The Hon’ble High Court of Telangana vide its order dated 05.09.2022 in the matter of Micro Systems and Services Vs. Union of India and Others in Writ Petition No. 37465 of 2021, allowed the refund of accumulated input tax credit on account of inverted duty structure, where accumulation of input tax credit is on account of rate of tax on output supply being less than the rate of tax on inputs as per some concessional notification issued by the Government, considering that the Circular dated 06.07.2022 would have the effect from the date when Circular date 31.03.2020 came in to effect.

The Petitioner filed the Writ petition challenging and praying for setting aside the impugned Order in Appeal No.HYD-GST-SC-AP2-002-21-22 dated 09.04.2021 by the Respondent Authority, where by the Order No.19/2020 dated 04.01.2021 rejecting the claim of Refund of Rs.77,91,857/- for the period April, 2019 to March, 2020 was upheld. Further prayer was made to declare the Board Circular No. 135/05/2020- GST dated 31.03.2020 issued by the Respondent Authorities as ultra vires of Section 54(3) (ii) of the CGST Act, 2017, to the extent that it seeks to reject the refund of accumulated unutilized tax credit in cases where the input & output supplies are the same, and also direct the respondents to allow the refund amounting to Rs. 77,91,857/- under Inverted Duty Structure in terms of Section 54 of the CGST Act, 2017.

Facts of the Case: –

• That the Petitioner is a proprietary concern established in the year 2005 and engaged in the business of assembling and supply of computers and computer parts. The Petitioner is duly registered under the CGST Act, 2017 and also a registered supplier of all the Defence, Research & Development Organisation (DRDO) Laboratories and affiliates across the country.
• The Petitioner supplied the goods at the 5% rate of GST, as per the concessional rates fixed by the Government for supplies to DRDO.
• The Petitioner filed an application on 02.12.2020 claiming refund of Rs. 77,91,857/ under inverted duty structure in terms of Section 54. That in pursuance of it, a show cause notice dated 28.12.2020 was issued to the petitioner by the respondent authorities, calling upon the petitioner to show cause as to why refund application should not be rejected for contravention of Section 54(3)(ii), to which the petitioner duly filed a reply dated 01.01.2021.
• However, the refund application of the petitioner was rejected by a speaking order dated 04.01.2021, relying on CBIC Circular dated 31.03.2020.
• Thereafter, against the said order the petitioner preferred an appeal under Section 107 before the respondent appellate authority, however, by order dated 09.04.2021 the appeal of the petitioner was dismissed and the rejection order was confirmed. Aggrieved thereby, the present writ has been filed.

Petitioner’s Submissions: –

• It was submitted on the behalf of the petitioner that the Board has issued a clarificatory Circular dated 06.07.2022 clarifying para 3.2 of the Circular dated 31.03.2020 relied upon by the respondents to reject the refund claim filed by the petitioner. Thus, in view of the changed circumstances, respondents may be directed to allow the refund application.

On the other hand, it was submitted on the behalf of the respondents that the decision has been taken by the respondents on the basis of existing Circular of the Board, thus, such decision of the Board cannot be faulted.  Further it was submitted that the Circular dated 06.07.2022 cannot be applied retrospectively.

Held: –

• The Hon’ble Court after considering the submissions from the both sides and the facts of the case, found that from the perusal of the order dated 04.01.2021, it is quite evident that the petitioner filed a refund claim for Rs.77,91,857/- on 02.12.2020 for the period from April, 2019 to March, 2020, contending that it has sold the goods to DRDO at the concessional rates for which requisite certificates have been issued by DRDO, and the petitioner is eligible for the credit of tax paid by it in procuring the raw-materials at full rate of tax. Therefore, the application for refund was made under Section 54 of the CGST Act, read with rule 89(4) and 89(5) of the CGST rules.
• It was observed by the Hon’ble Court that the refund claim of the petitioner was rejected on the basis of para 3.2 of the Board Circular dated 31. 03.2020, which states that refund of accumulated Input Tax Credit (ITC) under clause (ii) of sub-section (3) of Section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are the same.  Later, the said order was affirmed in the appeal preferred by the petitioner by the respondent appellate authority vide order dated 09.04.2021.
• The Hon’ble Court referring to the para 3.2 of the Board Circular dated 31.03.2020, found that according to the Board, the refund of accumulated ITC was available where rate of tax on inputs was higher than the rate of tax on output supplies, in terms of Section 54(3) (ii) of the CGST Act, 2017, however, it would not be applicable where input and out supplies are the same.
• That later representations were made and clarification was sought with respect to applicability of paragraph 3.2 of the Board Circular dated 31.03.2020, where the supplier is required to supply goods at lower rate under concessional notification issued by the Government. Thereafter, the Board exercising its power under Section 168(1) of the CGST Act and issued Circular No.173/05/2022-GST dated 06.07.2022, clarifying that ‘it was not the intent of paragraph 3.2 of Circular dated 31.03.2020 to cover the cases where the supplier is making supply of goods under a concessional notification and the rate of tax on output supply is less than the rate of tax on input supply (of the same goods)’.
• It has been clarified by the Board that in such cases, refund of accumulated input tax credit on account of inverted structure would be allowed, where the rate of tax on output supply is less than the rate of tax on input as per some concessional notification issued by the Government.
• The Hon’ble after perusal of the paragraph 3.2 of the Board Circular dated 31.03.2020 and the paragraph 3.3, substituting paragraph 3.2 through issuance of the Circular dated 06.07.2022, found that the Circular dated 06.07.2022 is clarificatory in nature and being so, Circular dated 06.07.2022 would have the effect from the date when Circular dated 31.03.2020 came into effect.  Therefore, the claim of the petitioner is liable to be re-considered on the basis of Board Circular dated 31.03.2020 as clarified by the Circular dated 06.07.2022.

The Hon’ble Court with the above findings allowed the writ petition by setting aside the orders dated 04.01.2021 and order dated 09.04.2021 passed by the respondent authorities.  The matter was remitted back to the respondents to re-consider it in terms of Circular dated 06.07.2022.