Facts of the Case:

In this case, the petitioner is engaged in the business of procuring edible oils such as sunflower oil, rice bran oil, cottonseed oil and palm oil (HSN 15) on payment of GST @ 5%. The oils are purchased in bulk tankers and thereafter packed into retail containers of 250 ml, 500 ml, 1 litre and 5 litres at the petitioner’s premises and sold both on B2B and B2C basis, continuing to attract GST @ 5% under the same HSN. In the course of such operations, the petitioner used various inputs and input services attracting higher rates of GST, leading to accumulation of unutilised Input Tax Credit (ITC) due to an inverted duty structure. The petitioner accordingly filed refund applications under Section 54(3)(ii) of the CGST Act, 2017 for refund of accumulated ITC.

The refund applications were issued show cause notices, replies were filed, but the refund claims were rejected, primarily relying on Circular No. 135/05/2020-GST dated 31.03.2020, on the ground that refund is not admissible where input and output supplies are the same. The appeals filed by the petitioner were also dismissed by the appellate authority. 

The petitioner relied heavily on the decision of the Delhi High Court in Indian Oil Corporation Ltd. v. Commissioner of CGST and subsequent Circular No. 173/05/2022-GST dated 06.07.2022, which substituted Para 3.2 of the earlier circular and deleted the restriction denying refund where input and output are the same.

Issue:

Whether refund of accumulated unutilised ITC under Section 54(3)(ii) of the CGST Act can be denied merely on the ground that input and output goods are the same, despite accumulation of ITC due to higher tax rates on certain inputs, by relying upon Circular No. 135/05/2020-GST.

Held that:

The Court held that Section 54(3)(ii) of the CGST Act is clear and unambiguous and does not carve out any exception denying refund merely because the input and output goods are the same. What is relevant is whether ITC has accumulated on account of higher tax rate on inputs vis-à-vis output supplies. The expression “inputs” in Section 54(3)(ii) is used in the plural, clearly indicating that refund entitlement is to be examined with reference to all inputs, and not merely the principal input or by comparing the tax rate on the main input with the output.

Further, Circular No. 135/05/2020-GST dated 31.03.2020 was issued only to address cases where ITC accumulated due to change in tax rates over time on the same goods, and cannot be applied to cases of genuine inverted duty structure arising from higher-rated inputs used in making lower-rated output supplies.  By Circular No. 173/05/2022-GST dated 06.07.2022, the restriction contained in Para 3.2 of the earlier circular denying refund where input and output are the same was expressly deleted, thereby clarifying that such refunds are admissible.

The substitution made by Circular No. 173/05/2022-GST is beneficial and clarificatory in nature and therefore applicable retrospectively, being binding on the Department, as held by the Supreme Court in Suchitra Components Ltd. and K.P. Varghese.

Circulars issued under Section 168 of the CGST Act cannot override or restrict statutory rights conferred under Section 54(3). If a refund is otherwise admissible under the Act, it cannot be denied by executive instructions. Where there are multiple inputs attracting different rates of tax, the term “Net ITC” under Rule 89(5) covers ITC availed on all inputs, irrespective of their individual tax rates.

Accordingly, the Court quashed the impugned Orders-in-Original and appellate orders and directed the respondents to grant refund of accumulated ITC to the petitioner in accordance with law. The petitioner was also held entitled to consequential statutory interest under Section 56 of the CGST Act, subject to fulfilment of procedural requirements.

Case Name: South Indian Oil Corporation Versus The Assistant Commissioner Central Tax, Division-1 Gst East Commissionerate, The Additional Commissioner of Central Tax, Gst Commissionerate, Bengaluru And Union of India dated 12.12.2025

To read the complete judgement 2025 Taxo.online 3416