only

those cases of ITC accumulation which are on account of inverted

duty structure, i.e., GST on output supplies being less than the

GST on inputs that the scheme of refund would be applicable.

Accumulation of unutilised input tax credit for other reasons like

stock accumulation, capital goods and partial reverse charge

mechanism for certain services may not attract the refund

mechanism. In para no. 81 of the aforesaid decision, it was

observed by the Hon'ble Supreme Court that in other cases, there

are provisions based on recommendations of the Committee,

providing for carrying forward of unutilised ITC to the next tax

period(s).

7.8 We are not oblivious of the legal position as adumbrated in

Para no. 106 of the decision of the Hon'ble Supreme Court in the

case of Union of India & Others Vs. VKC Footsteps India

Private Limited (supra), which was made clear while relying

upon the dictum in the case of Assistant Commissioner of

Commercial Taxes (Asst.) Dharwar & Others Vs.

Dharmendra Trading Company & Others (1988) 3 SCC 570,

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that the principles governing a benefit, by way of refund of tax

paid, may well be construed on an analogous frame with an

exemption from the payment of tax or reduction in liability.

However, in view of our considerations and interpretation

placed on the provisions contained in clause (ii) of proviso to

Section 54(3) of the CGST Act, 2017, while applying the rule of

literal construction and strict interpretation, the statutory scheme

of refund of unutilised input tax credit is applicable despite there

being multiple inputs and output supplies provided it fulfills

statutory precondition that accumulation of unutilised input tax

credit is on account of rate of tax on inputs exceeding the rate of

tax on output supplies.

In the present case, the rates of tax on inputs are 5%, 12%,

18% and 28% whereas the rates of tax on output supplies are

0.1%, 5% and 12%. Obviously, the rate of tax on inputs is

certainly higher than the rate of tax on output supplies/various

end products. Merely because present cases involve multiple

inputs and multiple output supplies, the scheme of refund based

on inverted duty structure cannot be held to be inapplicable.

7.9 The orders passed by the Adjudicating Authority and the

Appellate Authority, impugned before this Court, have denied the

benefit of refund under the scheme of Section 54(3) of the CGST

Act, 2017 on considerations which are not legally permissible and

are against the statutory prescription and the legislative object.

The impugned orders proceed on erroneous assumptions and

presumptions. The premise on which the claim for refund has

been outrightly rejected is that the output sales is to the extent of

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80% of goods having 5% duty only and input too is majorly of 5%

rate. On that basis, it has been concluded that the rate is more or

less the same. This approach that "rate is more of less the same",

runs contrary to the statutory scheme. This patently violates not

only the letter but also the spirit of the law. The statutory

prescription being that where the credit has accumulated on

account of rate of tax on inputs being higher than the rate of tax

on output supplies is sought to be substituted on the consideration

that where the rate of tax is more or less the same. That would

amount to altering the legislative scheme. Once all the inputs and

output supplies on comparative basis lead to a situation where the

rate of tax on inputs is higher than the rate of tax on output

supplies, the scheme of refund is required to be given full effect to

and it cannot be denied on such considerations that rate of tax, on

comparative analysis, is more or less the same. This, at the same

time, perilously boarders perversity because the rate of tax on

many inputs is much higher than the rate of tax on output

supplies. While rate of tax on certain inputs is 18% and 28%,

none of the output supplies attracts rate of tax beyond 12%.

Then, how the rate of tax could be said to be more or less the

same. Further, on facts also, it is found that 100% cotton goods

are only 50% of the total goods and the rest is cotton dominated

blends for which other inputs have rates of 18% whereas output

rate is 5%. Balance outputs are synthetic dominated blends and

100% polyester/viscose for which inputs bear rates of 12%, 18%

and 28%. The factual assertions made in this regard in the writ

petitions have not been denied by the respondents. Therefore, we

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have to accept the submission of learned counsel for the petitioner

that even if the overall rate of all inputs is marginally higher than rate of output supplies, the accumulation of unutilised input tax credit on such account will bring it within the net of inverted duty structure.

7.10 The other ground of rejection of claim of refund is equally unsustainable in law as it proceeds on the ground that the claim of refund is mainly due to high input purchases and they were in stock during the claim period(tax period). The authorities, while examining the claim of refund of the petitioner, were not only obliged to apply the statutory scheme as contained in Section 54(3) of the CGST Act, 2017, in its true spirit, but also to keep in view the law providing for refund mechanism as contained in Rule 89(5) of the CGST Rules, 2017, which does not talk of the stock, but refers to output turnover (adjusted turnover) during the claim period. Rule 89(5) of the CGST Rules, 2017 envisages that total ITC claimed on inputs during the claim period gets consumed in respect of the turnover of the claim period. Obviously, once refund is sanctioned, the ITC claimed for the relevant tax period cannot be carried forward to the subsequent claim periods (tax periods). Thus, determining factor for applicability of Section 54(3) of the CGST Act, 2017 read with Rule 89(5) of the CGST Rules, 2017 is rate of tax and quantum of ITC content and not the value/quantum of individual inputs (going into an output) and the outputs. The stock based approach, therefore, violates the statutory scheme of refund.

(Downloaded on 11/11/2023 at 09:06:07 PM) [2023:RJ-JP:30569-DB] (33 of 35) [CW-8476/2021] 7.11 At this stage, we may usefully refer refer to Circular No. 79/53/2018-GST dated 31.12.2018 and Circular No. 125/44/2019-GST dated 18.11.2019 both issued by the Central Board of Indirect Taxes and Customs, GST Policy Wing, Minister of Finance, Department of Revenue, Government of India, wherein scheme of inverted duty structure has been held applicable in a situation where there are multiple inputs having rate of tax higher than the rate of tax on output supplies. Though the aforesaid circulars do not provide necessary guidelines in dealing with claims for refund where there are multiple outputs, it is clear that the competent authority has issued clear guidelines for application of refund mechanism even in those cases where there are multiple inputs which are in line with the statutory scheme of refund engrafted under Section 54(3) of the CGST Act, 2017. However, the situation as to how the refund scheme would be applied in cases of more than one output supplies has not been dealt with in any of the aforesaid circulars. In view of our detailed considerations hereinabove, where the rates of tax on some of the inputs are higher than the rates of tax on output supplies, where the outputs are more than one, the statutory scheme of refund based on inverted duty structure shall become applicable. 7.12 As to how the refund would be computed in case the conditions and limitations provided under Section 54(3) of the CGST Act, 2017 are fulfilled, is provided under Rule 89(5) of the CGST Rules, 2017 which provides for a formula for making such computation. In a case of accumulation of unutilised input tax credit on account of rate of tax on inputs being higher than the (Downloaded on 11/11/2023 at 09:06:07 PM) [2023:RJ-JP:30569-DB] (34 of 35) [CW-8476/2021] rate of tax on output supplies, the refund mechanism is governed by the said formula providing for maximum limit of refund and therefore, refund claim is to be determined on the basis of computation based on statutory formula prescribed in Rule 89(5) of the CGST Rules, 2017 and not on the basis of any other mode of computation and determination of actual amount of refund payment under the law.

7.13 During the course of arguments and in the written submissions filed by the parties, facts and figures of relevant tax periods (giving rise to more than one petition) have been placed before this Court. In some of the cases, learned counsel for the respondents highlighted that in respect of certain tax periods, there is no accumulation of unutilised input tax credit. Learned counsel for the petitioner referred to some of the figures to submit that even if it is assumed that in respect of certain tax periods, there was no accumulation of unutilised input tax credit, in many cases such position obtains on record. Since the orders impugned in these writ petitions are not based on such factual premises but the rejection of claim of refund is based on erroneous interpretation of law and on considerations, we find such factual premises to be untenable in law. Therefore, we would not enter into those factual aspects. However, since in all the cases, the legal premise on which claim of refund has been rejected is contrary to the letter and spirit of the scheme of refund as provided under Section 54(3) of the CGST Act, 2017 read with Rule 89(5) of the CGST Rules, 2017, we are inclined to set aside all the orders, impugned in these writ petitions, passed by the (Downloaded on 11/11/2023 at 09:06:07 PM) [2023:RJ-JP:30569-DB] (35 of 35) [CW-8476/2021] Adjudicating Authority and the Appellate Authority with a direction to the Adjudicating Authority to undertake fresh exercise of consideration of claim of refund in the light of the observations made by this Court in this order applying the same on case to case basis. It, however, goes without saying that where there is no accumulation of unutilised input tax credit, claim of refund would not arise at all.

7.14 Writ petitions are, accordingly, allowed in the manner and to the extent as indicated hereinabove. Impugned orders are set aside.

7.15 Office is directed to place a copy of this order on record of each connected writ petition.

7.16 No orders as to costs.

(ANIL KUMAR UPMAN),J (MANINDRA MOHAN SHRIVASTAVA),J MANOJ NARWANI / (Downloaded on 11/11/2023 at 09:06:07 PM) Powered by TCPDF (www.tcpdf.org)

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Rajasthan High Court - Jaipur

M/S Nahar Industrial Enterprises ... vs Union Of India on 31 October, 2023

Bench: Manindra Mohan Shrivastava, Anil Kumar Upman