M/S. Vindhya Spinning Mills Private Limited vs. The Assistant Commissioner Of CGST And Central Excise

In W.P.(MD)No.16757 of 2025, the petitioner challenges the order dated 17.03.2025. The petitioner's case is that it is engaged in the manufacture of combed cotton yarn. For this purpose, the petitioner purchases raw cotton yarn and undertakes a process involving the application of chemicals and other inputs, resulting in the production of combed cotton yarn.

According to the petitioner, the rate of tax applicable to the principal input, namely, raw cotton yarn, is 5%, which is the same as the rate applicable to the output product, viz., combed cotton yarn. However, certain other inputs, such as chemicals, consumables and packing materials, attract GST at rates of 12% and 18%, whereas the output supply is taxable only at 5%. Consequently, owing to the higher rate of tax on certain inputs vis-à-vis the output supply, input tax credit accumulates and remains unutilized. The petitioner therefore claims entitlement to a refund of such accumulated unutilized input tax credit under Section 54(3) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “the CGST Act”).

The petitioner's application for a refund for the January 2023 tax period was rejected by the impugned order dated 17.03.2025. Aggrieved thereby, the present writ petition has been filed. Page No.3 of 11 https://www.mhc.tn.gov.in/judis

W.P.(MD)No.16758 of 2025 arises out of an identical factual matrix. In that case, the petitioner's claim for refund for the tax period March 2023 was similarly rejected, necessitating the filing of the writ petition.

The learned counsel appearing for the petitioner submitted that, in respect of an earlier period, namely, July 2022, a refund claim made on the very same basis had been accepted by the authorities, and a refund was sanctioned in proceedings dated 16.07.2024. 7. Drawing the attention of this Court to Section 54(3) of the CGST Act, the learned counsel submitted that clause (ii) expressly entitles the petitioner to a refund when input tax credit accumulates because the rate of tax on inputs exceeds the rate of tax on output supplies. According to the learned counsel, the authorities erred in denying the refund despite the statutory entitlement.

The learned counsel further relied on paragraph 54(a) of the Circular dated 18.11.2019, which clarifies that where multiple inputs attract different rates of tax, the formula prescribed under Rule 89(5) of the CGST Rules must be applied irrespective of the individual rates of tax applicable to such inputs. Page No.4 of 11 https://www.mhc.tn.gov.in/judis

In support of the above contention, reliance was placed on the judgment of the Karnataka High Court in Indian Oil Corporation Ltd. v. Assistant Commissioner of Central Tax1, wherein the Court specifically considered Circular No. 135/05/2020-GST and held that the CBIC cannot issue circulars contrary to the provisions of the statute. The Karnataka High Court observed that Section 54(3) concerns the accumulation of unutilized input tax credit and does not prescribe any requirement regarding the comparative percentage of tax applicable to inputs and outputs. On that basis, the Court held that the assessee was entitled to a refund.

The learned counsel also relied upon the subsequent decision of the Karnataka High Court in MK Agrotech Pvt. Ltd. v. Union of India2, wherein, following the earlier decision, the Court held that the benefit cannot be restricted solely to the principal input and that a refund cannot be denied merely because other inputs also contribute to the accumulation of credit.

Reliance was further placed on the decision of the Rajasthan High Court in M/s. Nainar Industrial Enterprises Limited v. Union of 1 (2025) 174 taxmann.com 1 (Kar.) 2 (2025) 32 Centax 479 (Kar.) Page No.5 of 11 https://www.mhc.tn.gov.in/judis

The learned counsel also referred to the decision of this Court in M/s. Eveready Spinning Mills Private Limited v. The Assistant Commissioner4, wherein, after considering the decisions of various High Courts and noting that the impugned circular had been declared ultra vires, this Court allowed the writ petition and directed the grant of a refund in similar circumstances.

Per contra, the learned Senior Standing Counsel appearing for the respondents, relying on the counter affidavit, submitted that Circular No. 135/05/2020-GST clearly governs the issue. According to him, where the rate of tax applicable to the principal input and the output supply is identical, no claim for refund under an inverted duty structure can be maintained. It was contended that a proper interpretation of Section 54(3)(ii) of the CGST Act would lead to the same conclusion. 3 2023 (11) TMI 209 – Rajasthan High Court 4 2024 (7) TMI 1160 – Madras High Court Page No.6 of 11 https://www.mhc.tn.gov.in/judis

Referring to paragraph 9 of the counter affidavit, the learned Senior Standing Counsel submitted that the value of outward supplies in the present case substantially exceeds the value of inputs, and that the cost of packing materials and other ancillary inputs is absorbed into the value of the finished goods. Accordingly, the respondents contend that no inverted duty structure exists in the present case. The learned Senior Standing Counsel also sought to distinguish the decisions relied upon by the petitioner on the ground that those judgments arose in different factual contexts and involved different categories of goods.

I have considered the rival submissions advanced on either side and perused the materials available on record.

Regarding the prayer made, the enabling provision in Section 54(3) of the Act is extracted hereunder for ready reference: Section 54 - Refund of Tax: (1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed: Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub- section (6) of section 49, may claim such refund in 1 [such from and] Page No.7 of 11 https://www.mhc.tn.gov.in/judis

Thus, it can be seen that 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 output supplies, the party is entitled to claim a refund of unutilised input tax credit. It is now well settled that the taxing statute has to be construed as such. The catena of decisions quoted by the Learned Counsel for the petitioner Page No.8 of 11 https://www.mhc.tn.gov.in/judis

As a result, (i)W.P.(MD)No.16757 of 2025 stands allowed. The impugned Order No. 7/XO0601/2025-Refund dated 17.03.2025 stands quashed. The respondent is directed to process and sanction the refund of Rs. 10,88,231/- along with interest as per the provisions of the CGST Act, 2017, in accordance with the formula prescribed under Rule 89(5), after affording an opportunity of personal hearing, within three months from the date of receipt of the web copy of the Order. (ii)W.P. (MD) No. 16758 of 2025 stands allowed. The impugned order No. 12/XO0601/2025-Refund dated 15.05.2025 stands quashed. The respondent is directed to process and sanction the refund of Rs. 15,50,228/- along with interest as per the provisions of the CGST Act, 2017, in accordance with the formula prescribed under Rule 89(5), after Page No.9 of 11 https://www.mhc.tn.gov.in/judis

2026 NCC : Yes smn2 To The Assistant Commissioner of CGST and Central Excise, Sivakasi Division, Central Revenue Building, 1/749, Thiruthangal - Pallapatti Road, Thiruthangal - 626 130, Sivakasi. Page No.10 of 11 https://www.mhc.tn.gov.in/judis