ITC Refund Admissible If Output Supply Tax Rate Is Less Than Inputs Tax Rate: Telangana High Court

The Telangana High Court has held that refund of accumulated input tax credit (ITC) on account of inverted structure would be allowed if accumulation of ITC is on account of the rate of tax on output supply being less than the rate of tax on inputs (same goods) at the same point of time as per some concessional notification issued by the government providing for a lower rate of tax for some specified supplies subject to fulfilment of other conditions.

The division bench of Chief Justice Ujjal Bhuyan and Justice C.V. Bhaskar Reddy has set aside the order rejecting the refund and the matter was remanded back for re-consideration in terms of the Circular dated 06.07.2022.

The petitioner/assessee is a proprietary concern established in the year 2005 and engaged in the business of assembling and supplying computers and computer parts. The petitioner is a registered person as per the provisions of the Central Goods and Services Tax Act, 2017. It is also a registered supplier to all the Defence, Research & Development Organisation (DRDO) Laboratories and affiliates across the country.

The petitioner added 5% GST as per the concessional rate fixed by the government for supplies to DRDO. The petitioner filed an application on 02.12.2020 before the respondent/department claiming a refund of Rs.77,91,857 under the inverted tax structure in terms of Section 54 of the CGST Act.

The respondent served the petitioner with a show cause notice dated December 28, 2020, requesting that the petitioner show cause why the refund application should not be rejected for violating Section 54(3)(ii) of the CGST Act.The petitioner submitted a reply dated January 1, 2021.

The respondent rejected the refund application dated 02.12.2020 by a speaking order. While rejecting the refund application of the petitioner, the respondent relied upon a circular of the Central Board of Indirect Taxes and Customs (CBIC) dated 31.03.2020.

The petitioner submitted that the CBIC has issued a clarificatory circular dated 06.07.2022 clarifying paragraph 3.2 of the Circular dated 31.03.2020 relied upon by the respondent while rejecting the refund application of the petitioner. Therefore, in view of the changed circumstances, respondents may be directed to allow the refund application.

As per para 3.2 of the Board’s Circular dated 31.03.2020, a refund of accumulated ITC in terms of section 54(3)(ii) of the CGST Act is available where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. The input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under section 54(3) (ii) of the CGST Act. It was clarified that the refund of accumulated ITC under section 54(3)(ii) of the CGST Act does not apply when the input and output supplies are the same.

The representations were received seeking clarification of paragraph 3.2 of the Board Circular dated 31.03.2020. The clarification was sought for in cases where the supplier is required to supply goods at a lower rate under concessional notification issued by the government. In order to clarify the issue and to ensure uniformity, the Board exercised power under Section 168(1) of the CGST Act and issued Circular No.173/05/2022-GST dated 06.07.2022.

The board has issued the clarification that where inputs and output goods are the same, but the output supplies are made under a concessional notification due to which the rate of tax on output supplies is less than the rate of tax on inputs. In such cases, as the rate of tax on output supply is less than the rate of tax on inputs at the same point of time due to the supply of goods by the supplier under such concessional notification, the credit accumulated on account of the is admissible for refund.

The court held that the circular dated 06.07.2022 is clarificatory in nature whereby paragraph 3.2 of the circular dated 31.03.2020 has been substituted. Circular dated 06.07.2022, inserting the clarification, would have had effect from the date when Circular dated 31.03.2020 came into effect.

Case Title: Micro Systems And Services Sole Proprietorship Vs Union Of India

Citation: Writ Petition No.37465 of 2021

Date: 05.09.2022

Counsel For Petitioner: Advocate Sai Chandra Haas

Counsel For Respondent: Senior Counsel Dominic Fernandes

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