2026-VIL-90-GSTAT-KLK
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SGST Tribunal

GST – Refund of accumulated Input Tax Credit under inverted duty structure, Relevance of classification as manufacturer or trader, Basis for refund eligibility – Revenue appealed against refund of accumulated ITC granted by first Appellate Authority under Section 54(3)(ii) of CGST Act 2017 - Revenue contended that respondent is engaged in trading and not manufacturing and therefore not eligible for refund of ITC under inverted duty structure - Respondent-assessee submitted that definition of registered person under Section 2(94) makes no distinction between trading entity and manufacturing entity and that the business involves substantial value addition through processes including bleaching, dyeing, cutting, stitching, packing, branding and labelling – Whether refund of accumulated ITC under inverted duty structure depends on whether the taxpayer is classified as a manufacturer or trader – HELD – In the GST regime the levy of GST is not on the point of manufacture but on the point of supply. As per Section 9(1) of the CGST Act 2017, GST is payable on supplies of goods or services or both. It is immaterial whether the respondent is engaged in trading or manufacturing of goods. The definition of registered person under Section 2(94) does not make any distinction between a trading entity and a manufacturing entity. The statute does not provide that the benefit of refund under Section 54(3)(ii) is available only to a manufacturer as opposed to any other registered person - The first Appellate Authority has correctly discussed in detail the processes adopted by the respondent and concluded that the respondent is engaged in value addition. The fact that respondent purchased raw or semi-finished goods and subjected them to substantial processing before emergence of finished marketable product demonstrates genuine value addition - Revenue's contention that respondent's eligibility for refund should be based on manufacturing classification is unsustainable. Refund eligibility under inverted duty structure depends on accumulation of ITC due to inputs being taxed at higher rate than output supplies, not on the classification of the taxpayer as manufacturer or trader - There is no infirmity in the order passed by the first Appellate Authority – Revenue appeal is dismissed - Refund of ITC under inverted duty structure despite overlapping HSN classification of input and output, Applicability of Circular 135/05/2020-GST, Scope of value addition through processing – Respondent purchased raw and semi-finished goods including ready-made garments and cloth, subjected them to dyeing, bleaching, printing, cutting, stitching, packing and branding and sold finished apparel at 5% GST. The inputs included dyes, chemicals, printing ink, packing materials at rates up to 18 percent and 28 percent – Whether refund of accumulated ITC under inverted duty structure can be denied when input and output have overlapping HSN classification merely on the basis of Circular No. 135/05/2020-GST notwithstanding value addition through processing and use of higher-taxed ancillary inputs – HELD – Circular No. 135/05/2020-GST is applicable only to cases where there is reduction in the rate of GST on the same goods over time. The heading of para 3 of the Circular clearly indicates it addresses refund on account of reduction in GST rate. The wordings such as attracting different tax rates at different points in time clearly indicate the Circular applies only when the same goods attract different rates at different points of time due to rate reduction - In the instant case the issue is entirely different since final products are sold at the same rate of GST with no reduction in rate. The fact that input fabric and output garment may carry overlapping HSN description does not preclude refund where accumulation of ITC arises due to various other inputs taxed up to 18% and 28% being used in manufacture of final product taxed at 5 percent - Section 54(3)(ii) read with Rule 89(5) does not make any distinction between principal and ancillary inputs or minor components. If there is higher rate of tax on other inputs used in the manufacturing process, the taxpayer is entitled to claim refund of unutilised input tax credit. The statutory formula under Rule 89(5) is a self-contained mechanism for computing refund covering all inputs used in manufacture – Revenue's reliance on Circular No. 135/05/2020-GST is factually incorrect and inapplicable to the present case. Refund cannot be denied merely on the basis of overlapping HSN between input and output when genuine value addition through processing and use of higher-taxed ancillary inputs creates inverted duty structure - Computation of refund of accumulated ITC on period-specific or annual basis, Application of Rule 89(5) formula, Significance of annual verification – Revenue contended that refund under inverted duty structure must be determined for each tax period and not on cumulative annual basis – Whether refund of accumulated ITC can be computed on annual basis or must strictly be computed on period-wise basis applying Rule 89(5) formula – HELD – The statutory formula prescribed under Rule 89(5) of CGST Rules 2017 requires computation of refund on the basis of Net ITC calculated for each relevant tax period applying the specific formula. Rule 89(5) does not mandate or permit computation of refund on cumulative annual basis - The operative basis of quantification of refund must be strictly governed by period-wise application of the Rule 89(5) formula to the data of each tax period. However, the overall annual basis verification used by adjudicating and appellate authorities to corroborate that the taxpayer's business model genuinely generates inverted duty structure and that month-to-month fluctuation in ITC accumulation is attributable to ordinary variation in purchase and sale volumes is permissible as verification mechanism. Such annual verification does not constitute the operative basis of computation but serves only to verify the authenticity and genuineness of the inverted duty claim - The computation of refund must be strictly on period-wise basis applying Rule 89(5) formula to period-specific data. The use of annual figures for overall verification to demonstrate genuine inverted duty structure is permissible as a corroborative mechanism but not as the operative basis of computation. The actual quantification undertaken by OAA was on period-wise basis hence there is no violation of Rule 89(5).
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