The Goods and Services Tax Appellate Tribunal (GSTAT), Kolkata Bench, has upheld a refund of Rs. 4 lakh granted to an agarbatti manufacturer after finding that the input tax credit accumulated because the GST rates on the inputs were higher than the rate applicable to the finished product.
The bench of S.G. Chattopadhyay (Judicial Member) and Bijoy Kumar Kar (Technical Member) that the restrictions contained in CBIC circulars concerning refund claims involving the same input and output goods could not be applied where the raw materials and the finished goods were commercially distinct.
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It further observed that circulars issued by the Central Board of Indirect Taxes and Customs (CBIC) are binding on departmental officers but do not have a binding effect on the GST Appellate Tribunal. Such circulars may nevertheless be considered for their persuasive value while interpreting the law.
The dispute arose from a refund application filed by the taxpayer for the period from April 2022 to March 2023. The taxpayer sought a refund of ₹4 lakh on account of input tax credit accumulated under an inverted duty structure.
According to the refund application, the taxpayer’s turnover from inverted-rated supplies was approximately ₹74.75 lakh. The tax payable on those supplies was ₹3.75 lakh, while the admissible net input tax credit, following departmental verification, was computed at ₹8.02 lakh.
On January 18, 2024, the Assistant Commissioner of the Siliguri CGST and Central Excise Division sanctioned the entire refund claimed by the taxpayer under Section 54 of the Central Goods and Services Tax Act, 2017.
The sanctioned amount comprised:
- ₹1 lakh in respect of IGST;
- ₹1.50 lakh in respect of CGST; and
- ₹1.50 lakh in respect of SGST.
The adjudicating authority found that the refund application had been filed within the prescribed limitation period. It also noted that the taxpayer had filed the requisite returns and that no recoverable arrears were outstanding against it.
Revenue Challenged Refund Sanction
The Revenue challenged the refund order before the first appellate authority.
Its principal contention was that the refund was inadmissible in view of paragraph 3.2 of CBIC Circular No. 135/05/2020-GST dated March 31, 2020.
The department also relied on CBIC Circular No. 173/05/2022-GST dated July 6, 2022. It argued that the taxpayer’s claim did not fall within the inverted duty structure contemplated under Section 54(3)(ii) of the CGST Act.
The first appellate authority, however, rejected the Revenue’s appeal and upheld the refund order.
The Revenue thereafter approached the GST Appellate Tribunal under Section 112(1) of the CGST Act, reiterating that the refund claim was not covered by Section 54(3)(ii).
Inputs Taxed At 12% To 18%, Agarbatti At 5%
Opposing the departmental appeal, the taxpayer submitted that it manufactured agarbatti using perfumes, fragrances, chemicals, packaging materials, cardboard and other raw materials.
GST on these inputs ranged between 12% and 18%, whereas the manufactured agarbatti was supplied on payment of GST at 5%.
The difference between the higher GST rates on the raw materials and the lower GST rate on the finished product resulted in the accumulation of unutilised input tax credit.
The taxpayer emphasised that agarbatti falling under HSN 3307 was commercially and functionally distinct from the perfumes, fragrances, chemicals, packaging materials and other goods used in its manufacture.
Therefore, the restriction relating to situations where inputs and output supplies were the “same goods” could not be invoked to reject the refund claim.
Two Questions Before GSTAT
The Tribunal considered two principal questions:
- Whether the taxpayer’s credit accumulated because the GST rate on the inputs was higher than the rate on the output supplies, as contemplated under Section 54(3)(ii); and
- Whether paragraph 3.2 of CBIC Circular No. 135/05/2020-GST created an embargo against the taxpayer’s refund claim.
Accumulation Resulted From Inverted Duty Structure
The Tribunal noted that Section 54(3) permits a registered person to claim a refund of unutilised input tax credit at the end of a tax period, subject to the restrictions prescribed in the provision.
One of the circumstances in which such a refund is available is where credit accumulates because the rate of tax on inputs is higher than the rate of tax on output supplies, other than nil-rated or fully exempt supplies.
In the present case, it was undisputed that the taxpayer paid GST ranging between 12% and 18% on the inputs, whereas the output supply of agarbatti attracted GST at 5%.
Referring to the definition of “input” under Section 2(59) of the CGST Act, the Tribunal observed that the perfumes, fragrances, chemicals, packaging materials and cardboard used in the agarbatti business constituted inputs used in the course or furtherance of business.
The Bench said:
“As a result, there cannot be any doubt that ITC was accumulated on account of Inverted Duty Structure contemplated under Section 54(3)(ii), CGST Act, 2017.”
The Tribunal, therefore, concluded that the refund claim was squarely covered by clause (ii) of the first proviso to Section 54(3).
Supreme Court’s VKC Footsteps Ruling Considered
The taxpayer relied upon the Supreme Court’s decision in Union of India v. VKC Footsteps India Private Limited.
The Tribunal noted that the Supreme Court had explained that refunds under Section 54(3) were confined to the two situations expressly identified in clauses (i) and (ii) of its first proviso.
In relation to an inverted duty structure, the refund must arise because the rate of tax on input goods is higher than the tax rate on the output supplies.
Applying the Supreme Court’s interpretation, the Tribunal found that the present dispute fulfilled the statutory requirement because the credit had accumulated due to the higher tax rate on the input goods used in manufacturing agarbatti.
Circular Concerning Same Goods Held Inapplicable
The Tribunal then examined Circular No. 135/05/2020-GST, under which CBIC had clarified the availability of refunds where accumulated credit arose because of a reduction in the GST rate.
Paragraph 3.2 of that circular dealt with cases where the input and output supplies were the same goods but attracted different GST rates at different points in time.
The circular was subsequently amended through Circular No. 173/05/2022-GST. The amended clarification provides that refund would ordinarily not be available where the inputs and outputs were the same goods attracting different rates at different points in time.
However, it also recognises that a refund may be available where the same goods are supplied at a concessional rate under a government notification, subject to the applicable conditions.
The Tribunal found that the present matter did not involve the same goods being treated as both inputs and output supplies.
The taxpayer purchased perfumes, fragrances, chemicals, packaging materials and cardboard, while the outward supply consisted of manufactured agarbatti. The inputs and finished product were, therefore, distinct.
Accordingly, the Revenue could not rely on the CBIC circulars to deny the refund.
CBIC Circulars Do Not Bind GST Appellate Tribunal
The Tribunal also reiterated its earlier ruling in Commissioner v. Power Tech Global Private Limited, in which it had held that CBIC circulars contain instructions and directions for central tax officers.
Such departmental officers are required to follow the circulars, but the instructions do not bind the GST Appellate Tribunal.
The Bench also referred to the GSTAT Principal Bench ruling in Dow Chemical International Private Limited v. Commissioner of State Tax. In that case, the Principal Bench held that the Tribunal was not a department under the CBIC and was consequently not bound by CBIC circulars.
The Kolkata Bench observed that such circulars can be examined for interpretative purposes and may have persuasive value, but they cannot override the statutory provision or bind a judicial authority such as GSTAT.
Revenue’s Appeal Dismissed
The Tribunal concluded that both the original adjudicating authority and the first appellate authority had correctly interpreted Section 54(3)(ii).
Since the taxpayer’s input tax credit accumulated because the GST rates on the inputs were higher than the rate applicable to its output supplies, the refund was legally admissible.
Upholding the first appellate authority’s decision, the GSTAT dismissed the Revenue’s appeal without any order as to costs.
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