The Goods and Services Tax Appellate Tribunal (GSTAT), Kolkata Bench, has held that an inverted duty structure refund cannot be denied merely because the principal raw material and finished product fall under the same HSN code and attract the same GST rate, where other inputs used in the manufacturing process attract higher rates of tax.

The bench of Sunil Kumar Singh (Judicial Member) and Bijoy Kumar Kar (Technical Member) ruled that Section 54(3)(ii) of the Central Goods and Services Tax Act, 2017 does not distinguish between principal and ancillary inputs. Eligibility must therefore be examined by considering the various inputs used in the business, rather than comparing only the principal input with the finished product. 

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The company manufactures crushed stone and stone aggregates from river bed material, boulders, pebbles and gravel. Its principal raw material and finished products fall under HSN 2517 and attracted GST at 5% during the disputed period.

The company sought a refund of accumulated SGST input tax credit amounting to ₹7,04,974 for May 1 to August 31, 2022, under the inverted duty structure provisions.

Following scrutiny, the jurisdictional officer issued a show cause notice on September 20, 2023. After considering the company’s reply, the officer sanctioned the entire refund on October 6, 2023.

The Commissioner subsequently reviewed the sanction and directed the filing of a departmental appeal. The Additional Commissioner (Appeals) rejected that appeal on January 7, 2025, prompting the Revenue to approach GSTAT.

The department argued that the refund was inadmissible because both inward and outward supplies attracted GST at 5% under the same HSN classification.

It relied on CBIC Circular No. 135/5/2020-GST dated March 31, 2020, and Circular No. 173/05/2022-GST dated July 6, 2022, to contend that refund under an inverted tax structure was unavailable where input and output supplies were the same.

The department also challenged the inclusion of higher-taxed items such as lubricants, tyres, vehicle parts, loader and excavator parts, and crusher and screening plant spare parts. It alleged that these items had no direct use in manufacturing the finished product and had been included to claim an otherwise inadmissible refund.

The company disputed this position, arguing that its raw materials underwent substantial processing to become commercially distinct stone chips and natural aggregates. It also submitted that classification under the same HSN did not automatically make the input and output identical goods.

The tribunal observed that Section 54(3)(ii) permits refund where credit accumulates because the rate of tax on inputs exceeds the rate on output supplies.

The bench emphasised that the legislature had used the expression “inputs” in the plural and had made no distinction between principal and ancillary inputs. Introducing such a restriction through interpretation would be inconsistent with the statutory provision.

The tribunal found that the company used several inputs attracting GST at 18% and 28%, while its finished products attracted GST at 5%. These included screening and crusher plant spare parts, conveyor belt spare parts, tyres and lubricants.

It therefore held that comparing only the principal raw material with the principal output could not determine refund eligibility.

The bench also referred to Section 2(59) of the CGST Act, which defines inputs as goods, other than capital goods, used or intended to be used in the course or furtherance of business. It concluded that the definition extends beyond goods incorporated directly into the finished product.

Further, the tribunal accepted that river bed material and boulders underwent multiple manufacturing stages to emerge as natural aggregates and stone chips. Their classification under the same HSN did not negate the differences between the raw materials and finished goods.

The tribunal held that paragraph 3 of Circular No. 135/5/2020-GST addresses credit accumulation arising from a reduction in the GST rate on the same goods at different points in time.

That situation differed from the present dispute. The company’s principal raw material and finished products both attracted GST at 5%, while the accumulation arose from other inputs taxed at higher rates.

Accordingly, the tribunal found that the Revenue’s reliance on the circular was misplaced.

It also rejected reliance on Circular No. 173/05/2022-GST, noting its clarificatory nature and its treatment of supplies under concessional notifications. The bench held that it did not support denial of the refund in the circumstances of this case.

Relying on the Delhi High Court’s decision in Indian Oil Corporation Limited v. Commissioner of Central Goods and Services Tax & Others, the tribunal reiterated that CBIC’s power under Section 168(1) is intended to ensure uniform implementation of the CGST Act.

A circular cannot add restrictions to the legislation or curtail a refund entitlement available under the Act.

Finding no merit in the Revenue’s challenge, GSTAT upheld the appellate order and dismissed the departmental appeal. The sanctioned refund of ₹7,04,974 consequently remained undisturbed, with both parties directed to bear their own costs.

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