The Goods and Services Tax Appellate Tribunal (GSTAT), Ernakulam Bench, has held that a refund application under Section 54(3) of the Central Goods and Services Tax Act, 2017 cannot be rejected on the ground that the underlying input tax credit was ineligible unless the tax authorities have first determined its wrongful availment or utilisation through proceedings under Section 73 or Section 74.
The bench of Subramanya Rayaprol (Vice-President) and Ramamoorthi Sriram (Technical Member) set aside the denial of an inverted duty structure refund amounting to Rs.7,07,173 and observed that refund proceedings cannot be converted into collateral proceedings for examining the eligibility of ITC that has not otherwise been disputed under the statutory recovery provisions.
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The appellant/assessee is engaged in manufacturing garments and is registered under the GST laws. Its inputs were taxable at the higher rate of 18%, while its finished products were subject to GST at the concessional rate of 5%.
This tax-rate mismatch resulted in the accumulation of unutilised ITC under the inverted duty structure.
The company consequently filed a refund claim of Rs.18,41,280 in respect of IGST for the period from July 2019 to September 2019 under Section 54(3), read with Rule 89(5) of the CGST and Kerala GST Rules.
The adjudicating authority, through an order dated January 28, 2022, partially sanctioned a refund of Rs.8,69,253 while rejecting Rs.9,72,027.
The company challenged the rejection before the Joint Commissioner (Appeals), State GST Department, Thrissur. The appellate authority granted partial relief of Rs.2,64,860 but sustained the rejection of the remaining Rs.7,07,173.
The company thereafter approached the GSTAT against the continued denial of the refund.
The appellant argued that the show-cause notice issued in Form GST RFD-08 was vague, non-specific and lacking in material particulars.
According to the company, the notice merely alleged that the refund claim included wrongly availed ITC of Rs.9,72,027. It did not provide invoice-wise details, identify the nature of the alleged ineligibility or disclose the calculation through which the proposed rejection had been arrived at.
The appellant further submitted that the original refund rejection order was equally non-speaking. It did not contain any specific findings explaining how the disputed ITC was ineligible or how it formed part of the refund claimed.
It was also contended that the first appellate authority had travelled beyond the show-cause notice by introducing a new ground that certain goods and services were not used “in the course or furtherance of business.”
The company maintained that this reasoning was neither mentioned in the show-cause notice nor adopted by the original adjudicating authority.
The appellant also challenged the appellate authority’s narrow interpretation of the expression “in the course or furtherance of business.”
It argued that the disputed credits related to consumables, maintenance materials and safety equipment used in its regular business activities. Though these goods did not become part of the finished garments, they were required for maintaining machinery, ensuring uninterrupted production, protecting workers and complying with statutory requirements.
According to the appellant, tax authorities cannot substitute their judgment for that of the taxpayer and decide whether a particular business procurement was commercially necessary.
More importantly, the company argued that the eligibility of ITC has to be determined under Sections 16 and 17 of the CGST Act through proceedings under Section 73 or 74.
Once the ITC was availed through statutory returns and was not challenged through the prescribed proceedings, its eligibility could not be reopened for the first time while processing a refund application under Section 54(3), the appellant submitted.
The State Tax Department contended that the company had understood the allegations and had submitted detailed invoice lists in response to the show-cause notice.
It maintained that an invoice-by-invoice verification had been undertaken and partial relief had already been granted by the appellate authority. Therefore, no prejudice had been caused to the appellant by the wording of the notice.
The Revenue further submitted that the first appellate authority was empowered under Section 107(11) to confirm, modify or annul the decision under challenge and pass an order considered just and proper.
According to the department, examining whether the goods qualified as “inputs” under Section 2(59) for calculating “Net ITC” under Rule 89(5) was part of the appellate authority’s statutory responsibility.
The disputed amount allegedly included credits relating to vehicle parts, automobile procurements, electrical fittings, PVC pipes, building infrastructure, nickel screens and equipment connected with textile printing machinery.
The Revenue argued that some procurements were capital goods, input services or supplies blocked under Section 17(5), while others did not have a direct connection with garment manufacturing.
Reliance was placed on the Supreme Court’s decisions in Union of India v. VKC Footsteps India Private Limited, Maruti Suzuki Limited v. Commissioner of Central Excise and TVS Motor Company Limited v. State of Tamil Nadu.
The Tribunal found merit in the company’s objections to the show-cause notice.
It noted that the notice contained only a general statement that the refund was ineligible on account of a wrong ITC claim and mentioned a consolidated amount of Rs.9,72,027. It did not provide an invoice-wise breakup or explain why the disputed credits were considered ineligible.
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