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

Held

The Court held that the rejection of the petitioner's refund claims was unsustainable in law. It found that the inverted duty structure, as contemplated under Section 54(3) of the CGST Act, 2017, is applicable even when there are multiple inputs and multiple outputs, provided the rate of tax on inputs is higher than the rate of tax on output supplies. The Court reasoned that the statutory scheme, particularly Rule 89(5) of the CGST Rules, 2017, focuses on the rate of tax and the quantum of input tax credit relative to the output turnover, not on the value of individual inputs or a stock-based approach. The Court noted that the authorities erred by considering the stock of inputs and by not adhering to the formula prescribed in Rule 89(5). The Court also referred to the circulars issued by the Central Board of Indirect Taxes and Customs, which, while not fully addressing multi-output scenarios, indicated a clear intention to apply the refund mechanism in cases of higher input tax rates. The Court set aside the impugned orders and directed the Adjudicating Authority to re-examine the refund claims on a case-to-case basis in light of the Court's observations, clarifying that no refund would arise if there was no accumulation of unutilised input tax credit.

Facts

The petitioner, M/s Nahar Industrial Enterprises Limited, filed multiple writ petitions challenging orders passed by the Additional Commissioner (Appeals), Central Goods and Services Tax, Jaipur. These orders rejected the petitioner's claims for refund of unutilised input tax credit. The petitioner is engaged in manufacturing textiles, including spinning, weaving, and processing, and uses various raw materials with GST rates ranging from 5% to 28%. The output products are yarns. The core of the dispute revolves around the rejection of refund claims for unutilised input tax credit, which the petitioner argues is due to an inverted duty structure where input tax rates exceed output tax rates.

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, where the rate of tax on inputs is higher than the rate of tax on output supplies, even when there are multiple inputs and multiple outputs? Petitioner's arguments: The petitioner contended that the rejection of refund claims was based on an erroneous interpretation of the law. They argued that the inverted duty structure applies when the overall rate of tax on inputs is higher than the rate on output supplies, irrespective of the number of inputs or outputs. They relied on Circular No. 79/53/2018-GST and Circular No. 125/44/2019-GST, which they argued support the application of the inverted duty structure in such scenarios. They also argued that the authorities incorrectly considered the stock of inputs rather than the output turnover during the claim period, contrary to Rule 89(5) of the CGST Rules, 2017. Revenue's arguments: The respondents argued that in certain tax periods, there was no accumulation of unutilised input tax credit. They also appear to have rejected the claims based on a stock-based approach and the presence of multiple inputs and outputs, which they believed did not qualify for refund under the inverted duty structure.