Madras High Court Grants ITC Refund To Vindhya Spinning Mills, Says Same Input Rate Can't Deny Relief

The Madras High Court on 14 July held that Goods and Services Tax (GST) authorities cannot deny a refund of unutilised input tax credit (ITC) under the inverted duty structure merely because the principal input and the finished product attract the same rate of tax, if other inputs used in manufacturing are taxed at higher rates, leading to accumulation of ITC.

Justice D. Bharatha Chakravarthy allowed two writ petitions filed by Vindhya Spinning Mills Private Limited, quashed the refund rejection orders, and directed the GST Department to process and sanction refunds of Rs. 10.88 lakh and Rs. 15.50 lakh, along with applicable interest, within three months after granting the company a personal hearing. The Bench held:

“The statute does not make any distinction between major and minor components. It clearly provides that if there is a higher rate of tax on inputs, the party is entitled to claim a refund of unutilised input tax credit.”

Vindhya Spinning Mills Private Limited, a manufacturer of combed cotton yarn, sought a refund of accumulated ITC under Section 54(3) of the Central Goods and Services Tax Act, 2017 (which permits refund of unutilised ITC in specified cases, including an inverted duty structure). It submitted that although raw cotton yarn and the finished product were both taxed at 5 per cent, several other manufacturing inputs, including chemicals, consumables and packing materials, attracted GST at 12 per cent and 18 per cent, resulting in accumulation of ITC.

The GST Department rejected the refund claims, relying on a Central Board of Indirect Taxes and Customs (CBIC) circular and contending that no inverted duty structure existed because the principal input and the output were taxed at the same rate.

Rejecting the Department's interpretation, the Court held that neither the CGST Act nor the Rules distinguish between major and minor inputs for the purpose of granting a refund under the inverted duty structure. It observed that the higher GST paid on chemicals, packing materials and other inputs resulted in accumulation of ITC, making the company eligible for a refund. It noted:

“though the rate of tax on cotton yarn is the same, with reference to the chemicals used, the packing and other materials used, there is a higher rate of tax on the output goods, and hence the petitioner is entitled to succeed. The necessary formula for the calculation is also prescribed in Rule 89 (5) of the Rules”

Further, the Bench observed that Rule 89(5) of the Central Goods and Services Tax Rules, 2017 (which prescribes the formula for calculating refunds under the inverted duty structure) already provides the mechanism for computing the refund, and therefore the Department could not deny the claim based on its interpretation of the law.

Accordingly, the High Court quashed both refund rejection orders and directed the GST authorities to process and sanction the refunds with applicable interest, in accordance with law, within three months after granting the company a personal hearing.

For Petitioner: N. Sudalaimuthu

For Respondent: R. Gowrishankar, Senior Standing Counsel