Facts of the Case:

In this case, the petitioner engaged in manufacture of wearing apparel, undertakes processes such as bleaching, dyeing, printing, cutting, stitching, branding, labelling and packing of readymade garments and raw cotton cloth. Its principal input is fabric taxable at 5%, while other inputs such as printing chemicals, packing materials and stores attract GST at higher rates of 12% and 18%. The finished apparel supplied by the respondent is taxable at 5%. Owing to this inverted tax structure, the respondent regularly claimed refund of accumulated ITC under Section 54(3)(ii) of the CGST Act.

For March 2024 and February 2024, the respondent filed refund claims of ₹34,47,623/- and ₹7,86,037/- respectively. During scrutiny, the original authority issued SCNs and subsequently rejected both claims on the ground that the inputs and outputs were covered under the same HSN and, therefore, the respondent was not entitled to refund under Section 54(3). The respondent challenged the orders before the first Appellate Authority, which allowed both refund claims and set aside the rejection orders.

The Revenue preferred appeals before the GSTAT, contending, inter alia, that the first Appellate Authority had accepted the manufacturing activity without adequate verification, had incorrectly allowed refund despite the input and output having the same HSN, and had failed to properly examine alleged capital-goods/personal-use invoices, GSTR-2B mismatches, exclusion of ITC relating to zero-rated supplies and period-wise computation of refund.

Issue:

Whether refund of accumulated ITC under Section 54(3)(ii) can be denied merely because the input and output goods fall under the same or overlapping HSN classification, particularly when the accumulation arises from higher-taxed inputs used in the processing/manufacture of goods taxable at a lower rate? Whether the first Appellate Authority erred in accepting the respondent’s refund claims on the grounds of alleged non-verification of documents, GSTR-2B discrepancies, capital-goods/personal-use invoices, zero-rated supplies and period-wise computation?

Held That:

The GSTAT, Kolkata Bench dismissed both appeals filed by the Revenue, holding that there was no infirmity in the orders of the first Appellate Authority allowing the refund claims. The Tribunal held that the Revenue’s emphasis on whether the respondent was a manufacturer or trader was misplaced in the GST regime. Referring to Section 9(1) of the CGST Act, the Tribunal observed that GST is levied on the supply of goods or services and not on the activity of manufacture. Therefore, eligibility for refund under Section 54(3)(ii) cannot be made dependent merely upon whether the registered person is classified as a manufacturer or trader. The first Appellate Authority’s detailed findings regarding the processing undertaken by the respondent were therefore not required to determine refund eligibility on that basis.

On the applicability of Circular No. 135/05/2020-GST, the Tribunal rejected the Revenue’s interpretation. It noted that paragraph 3 of the Circular specifically bears the heading “Refund of accumulated input tax credit (ITC) on account of reduction in GST Rate”. Paragraph 3.2 deals with the situation where the same goods are purchased at one point of time at a higher rate and subsequently supplied after a reduction in the rate of GST. According to the Tribunal, the expression in paragraph 3.2 referring to the input and output being the same goods and attracting different rates “at different points in time” makes it clear that the clarification was intended for cases involving a reduction in the GST rate, and not for a manufacturing/processing situation where different inputs are used to produce the final product.

The Tribunal further relied upon the decision of the Madras High Court in Vindhya Spinning Mills Pvt. Ltd. v. Assistant Commissioner of CGST and Central Excise, wherein it was held that Section 54(3)(ii) does not distinguish between major and minor inputs and that where accumulation of ITC arises because inputs used in the manufacturing process bear a higher rate than the output supplies, refund cannot be denied merely because one of the principal inputs attracts the same rate as the output. The Tribunal observed that Rule 89(5) itself prescribes the statutory formula for determining the amount of refund and an executive circular cannot be construed in a manner that restricts the substantive entitlement provided by the statute.

The Tribunal also rejected the Revenue’s contention that the refund had been computed on an annual or cumulative basis contrary to Rule 89(5). On examination of the records, it found that the original authority had computed Net ITC and the refund on the basis of period-specific data, applying the formula prescribed under Rule 89(5). Accordingly, the Revenue’s objection on this count also had no force.

Case Name: The Commissioner of CGST & Central Excise, Kolkata North Commissionerate Versus M/s. HP Cotton Casuals Private Limited. dated 10.09.2026

Citation No. 2026 Taxo.online 2712