The Goods and Services Tax Appellate Tribunal (GSTAT), Kolkata Bench, while uphold the grant of refunds totalling ₹42.34 lakh to a garments company for February and March 2024, held that a taxpayer’s eligibility for refund of accumulated Input Tax Credit (ITC) under the inverted duty structure cannot be made dependent on whether the taxpayer is a manufacturer or a trader.
The Bench of Sunil Kumar Singh (Judicial Member) and Bijoy Kumar Kar (Technical Member) observed that the concept of manufacture is no longer decisive under the GST regime because GST is levied on the supply of goods or services, rather than at the point of manufacture.
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“GST is payable on the supply of goods or services or both. It is immaterial whether the respondent is engaged in the trading or manufacturing of goods,” the Tribunal held.
The appeals were filed by the department challenging two orders passed by the Additional Commissioner (Appeals), which had allowed the company’s refund claims under the inverted duty structure.
The assessee is engaged in the production of wearing apparel through processes including bleaching, dyeing, printing, cutting, stitching, branding, labelling and packing of readymade garments and raw cotton cloth.
According to the Tribunal’s order, the company procured fabric taxable at 5%, along with other inputs such as printing chemicals, packaging materials and stores attracting GST at 12% and 18%. Its finished products, including suits, tops, shorts, night suits and joggers falling under Chapters 61 and 62 of the Customs Tariff, were generally taxable at 5%.
The company filed refund claims of ₹34,47,623 for March 2024 and ₹7,86,037 for February 2024 under Section 54(3)(ii) of the Central Goods and Services Tax Act, 2017. The provision permits refund of unutilised ITC where credit accumulates because the rate of tax on inputs is higher than the rate of tax on output supplies.
The original adjudicating authority rejected both claims, principally on the ground that the inputs and outputs were the same goods falling under the same Harmonised System of Nomenclature, or HSN, classification. It consequently concluded that the claims were not eligible for refund under Section 54(3).
On appeal, the Additional Commissioner (Appeals) set aside the refund rejection orders and allowed the claims. The Revenue then approached the GSTAT under Section 112 of the CGST Act.
The department argued that the first appellate authority had accepted the company’s claim of carrying on manufacturing operations without adequately verifying the supporting documents.
It further contended that both the inputs and outputs were garments falling under the same HSN classification. Reliance was placed on paragraph 3.2 of CBIC Circular No. 135/05/2020-GST dated March 31, 2020, which states that refund of accumulated ITC is not available where input and output supplies are the same.
The department also alleged that certain invoices relating to capital goods and personal use had been wrongly included in the refund calculation. It raised questions about invoices allegedly not appearing in GSTR-2B, the segregation of ITC attributable to zero-rated supplies and the use of annual turnover figures instead of tax-period-specific figures.
The company opposed the appeals and submitted that Section 54(3)(ii) applies to every registered person and does not distinguish between a manufacturer and a trader.
It argued that the goods purchased in a raw or semi-finished condition underwent substantial processing before emerging as marketable finished apparel. The accumulated credit arose not merely from the principal fabric input but also from dyes, chemicals, printing materials and packaging inputs attracting GST at rates higher than the 5% tax applicable to the finished products.
The GSTAT rejected the Revenue’s contention that refund eligibility depended upon proof that the company was engaged in manufacturing.
Referring to Section 9(1) of the CGST Act, the Tribunal noted that central GST is levied on intra-State supplies of goods or services or both.
It observed that the first appellate authority had discussed the processes undertaken by the company and had found that the company was not merely a trader but was carrying out value-addition activities amounting to manufacture.
However, the Tribunal held that even this distinction was not material for deciding entitlement to an inverted duty refund.
“The concept of manufacture is no more relevant in the GST era since the levy of GST is not on the point of manufacture but on the point of supply,” the Bench observed.
The department had contested the refund primarily on the basis of manufacturing activity without appreciating the charging provisions of the CGST Act. The company’s eligibility for refund, therefore, did not depend on whether it was engaged in trading or manufacturing goods.
The Tribunal also rejected the Revenue’s reliance on Circular No. 135/05/2020-GST.
It explained that paragraph 3 of the circular deals specifically with the refund of accumulated ITC arising from a reduction in the GST rate on the same goods. The circular gives the example of a trader purchasing goods when they attract 18% GST and later supplying the identical goods after the tax rate is reduced to 12%.
The restriction contained in paragraph 3.2, therefore, applies where the same goods attract different tax rates at different points in time because of an intervening rate reduction.
In the present case, there was no subsequent reduction in the GST rate on the goods. The accumulation arose because several inputs used by the company attracted higher GST rates, while the finished apparel was taxable at 5%.
“The provisions of the circular are only applicable in cases where there is a reduction in the rate of GST,” the Tribunal held, adding that the Revenue’s reliance on the circular was factually incorrect.
The Bench also relied on the Madras High Court’s decision in M/s Vindhya Spinning Mills Private Limited v. Assistant Commissioner of CGST and Central Excise.
In that case, the High Court held that Section 54(3)(ii) does not distinguish between major and minor inputs. Refund cannot be denied merely because the tax rate on a principal input is the same as that applicable to the output when other inputs used in producing the output attract higher rates and cause ITC accumulation.
The Tribunal noted that Rule 89(5) of the CGST Rules provides the statutory formula for calculating the refund. In view of the Madras High Court ruling, it found no merit in the Revenue’s argument that the company was ineligible merely because the input fabric and finished apparel allegedly shared an overlapping HSN classification.
The Tribunal also rejected the contention that the refund had been calculated cumulatively for the entire financial year rather than separately for each tax period.
It found from the record that the original adjudicating authority had computed the net ITC after verifying the available data and that the refund calculations were based on period-specific figures in accordance with Rule 89(5).
The reference to annual figures by the first appellate authority was only for corroborating the existence of an inverted duty structure in the company’s business. It was not the basis on which the refund amount was quantified.
On the allegations concerning capital goods, personal-use invoices, GSTR-2B discrepancies and ITC connected with zero-rated supplies, the Tribunal found that the relevant documents had already been examined by the authorities.
The first appellate authority had recorded that invoices for inputs such as dyes, chemicals, acid slurry, paraffin wax and cotton hosiery fabrics were matched with Annexure-B and the corresponding details in GSTR-2A and GSTR-2B.
The Tribunal further noted that ITC on capital goods and input services had not been included in the computation of net ITC.
It held that the Revenue had failed to produce any evidence, apart from oral submissions, to rebut the factual findings recorded by the appellate authority.
Finding no infirmity in the orders granting the refund, the GSTAT dismissed both Revenue appeals and directed the parties to bear their own costs.
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