Facts of the Case:

In this case, the petitioner purchased raw cotton yarn as its principal input, which attracted GST at 5%, identical to the GST rate applicable on the finished product. However, the manufacturing process also required several ancillary inputs such as chemicals, consumables, and packing materials, which were subject to GST at higher rates of 12% and 18%. As a result, substantial unutilized Input Tax Credit (ITC) accumulated on account of the higher tax paid on these ancillary inputs. The petitioner claimed a refund of the accumulated ITC under Section 54(3) of the CGST Act for the tax periods January 2023 and March 2023.

The refund claims were rejected by the department on the ground that the principal input and the output were both taxable at the same rate of 5%, relying upon Circular No. 135/05/2020-GST. Challenging the rejection orders, the petitioner approached the Madras High Court, contending that Section 54(3) does not distinguish between principal and ancillary inputs and that refund cannot be denied merely because the principal input attracts the same tax rate as the output supply.

Issue:

Whether refund of accumulated unutilized Input Tax Credit under Section 54(3)(ii) of the CGST Act can be denied merely because the principal input and the output supply attract the same GST rate, despite accumulation of ITC arising from other inputs taxed at higher rates.

Held that:

The Court observed that the statute merely requires that accumulated ITC should arise because the rate of tax on inputs exceeds the rate of tax on output supplies, without restricting the benefit only to the principal input. It held that chemicals, packing materials, consumables and other manufacturing inputs form part of the eligible inputs for computing refund under Rule 89(5), and therefore, refund cannot be denied merely because the primary raw material attracts the same GST rate as the finished goods.

Rejecting the department’s reliance on Circular No. 135/05/2020-GST, the Court reiterated that a circular cannot curtail or override the statutory benefit conferred under Section 54(3), particularly when similar circulars have already been declared ultra vires by various High Courts. Consequently, the impugned refund rejection orders were quashed, and the department was directed to process and sanction the refund along with applicable interest. 

The Court held that Section 54(3)(ii) of the CGST Act does not recognize any distinction between “principal inputs” and “other inputs” for determining eligibility to claim refund under an inverted duty structure.

Case Name: M/s. Vindhya Spinning Mills Private Limited Versus The Assistant Commissioner of CGST and Central Excise, Thiruthangal dated 14.07.2026

To read the complete judgement 2026 Taxo.online 1998