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

Held

The Court held that the rejection of the refund claims by the authorities was unsustainable in law. Regarding the first issue, the Court found that the authorities had erred in their interpretation of the inverted duty structure. It was held that even if the overall rate of all inputs is marginally higher than the rate of output supplies, it would fall within the ambit of an inverted duty structure. The Court emphasized that the statutory scheme under Section 54(3) of the CGST Act, 2017, read with Rule 89(5) of the CGST Rules, 2017, is to be applied in its true spirit. Concerning the second issue, the Court agreed with the petitioner that the authorities' focus on input stock was incorrect. Rule 89(5) of the CGST Rules, 2017, mandates consideration of output turnover (adjusted turnover) during the claim period, not the stock of inputs. The Court noted that the circulars issued by the Central Board of Indirect Taxes and Customs supported the application of the inverted duty structure even with multiple inputs. The Court set aside the impugned orders and directed the Adjudicating Authority to re-examine the refund claims based on the observations made, applying the statutory formula under Rule 89(5). It was clarified that where no unutilised ITC accumulation exists, no refund would arise.

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 argued that the rejection was based on an erroneous interpretation of the law. The core of the dispute revolves around the petitioner's eligibility for refund due to an "inverted duty structure," where the GST rate on inputs is higher than on output supplies. The tax periods for these claims are not explicitly detailed but are implied to be those leading to the impugned orders.

Key Issues

1. Whether the rejection of the petitioner's refund claim for unutilised input tax credit, based on the premise that the overall rate of tax on inputs was not higher than the rate of tax on output supplies, is legally sustainable, particularly in light of Section 54(3) of the CGST Act, 2017 and Rule 89(5) of the CGST Rules, 2017? 2. Whether the authorities erred in rejecting the refund claim 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? Petitioner's Arguments: The petitioner contended that the authorities misinterpreted the concept of "inverted duty structure" by not considering the cumulative effect of various inputs having higher tax rates than the output. They argued that the rejection based on stock was also incorrect as Rule 89(5) focuses on 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 certain tax periods, there was no accumulation of unutilised input tax credit. They also highlighted that in some cases, the overall rate of inputs was not higher than the output rate.