Can excess refund claim not be filed on account of excess stock on inputs during the period?

PJ/Case Study/2020-21/158

11 July 2020

M/s Shree K.R Engineering Works (OIA No. 66(DSD)CGST/JDR/2020 dated 18.06.2020)

Introduction: M/s Shree K R Engineering Works have claimed refund of accumulated input tax credit on account of inverted duty structure for the month of February, 2019.

Issue involved: Can excess refund claim not be filed on account of excess stock on inputs during the period?

Brief Facts: M/s Shree K R Engineering Works have claimed refund of accumulated input tax credit on account of inverted duty structure for the month of February, 2019. A Show cause notice has been issued alleging that the refund claim field by them is not admissible under the provisions of section 54 of the CGST Act, 2017 as input tax credit in respect of import of goods not showing in GSTR-3B and that excess refund claim has been filed on account of excess stock on inputs during the period. Reply to show cause notice was submitted but the adjudicating authority didn’t consider the submissions made and passed an impugned order in original. Aggrieved by the OIO the appellant has filed an appeal before Commissioner Appeals where the contention is made in the below manner.

Applicant’s Contention: The assesse has contended in the following manner

The impugned order in original rejecting the refund claim filed by them is wholly and totally erroneous and is liable to be set aside.
The appellant submit that the present refund claim has been rejected on the grounds that the taxpayer has filed refund of ITC on account of inverted duty structure but in reality, the refund claim is filed on account of excess stock of inputs during a particular period.On scrutiny of the returns filed by the taxpayer and the document submitted along with the refund application, it is found that the taxpayer hasmade outward supply of Rs.42,37,892/- for the period February 2019,paid GST of Rs. 5,24,474/-.During the period, ITC of 13,10,636 have been taken on inward supplies having taxable value of Rs. 92,11,355/-, which is 2.17 times of outward supply. On the plain reading of above, it is clear that due to excess stock (inward supply),the ITC has been accumulated in the ledger of the taxpayer during the claim period. In this regard, the appellant reiterate that the allegation of the impugned order is without any legal backing. The appellant has claimed refund of input tax credit on account of inverted duty structure as per the prescribed formula and there is no dispute about that. The appellant submits that theyhave claimed refund according to the formula prescribed in Rule 89(5) of CGST Rules, 2017 which grants refund in proportion to turnover of inverted rated supply of goods and services subject to tax paid on inverted supply of goods or services. Accordingly, the formula prescribed takes care of the quantum of refund to be granted to the assessee subject to payment of tax on outward supplies. The appellant submit that they have claimed according to the mechanism prescribed and so the allegation is not at all sustainable. Moreover, the allegation is not backed by any provision contained either in the CGST Act, 2017 or in the CGST Rules, 2017 and is totally baseless. The appellant submit that the allegation should be supported by statutory provisions which is not the case and rather they have acted according to the provisions contained in Rule 89(5) of the CGST Rules, 2017. Therefore, the refund claim should be granted to them. Without prejudice to the above, the appellant further submit that even if it is accepted for the sake of argument that they have claimed excess refund on account of excess stock, in that case, their refund claim in the next period would be reduced automatically. As such, the allegation is illogical and absurd and the impugned order deserves to be set aside.
The impugned order has further alleged that although there is difference in tax rate but the accumulation is due to excess inputs purchased during the claimed period. The allegation of the appellant that if they claim excess refund on account of excess stock, then their refund claim in the next period would be reduced automatically has been rejected by stating that in the instant case the taxpayer has filed nil return for the subsequent period. In this respect, the appellant submits that filing of nil return for the subsequent period indicates that the refund claim has been reduced which substantiates their submission. Therefore, the rejection of refund claim on absurd and irrational grounds deserves to be set aside.
The impugned order has alleged that the appellant has filed refund claim for the month of October, 2018, December, 2018 and February, 2019 and filed nil refund for the month of September, 2018, November, 2018 and January, 2019 in these three months as the total ITC availed is less than the tax liability for the particular period. It is also stated that from March, 2019 to March, 2020, total ITC availed is 77,59,716/- and total liability stands at Rs. 86,89,713/- which clearly depicts that there is no accumulation of credit due to inverted duty structure in fact there is excess payment to be made by the claimant during the said period. The appellant submits that the formula prescribed itself restricts the refund claim filed by the taxpayer and refund is granted only if the credit is more than the tax paid on the supply of inverted rated goods. It is only for this reason that for the months of September, 2018, November, 2018 and January, 2019 nil refund claims were filed by them. Consequently, the allegation of excess claim on account of high stock of inputs is not at all tenable. The appellant submits that they are engaged in manufacturing of umbrella parts which is a seasonal business. The sales are high in the months immediately preceding the monsoon season whereas there is comparatively low sales in other months. Consequently, the requirement of inputs also varies and it is quite possible that high stock of inputs is procured in particular months. However, in case where the stocks are maintained at low levels, their refund claims are also nil. Therefore, automatically there is a balance and there is no undue claim filed by them. The appellant further submits that requirement of inputs depends not only on the demand of their product which is seasonal but also on other factors such as discount policies of the suppliers of raw materials. The inputs may be procured in more quantity when huge discounts are offered by the suppliers of inputs. Therefore, the stock of inputs maintained by them is not dependent on the quantum of refund to be claimed by them and the allegation for rejection of their present refund claim is totally baseless and order deserves to be quashed.
The appellant further wish to place reliance on the decision given by the hon’ble Commissioner Appeals in the case of M/s K K Steel Industriesvide Order in Appeal No. 32-36 (DSD) CGST/JDR/2019 dated 18.12.2019 wherein the refund claim filed under inverted duty structure was denied on the ground that the cost data or value addition analysis was not provided while claiming such refund claim. It was held by the Commissioner Appeals that the refund claim under inverted duty structure is to be strictly scrutinized as per formula given under Rule 89(5) as prescribed under law. It was concluded that if the adjudicating authority had found something suspicious in appellant’s account such as high use of inputs, separate inquiry proceedings should have been initiated. The appellant submit that the benefit of this decision is equally applicable in the present case as there is no separate proceedings initiated for excess stock and the refund claim cannot be denied for assumptions and presumptions. Therefore, the order rejecting refund claim on baseless allegation that there was excess stock of inputs deserves to be set aside and the refund claim should be allowed. It is pertinent to mention that the above order was relied upon by the appellant in their reply to the show cause notice but the same has not been considered while passing the impugned order. The appellant submits that the learned adjudicating authority is required to discuss and distinguish the reliance placed by the appellant on decision but since the impugned order has not done so, the same turns out to be a non-speaking and non-reasoned order which is not tenable in light of the decision given by Hon’ble Apex Court in the case of STATE OF HIMACHAL PRADESH VS SARDARA SINGH [2008-TIOL-160-SC-NDPS].

Reasoning:
The order has been passed on the basis of the following reasons.

1.Refund of inverted duty structure shall only be granted as per formula prescribed uder Rule 89(5) of CGST Rules, 2017 as the formula itself doesnot allow any refund if the output tax liability exceeds the input tax credit availed during the period for which refund is filed.
2. There is no need to check Input tax credit and tax liability for full financial year when the refund claim for inverted duty structure is filed at the end of any tax period.
3. As per the provisions contained under Section 54 of the Act it is no where mentioned that the purchases in a particular month cannot exceed the sales.

Decision:The appeal has been allowed in favour of the appellant and set aside the order of adjudicating authority. Refund has been sanctioned to the appellant.

Conclusion: Formula prescribed for obtaining inverted duty structure does nowhere mention that refund of excess stock purchased in a particular tax period cannot be applied. The provisions of the act only mention that refund can be applied for any tax period. Since the appellant carries on the business of umbrella parts which is seasonal, it is very clear that he shall purchase the inputs taking advantage of the discount schemes. So if he applies for refund claim in the coming months then there shall be nil refund amount. So the balance is being maintained. Therefore, the contention of the department that excess refund claim for a particular month cannot be applied for is wrong. Refund claim is to be disbursed on the basis of formula but not on the quantum of refund applied.

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PJ/Case Study/2020-21/158
11 July 2020

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