The Goods and Services Tax Appellate Tribunal (GSTAT), Kolkata Bench, has upheld an inverted duty structure refund of Rs. 59.24 lakh granted to a packaged tea supplier, ruling that packing materials used for marketing tea qualify as “inputs” under the Central Goods and Services Tax Act, 2017.
The bench of Sunil Kumar Singh (Judicial Member) and Bijoy Kumar Kar (Technical Member) observed that Section 54(3)(ii) does not distinguish between a “principal input” and “ancillary inputs”. Consequently, the refund could not be rejected merely because bulk tea purchased by the taxpayer and packaged tea sold by it were both taxable at 5%.
The taxpayer is engaged in purchasing tea in bulk and supplying it in containers, packets, pouches and sachets under a brand name. Bulk tea purchased by the taxpayer attracted GST at 5%, while the packing materials used for supplying the tea attracted GST at 12%.
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The final supply of packaged tea was treated as a composite supply taxable at 5%, with tea constituting its principal supply.
Due to the higher tax rate applicable to packing materials compared with the rate applicable to the packaged tea, the taxpayer accumulated unutilised input tax credit. It consequently applied for a refund of ₹59,26,077 under Section 54(3)(ii) of the CGST Act for the period from October 1, 2021, to March 31, 2022.
After scrutiny and issuance of a show-cause notice, the adjudicating authority sanctioned a refund of ₹59,24,669. The first appellate authority subsequently upheld the refund.
The Revenue challenged that decision before the GSTAT.
The Revenue argued that the taxpayer was not entitled to an inverted duty structure refund because both the principal input and the output were tea, taxable at the same GST rate of 5%.
According to the Department, the fact that packing materials attracted a higher rate of 12% could not, by itself, bring the case within Section 54(3)(ii). It maintained that only the principal input should be compared with the output supply while examining whether an inverted tax structure existed.
The Revenue also relied on paragraph 3.2 of CBIC Circular No. 135/5/2020-GST dated March 31, 2020. The circular dealt with refund claims where the input and output supplies were the same goods but attracted different tax rates at different points in time.
It further contended that the Calcutta High Court’s ruling in Shivaco Associates was distinguishable because that case concerned bulk and bottled liquefied petroleum gas attracting different tax rates.
The taxpayer responded that the inputs used for its outward supply were not limited to bulk tea. Packing materials were also necessary inputs because packaged tea could not be marketed or sold without them.
It argued that Section 54(3) does not create any distinction between principal inputs and packing materials. The definition of “input” under Section 2(59) covers all goods, other than capital goods, used or intended to be used by a supplier in the course or furtherance of business.
The taxpayer also relied on CBIC Circular No. 79/53/2018-GST dated December 31, 2018, which recognises packing materials as eligible inputs for claiming ITC, provided they are used for business or for making taxable supplies.
It further submitted that Circular No. 135/5/2020-GST applied only where ITC accumulated because of a subsequent reduction in the GST rate on the same goods. There had been no change in the GST rate applicable to tea in the present case.
The Tribunal observed that Section 54(3)(ii) permits a refund where credit accumulates because the rate of tax on inputs is higher than the rate of tax on output supplies.
The Bench placed particular emphasis on the legislature’s use of the expression “inputs” in the plural.
It held that the provision does not distinguish between a principal input and ancillary inputs. Reading such a restriction into Section 54 would be contrary to the statutory language and would not serve the ends of justice.
The Tribunal said that comparing only bulk tea with packaged tea, while ignoring packing materials, was factually incorrect. Packing materials formed part of the inputs used to make the taxable outward supply and could not be disregarded solely because tea remained the principal component.
Referring to Section 2(59), the Tribunal observed that the expression “input” has a broad meaning and covers all goods, other than capital goods, used or intended to be used in the course or furtherance of business.
It also relied on CBIC Circular No. 79/53/2018-GST, which specifically recognises the availability of ITC on stores, spares and packing materials used for business or taxable supplies.
The Bench held that packing materials, labels, cartons and plastic containers were indispensable for marketing packaged tea and, therefore, clearly qualified as inputs.
“Once goods are eligible for availing ITC, the same is allowed for refund under Section 54 of the CGST Act, 2017 unless the same is specifically disallowed by the statute,” the Tribunal observed.
The GSTAT rejected the department’s reliance on Circular No. 135/5/2020-GST.
It noted that paragraph 3 of the circular specifically concerned refunds of accumulated ITC arising from a reduction in the GST rate. The circular contemplated a situation where goods were purchased at a higher rate and, following a rate reduction, the same goods were sold at a lower rate.
The tea attracted GST at 5% both when purchased in bulk and when sold in smaller packages. There had been no reduction in the rate of tax on tea over time.
The accumulation arose because another input—packing material—was taxed at a higher rate. The Tribunal therefore held that the circular did not cover the facts of the case.
The Bench also relied on the Delhi High Court’s decision in Indian Oil Corporation Limited, which held that a taxpayer’s refund admissible under Section 54 could not be denied through a CBIC circular issued under Section 168(1).
The Tribunal reiterated that CBIC may issue instructions to ensure uniform implementation of the GST law, but it cannot add restrictions to the legislation or curtail a statutory benefit.
Accordingly, even if Circular No. 135/5/2020-GST were interpreted in the manner suggested by the Revenue, it could not override the refund entitlement flowing from Section 54(3)(ii).
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