The Madras High Court has held that refund can’t be denied merely because principal input, output attract the same GST rate under inverted duty structure.
The bench of Justice D. Bharatha Chakravarthy ruled that where input tax credit (ITC) accumulates due to higher GST paid on other inputs such as chemicals, consumables and packing materials, the registered taxpayer remains entitled to claim a refund under Section 54(3) of the Central Goods and Services Tax (CGST) Act, 2017.
The petitioner manufactures combed cotton yarn by processing raw cotton yarn using chemicals, consumables and packing materials. While both the principal input (raw cotton yarn) and the final product (combed cotton yarn) attracted GST at 5%, several ancillary inputs used in the manufacturing process were taxed at 12% and 18%.
The company contended that this differential tax structure resulted in accumulation of unutilised input tax credit, making it eligible for a refund under Section 54(3) of the CGST Act. It sought refunds of ₹10.88 lakh for January 2023 and ₹15.50 lakh (the impugned order originally related to a higher claimed amount) for March 2023, but both applications were rejected by the tax department.
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The tax department relied upon CBIC Circular No. 135/05/2020-GST, arguing that refund under an inverted duty structure is unavailable where the GST rate on the principal input is identical to that on the output supply.
The department argued that since the value of outward supplies substantially exceeded the value of the ancillary inputs, no genuine inverted duty structure existed. According to the department, the cost of packing materials and other inputs merely formed part of the value of the finished goods and therefore did not justify refund of accumulated ITC.
The petitioner submitted that the statute does not distinguish between principal inputs and other inputs. It pointed out that refund for an earlier tax period had already been sanctioned by the department on the same factual basis.
The company also relied upon several judicial precedents, including: Indian Oil Corporation Ltd. v. Assistant Commissioner of Central Tax (Karnataka High Court), MK Agrotech Pvt. Ltd. v. Union of India, Nainar Industrial Enterprises Ltd. v. Union of India (Rajasthan High Court), and Eveready Spinning Mills Pvt. Ltd. v. Assistant Commissioner (Madras High Court), all of which recognised that refund cannot be denied merely because the principal input and output attract identical tax rates where accumulated ITC arises due to higher taxation of other inputs.
The Court examined Section 54(3) of the CGST Act and observed that the statutory provision simply requires accumulation of input tax credit because the rate of tax on inputs exceeds that on output supplies.
The court emphasised that the legislation makes no distinction between major and minor inputs. Therefore, the authorities cannot introduce such a distinction through administrative interpretation.
The Court held that the presence of higher GST on chemicals, packing materials and other manufacturing inputs was sufficient to create an inverted duty structure even if the GST rate on the principal raw material matched the GST rate on the finished product.
The Court further observed that the refund computation mechanism is already prescribed under Rule 89(5) of the CGST Rules, making it unnecessary to deny refund on grounds not found in the statute.
The Court also noted that the circular relied upon by the department had already been declared unconstitutional in earlier decisions and therefore could not restrict the statutory benefit available under Section 54(3).
Reaffirming settled principles of tax law, the Court observed that taxing statutes must be interpreted strictly in accordance with their language, and administrative circulars cannot curtail benefits expressly granted by Parliament.
The Madras High Court quashed the refund rejection order dated 17 March 2025 relating to the January 2023 refund claim.
The court quashed the refund rejection order dated 15 May 2025 relating to the March 2023 refund claim.
The court directed the Assistant Commissioner to process and sanction the refunds along with applicable statutory interest and ordered that the refund be calculated in accordance with the formula prescribed under Rule 89(5) of the CGST Rules after providing an opportunity of personal hearing.
The court directed the exercise to be completed within three months from receipt of the Court’s order.
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