High Court Directs GST Refund for Edible Oil Packer Due to Inverted Duty Structure
High Court Directs GST Refund for Edible Oil Packer Due to Inverted Duty Structure
The petitioner, South Indian Oil Corporation, is a partnership firm engaged in the business of procuring edible oils like Sunflower, Rice bran, Palm oil in bulk tankers. They pay a 5% GST on these bulk purchases under HSN Code 15. The firm then packs these oils into smaller containers (250 ml to 5 litres) and sells them to both businesses and consumers, also applying a 5% GST rate under the same HSN Code. However, the petitioner incurred higher GST rates (18%) on various inputs used in the packing process, such as packing materials and transportation.
This created an “inverted duty structure” leading to an accumulation of unutilized Input Tax Credit (ITC). The petitioner filed applications for a refund of this accumulated ITC under Section 54(3)(ii) of the CGST Act. The Assistant Commissioner of Central Tax rejected the refund claims, arguing that since the principal input (bulk edible oil) and the output supply (packed edible oil) attract the same rate of tax (5%), the inverted duty structure refund is not applicable. The Appellate Authority upheld this rejection, prompting the petitioner to file a writ petition before the Karnataka High Court.
Main Issue The core issue was whether an assessee is entitled to a refund of accumulated Input Tax Credit under Section 54(3)(ii) of the CGST Act on account of an inverted duty structure when the principal input and the final output goods are the same and attract the identical rate of tax, but other inputs used in the process attract a higher rate of tax.
HC Decided: The Hon’ble High Court allowed the writ petition, quashing the impugned orders that rejected the refund. The Court heavily relied on M/s. Indian Oil Corporation Ltd. vs. The Assistant Commissioner of Central Tax. The Court reiterated that Section 54(3)(ii) does not prohibit a refund where the principal input and output are the same. The provision does not restrict the comparison of tax rates solely to the “principal” input versus the output. When multiple inputs are used, attracting different tax rates, the term “Net ITC” in Rule 89(5) of the CGST Rules encompasses the ITC availed on all inputs, regardless of their individual tax rates.
The Court also noted that the restrictive interpretation in Circular No. 135/05/2020-GST was substituted by the beneficial Circular No. 173/05/2022-GST, which deleted the restriction regarding identical input and output supplies, and this clarification should be applied retrospectively. Thus, the Court held the petitioner was eligible for the refund of unutilized ITC.
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