2023 (11) TMI 209 - HC - GST

Refund of unutilised input tax credit - 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 - HELD THAT - 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 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 . t 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. The Hon ble Supreme Court in the case of COMMISSIONER OF INCOME-TAX VERSUS KASTURI AND SONS LTD. 1999 (3) TMI 6 - SUPREME COURT , 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 Supreme Court in VKC Footsteps India Private Limited 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. 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 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 - 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. 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. 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 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. Impugned order set aside - petition allowed.

Summary

Issues Involved:
1. Rejection of refund claims for unutilized input tax credit (ITC) under the inverted duty structure.
2. Interpretation of Section 54(3) of the CGST Act, 2017 and Rule 89(5) of the CGST Rules, 2017.
3. Applicability of Circulars No. 79/53/2018-GST and No. 125/44/2019-GST.

Summary:

1. Rejection of Refund Claims:
The petitioner, a public limited company engaged in textile manufacturing, challenged the rejection of its refund claims for unutilized ITC accumulated due to an inverted duty structure. The refund claims were rejected by the Adjudicating Authority and affirmed by the Appellate Authority on the grounds that the petitioner's case did not fall under the inverted duty structure as the rate of tax on inputs and outputs was considered "more or less the same."

2. Interpretation of Section 54(3) and Rule 89(5):
The court analyzed Section 54(3) of the CGST Act, 2017, which allows for refund claims of unutilized ITC when the rate of tax on inputs is higher than the rate of tax on output supplies. The court emphasized the importance of the terms "inputs" and "output supplies," noting that the statute uses these terms in plural, indicating multiple inputs and outputs. The court held that the statutory scheme of refund applies irrespective of the number of inputs and outputs, provided the rate of tax on inputs exceeds the rate of tax on outputs.

3. Applicability of Circulars:
The court referred to Circulars No. 79/53/2018-GST and No. 125/44/2019-GST, which clarify the refund mechanism for inverted duty structures. The court noted that these circulars support the statutory scheme of refund for cases with multiple inputs and outputs. The court found that the authorities' reliance on these circulars to reject the refund claims was misplaced, as the circulars did not restrict the refund mechanism to cases with a single input and output.

Conclusion:
The court concluded that the rejection of the refund claims was based on erroneous assumptions and misinterpretations of the statutory provisions. The court set aside the impugned orders and directed the Adjudicating Authority to reconsider the refund claims in light of the correct interpretation of Section 54(3) and Rule 89(5) of the CGST Act and Rules, respectively. The court emphasized that the refund mechanism should be applied based on the statutory formula and not on any other considerations.