Department cannot deny the ITC refund on the ground GST Circular contra to GST Act: Rajasthan High Court

Jul 4, 2022 | Blog | 0 comments


The Petitioner entered into the development contract with the company name Vedanta Limited which has been granted exclusive rights to carry out petroleum operations in Rajasthan by GOI. For this purpose, a Production Sharing Contract was executed between Vedanta and the Central Government. In order to procure essential goods, materials and equipment required for carrying out the petroleum exploration and production operations as prescribed in the Production Sharing Contract, Vedanta entered into a sub contract with the petitioner for the supply of these articles.

As per terms of the contract, the petitioner was required to procure the specified goods, material and equipment from India and abroad for onward dispatch to its Customer i.e. Vedanta. For executing the aforementioned supply of goods, the petitioner obtained registration under the CGST/RGST Acts and claims to have been regularly filing returns and paying tax to the Central/ State Government. For the purpose of execution of the contract, the petitioner procured goods from authorized vendors at GST rates varying between 5% to 28%.

Central Government issued a Notification No.3/2017- CGST dated 28.06.2017 providing for an effective GST Rate of 5% on all supplies made for specified operations subject to certain conditions.

The petitioner, procured the goods by paying GST from 5% to 28% (Input Tax) and supplied the same to the Vedanta at the fixed GST rate of 5% (Output Tax) under the notification No.3/2017-Central Tax (Rate), dated 28.06.2017

It was claimed that Input Tax Credit available to the petitioner is much higher than its Output Tax Liability and as a consequence, after complete utilization of the credit towards the Output Tax Liability, a significant percentage of Input Tax Credit accumulated in favor of the petitioner on account of difference in rate of tax (GST) which was much higher than the rate of output tax. The petitioner has thus claimed that it is entitled to refund under the inverted duty structure as provided by the CGST and RGST Acts.

The petitioner filed a legitimate refund claim quantified at Rs.27,02,26,876/- in FORM No.GST-RFD-01 for the period between September 2018 to September 2019.

However, Petitioner was summoned by the respondent and alleged that why the refund claim of Rs. be not rejected in light of the circular dated 31.03.2020, which stipulates that refund under the Inverted duty structures in terms of section 54(3)(ii) of the CGST/RGST would not be available where the Input and Output supplies are the same.

Contention from the petitioner

The petitioner relied upon Para 59 of the Circular No.125/44/2019-GST – CBEC-20/16/04/18-GST wherein, it has been clarified that refund under Section 54(3)(ii) of the CGST Act i.e. inverted duty structure, is to be allowed when the inputs are being procured at the normal GST rate and the output supplies are being made at a lower GST rate because of the lower rate notification in place.

Petitioner filed the SCN reply and relied upon the notification dated 18.11.2019, which approves refund in cases where input and output supplies are same and where GST on output supply is fixed at lower rate.

Respondent rejected the refund claim submitted by the Petitioner by citing circular dated 31.03.2020.

Petitioner relied upon the judgement of B.M.G Informatics Pvt. Ltd. Vs UOI & Os, & M/S Shivaco Associates & Anr vs Joint Commissioner of State Tax, and urged that in the case of B.M.G Informatics Pvt. Ltd. Vs UOI & Os, Hon’ble Guwahati High Court categorically disapproved the stipulation made in the circular dated 31.03.2020 providing that even though different tax rates may be attracted at different points of time but the refund of accumulated unutilized tax credit will not be available under Section 54(3)(ii) of the CGST Act where the input and output supplies are same. It has been directed by the Guwahati High Court that this Circular would have to be ignored in situations akin to the case at hand. M/s. Shivaco Associates, Hon’ble Calcutta High Court went on to hold that the respondent authority, ought not to have rejected the claim of the petitioners by relying on the circular dated 31.03.2020 as the same was contrary to the provisions of the Act.

Further, Petitioner contended that statutory circular cannot supersede or override the parent statue and as such the impugned circular, to the extent it disallows the ITC under the Inverted Duty Structure where he Input and Output supplies are same, and so also the impugned order are illegal and hence deserve to be struck down.

Contention from the Respondent

Respondent contended that the petitioner is not entitled to the refund claim for ITC in face of the Circular dated 31.03.2020 and implored the Court to affirm the impugned order and sought dismissal of the writ petition

Court Held

Section 54(3)(ii) of the CGST Act is absolutely unambiguous and does not carve out any exception that Input Tax Credit under the Inverted Tax Structure would not be applicable where the input and the output goods are the same.

Government vide Para 59 of notification dated 18.11.2019, makes it clear that the supplier who supplies goods at concessional rate to companies involved in specific projects is entitled to refund under the Inverted tax structure as per 54(3)(ii) of the CGST Act, while circular dated 31.03.2020 states that ITC refund of accumulated ITC under section 54(3)(ii) would not be applicable in cases where the input and output supplies are the same.

Court held that circular dated 31.03.2020 was issued after the September 2018 to September 2019, the clarification dated 18.11.2019 was in force which clearly stipulates that a registered dealer who supplies goods at concessional rate is eligible for refund under the Inverted Tax Structure.

Court relied upon the judgment pronounced by the B.M.G. Informatics Pvt. Ltd. The learned Single bench of Guwahati High Court, vide judgment dated 02.09.2021, held that the supplying dealer would be entitled to claim refund of accumulated unutilized tax credit under Section 54(3)(ii) of the CGST Act irrespective of the fact the input and output supplies are the same by ignoring the circular dated 31.03.2020. Similar view was taken by Hon’ble Calcutta High Court in the case of M/s. Shivaco Associates.

Court on the opinion that the circular dated 31.03.2020, being a subordinate legislation, is repugnant and conflicting to the parent legislation i.e. Section 54(3)(ii) of the CGST Act and hence, the same cannot be applied to oust the legitimate claim for accumulated ITC refund filed by the petitioner. Otherwise also, the claim for refund of ITC filed by the petitioner was for a period prior to issuance of the circular dated 31.03.2020. Consequently, rejection of the petitioner’s claim for accumulated input tax credit by the respondent No.3 is invalid on the face of the record and cannot be sustained.

Court held that, Respondent are directed to forthwith, refund the accumulated input tax credit to the petitioner as per its entitlement.

Citation: Baker Hughes Asia Pacific Limited vs Union of India.

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