GST Update No 243 on denial of refund under inverted duty structure in case where input and output goods are same.

It is well known fact that claiming refund from the government department is a burdensome task since governmental authorities are stubborn and reluctant enough to sanction refund from the Government’s Exchequer. It is also observed that at times, clarifications issued by circulars tend to restrict the scope of refund claims to be filed by the assessees. In this context, reference may be made to the amendment made in clarification issued in para 3.2 of the Circular No. 135/05/2020-GST dated 31.03.2020 by the GST Council in its recent meeting. The Circular No. 173/05/2022-GST dated 06.07.2022 seeks to explain that the benefit of refund of credit on account of inverted duty rate structure will be available if the input and output goods are same but GST is being paid at concessional rate on the output goods. The old version of the clarification restricted claiming of refund by the assessees if the input and output goods are same. However, inspite various favourable judicial pronouncements on this issue, the revenue authorities are reluctant to follow the principle of judicial discipline due to which issue is litigated before higher judicial forums. Recently, the issue regarding denial of refund claim of inverted duty tax structure in similar situation was raised before hon’ble Rajasthan High Court in the case of M/S BAKER HUGHES ASIA PACIFIC LIMITED. The decision imparted in this case and the amendment made in the circular is subject matter of discussion of our present update. As far as the decision is concerned, the petitioner entered development contract with Vedanta Limited wherein project of exclusive rights to carry out petroleum operations was granted by Government of India. For this, a production sharing contract was entered between the Vedanta and Central Government. To procure essential goods for carrying out petroleum extraction, Vedanta entered sub-contract with the petitioner. The petitioner procured the goods from abroad and India at the GST rates ranging from 5% to 38% and delivered the same to the Vedanta at concessional GST rate of 5% subject to fulfillment of prescribed conditions. The petitioner submitted that to give a boost to oil and gas Industry, CBIC issued a Notification No. 3/2017-CGST dated 28.06.2017 providing GST rate of 5% on all supplies made in this respect subject to fulfilment of certain conditions such as procurement of a certificate from Directorate General to transfer the goods. The goods were procured at GST rate ranging from 5% to 28% and supplied to customer at 5% thereby attracting inverted tax structure for which refund was applied by the petitioner in accordance with Section 54 of CGST Act, 2017. However, the refund applied was rejected on the ground that input and output supplied are same considering Clause 3.2 of Circular dated 31.03.2020. The petitioner thereby relied on Para 59 of Circular No. 125/44/2019-GST-CBEC-20/16/04/18-GST prescribing that refund shall be granted as per inverted duty structure to the taxpayer and claiming that in case input and output are supplied at concessional rates, refund cannot be restricted. The Counsel of petitioner relied upon decision of Guwahati High Court in the case of M/S B.M.G. INFORMATICS PVT. LTD. V/S UNION OF INDIA, and Calcutta High Court in the case of M/S SHIVACO ASSOICATES & ANR. V/S JOINT COMMISSIONER OF STATE TAX wherein the circular was ignored and refund was granted to the assessee. Further, it was argued that subordinate legislation in form of statutory circular cannot supersede the parent statue and therefore, the impugned order deserves to be struck down. The Counsel of respondent relied on the Circular dated 31.03.2020 and argued that since input and output supplied are same, there is no value addition on goods supplied. Therefore, refund granted should be rejected. Further, the contentions of petitioner were fervently opposed. The Court held that Section 54 is unambiguous and does not carve out any restriction on claiming refund of input tax credit even if inputs and outputs are same. Further, the Circular dated 31.03.2020 does not pertain to the petitioner’s claim for refund as it was of prior period between September 2018 to September 2019 during which clarification dated 18.11.2019 was issued. The provision of claiming inverted tax structure refund does not mention any condition regarding value enhancement of goods supplied. Further, the decision of Guwahati High Court stated above is not challenged before any other Court. Therefore, the subordinate legislation cannot override the parent legislation and hence, the legitimate claim for accumulated ITC was directed to be refunded to the petitioner. The above decision is a landmark judgement wherein the adverse clarification issued vide circular dated 31.03.2020 was not implemented rather the statutory provisions were held to have precedence. It is worth mentioning here that although, the petitioner prayed to quash the Circular No. 135/05/2020-GST dated 31.03.2020 but the hon’ble Rajasthan High Court had simply stated that since the provisions contained in section 54 are clear, the same would supersede the clarification issued by the circular. The Hon’ble High Court refrained from quashing the said circular. Even if we refer to the decisions given by Guwahati High Court in the case of M/S B.M.G. INFORMATICS PVT. LTD. V/S UNION OF INDIA, and Calcutta High Court in the case of M/S SHIVACO ASSOICATES & ANR. V/S JOINT COMMISSIONER OF STATE TAX, it is found that the circular was not set aside and rather it was held that the statutory provisions should be made applicable. Hence, the action of the government to amend the Circular No. 135/05/2020-GST dated 31.03.2020 is proper and is in consonance with the decisions rendered by the High Courts. Therefore, the current position is that in the recent 47th GST Council Meeting, the government has issued Circular no. 173/05/2022-GST dated 06.07.2022 wherein it has been clarified that refund of credit accumulated on account of inverted duty rate structure will be admissible in case where inputs and output goods are same but the output supplies are made under a concessional GST rate notification due to which the rate of tax on output supplies is less than the rate of tax on inputs. The above clarification is definitely a huge sigh of relief to the assessees.

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GST Update No 243 on denial of refund under inverted duty structure in case where input and output goods are same.

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