Whether the high use of inputs as compared to the selling price of goods sold is required to be justified while sanctioning refund of unutilized input tax credit.

PJ/Case Study/2020-21/153

02 May 2020

Case:
M/s K.K Steel industries (Order in Appeal No. 32-36 (DSD)GST/JDR/2019)

Introduction:

M/s K.K Steel Industries are engaged in the manufacture of utensils. They have claimed refund of accumulated input tax credit on account of inverted duty structure as the rate of GST on utensils is 12% whereas the inputs are procured at higher GST rate.
Issue involved:
Whether the high use of inputs as compared to the selling price of goods sold is required to be justified while sanctioning refund of unutilized input tax credit.
Brief Facts:

M/s K.K Steel industriesis engaged in supply of S.S Utensils with their main input being S.S patta having GSTIN No. 08AUPT1388H1ZR. Refund application of total unutilised credit on account of inverted duty structure of Rs.12,11,261/- for the months of October 17, November 17, January 2018, February 2018 and March 2018 has been rejected on the grounds that there is high use of inputs as compared to the selling price of goods sold.

Show cause notice was issued alleging that the refund claim filed by them is not admissible under the provisions of section 54(3) of the CGST Act, 2017.The appellant replied to the show cause notice issued to them. The submissions were not adhered to and the impugned order in original was passed for confirming the allegations levelled in the impugned show cause notice. The refund claim pertaining to SGST was rejected.

Assessee’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 entire basis for rejection of the refund claim filed by them is in case of refund pertaining to inverted duty structure, the refund sanctioning authority has to examine the value addition aspect. In this regard, the appellant submits that if the provision contained in the proviso to section 54(3) of the CGST Act, 2017 is studied, it is found that there is no condition regarding the quantum of value addition required for claiming the refund of credit accumulation on account of inverted duty structure. The proviso reads as follows:-

Provided that no refund of unutilised input tax credit shall be allowed in cases other than-

Zero rated supplies made without payment of tax;
Where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the government on the recommendations of the Council:

From the above provision, it is clear that there is no condition as regards the value addition required for claiming refund of accumulation of input tax credit on account of inverted duty structure. The only condition for claiming refund is that the rate of tax on inputs should be higher than the rate of tax on output supplies. The appellant submits that the rate of GST on their output supplies of utensils is 12% whereas inputs being patta patti is procured at the rate of 18%. As such, they are rightly eligible for claiming refund of accumulation of credit on account of inverted duty structure.

In continuation to the above, the appellant submits that even the provision contained in Rule 89(5) of the CGST Rules, 2017 does not prescribe that cost data or value addition analysis is required before sanctioning refund of input tax credit on account of inverted duty structure. Rather, the formula prescribed for granting refund takes into account the fact that refund of credit accumulated on account of inverted duty structure itself is granted to the assessee. The provision contained in Rule 89(5) of the CGST Rules, 2017 reads as follows:-

(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:-
Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} - tax payable on such inverted rated supply of goods and services.
Explanation:- For the purposes of this sub-rule, the expressions –
(a) “Net ITC” shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and
(b) “Adjusted Total turnover” shall have the same meaning as assigned to it in sub-rule (4)

The appellant submits that when the formula stated above grants refund of input tax credit in proportion to the turnover of inverted rated supply of goods and services, the allegation regarding analysis of value addition or excess usage of material is not at all tenable. As such, the order in original rejecting the refund claim on irrational grounds is not at all sustainable and deserves to be set aside.

The impugned order has alleged that the average purchase price of SS Patta/patti is Rs. 89.01 per kgs and the average sales price is Rs. 86.99 per kgs. which shows that they have tried to get refund by any means. In this regard, the appellant submits that the allegation is totally baseless as the details provided by them with respect to S SPatta/Patti pertained to trading and manufacturing both. The appellant submits that the details of average purchase price and average sales price of S SPatta/Patti in case of trading and manufacture for the period from July, 2017 to March, 2018 is separately tabulated as follows:-

SS PATTA/PATTI TRADING DETAILS:

Sales Value (in Rs.)	Sales Quantity (in Kgs)	Average Sales Price Per Unit (in Rs.)	Purchase Value (In Rs. )	Purchase Quantity (In Kgs)	Average Purchase Price Per Unit	Average Profit per Unit (in Rs.)
16105194	189719.200 KG	84.89	15996367	193802.180 KG	82.54	2.35

The appellant submits that in case of trading, the value addition is not significant and the average profit per unit is minimum. Therefore, the allegation that there was no value addition is not at all tenable and deserves to be set aside.

DETAILS OF SS PATTA/PATTI USED IN MANUFACTURING OF UTENSILS:

Sales Value of Utensils (in Rs.)	Sales Quantity of Utensils (in Kgs)	Average Sales Price Per Unit (in Rs.)	Purchase Value of Patta Patti (In Rs. )	Purchase Quantity of Patta Patti (In Kgs)	Average Purchase Price Per Unit	Average Profit per Unit (in Rs.)
16128446	158391.850 KG	101.83	18134302	208968	86.78	15.05

The appellant submits that in case of manufacturing, the value addition is significant which is clear from the average profit per unit as reflected in the table. Therefore, the allegation that there was no significant value addition is not at all tenable and deserves to be set aside.

The impugned order has also alleged that the appellant has claimed input tax credit on invoice no. 140 dated 30.10.2017 during October, 2017 for Rs. 16,053.93 + Rs. 16,053.93 but the said invoice does not exist in their books of accounts. In this regard, the appellant submit that the allegation is totally baseless as they have availed input tax credit on the basis of invoice issued by M/s Shanti Udyog. The copy of invoice is enclosed. Therefore, the contention of the order as regards non-existence of invoice in the books of accounts is totally absurd and deserves to be quashed.

The appellant submits that the refund of input tax credit on account of inverted duty structure is admissible as far as the rate of tax on input is higher than rate of tax on output irrespective of the proportion of material consumed by the assessee in manufacture of finished product. The appellant submits that the refund on account of inverted duty structure is not on the basis of proportion of inputs used rather it is admissible simply if the rate of tax on inputs is higher than the rate of tax on output. The appellant have also negated the submission as regards no value addition by the impugned order by separately providing the details of S SPatta/Patti used in manufacture of utensils and that traded by them. The appellant submits that although the profit margin in trading of S SPatta/Patti is insignificant, the value addition in case of manufacture of utensils is reasonable. Even otherwise, the appellant are not statutorily required to prove the quantum of value addition while claiming refund of accumulated input tax credit on account of inverted duty structure. Therefore, the impugned order rejecting their refund claim is not at all tenable and deserves to be set aside.
Decision:
The commissioner Appeals has set aside the impugned order and allowed the appeal of the appellant.
Conclusion:
The taxpayer need not prove if they there is no requirement in law. The refund of inverted duty structure only requires that the tax rate on inputs be higher than the tax rates on output. This has been evidently stated in the provisions of Section 54(3) of CGST Act and Rule 89(5) of CGST Rules.

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PJ/Case Study/2020-21/153
02 May 2020

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