M/S Nahar Industrial Enterprises Limited vs. Union Of INDIA

Held

The Court held that the rejection of the petitioner's refund claims by the authorities was unsustainable in law. On the first issue, the Court found that the petitioner is entitled to a refund of unutilised ITC under Section 54(3) of the CGST Act, 2017, if the rate of tax on inputs is higher than the rate of tax on output supplies, even in cases involving multiple inputs and multiple outputs. The Court reasoned that the statutory scheme of refund, as embodied in Section 54(3) and Rule 89(5), focuses on the rate of tax and the quantum of ITC, not on the value of individual inputs or outputs. The Court also referred to the circulars issued by the Central Board of Indirect Taxes and Customs, which support the application of the inverted duty structure in such scenarios. On the second issue, the Court held that the authorities erred by considering the stock of inputs, as Rule 89(5) of the CGST Rules, 2017, clearly mandates computation based on the output turnover during the claim period. The Court emphasized that the stock-based approach violates the statutory scheme of refund. Consequently, the Court set aside all impugned orders and directed the Adjudicating Authority to re-examine the refund claims afresh, applying the principles laid down in the judgment. The Court clarified that where no accumulation of unutilised ITC exists, no refund would be admissible. The Court did not delve into the factual aspects of accumulation of ITC for specific periods, as the rejection was based on an erroneous legal premise.

Facts

The petitioner, M/s Nahar Industrial Enterprises Limited, engaged in textile manufacturing, filed multiple writ petitions challenging orders from the Additional Commissioner (Appeals), Central Goods and Services Tax, Jaipur. These orders rejected the petitioner's claims for refund of unutilised input tax credit (ITC). The petitioner's operations involve various raw materials with GST rates ranging from 5% to 28%, and the manufactured products include different types of yarn. The core of the dispute lies in the interpretation and application of the provisions related to refund of unutilised ITC, particularly concerning the concept of an 'inverted duty structure'. The petitioner argues that the authorities erred in rejecting their refund claims based on an incorrect understanding of the law.

Key Issues

1. Whether the petitioner is entitled to a refund of unutilised input tax credit under Section 54(3) of the CGST Act, 2017, on account of an inverted duty structure, when the rate of tax on inputs is higher than the rate of tax on output supplies, even if there are multiple inputs and multiple outputs? (Question of law) 2. Whether the authorities erred in rejecting the refund claims by considering the stock of inputs rather than the output turnover during the claim period, contrary to the provisions of Rule 89(5) of the CGST Rules, 2017? (Question of mixed law and fact) Petitioner's arguments: The petitioner contended that the rejection of refund claims was based on an erroneous interpretation of the law. They argued that an inverted duty structure, entitling them to a refund, arises when input tax rates exceed output tax rates, irrespective of the number of inputs or outputs. They further argued that the authorities incorrectly focused on the stock of inputs and failed to apply the formula prescribed under Rule 89(5) of the CGST Rules, 2017, which considers output turnover. They relied on Circular No. 79/53/2018-GST and Circular No. 125/44/2019-GST to support their interpretation of the inverted duty structure. Revenue's arguments: The respondents argued that in some tax periods, there was no accumulation of unutilised input tax credit, which would disentitle the petitioner from claiming a refund. They also highlighted that for certain tax periods, the overall rate of inputs was not higher than the rate of output supplies.