GSTAT Kolkata Confirms ITC Refund Eligibility Under Inverted Duty Structure Where Packing Materials Attract Higher GST Than Tea
1. Background and Nature of the Dispute
A tea trading business registered under GSTIN 19ACBPA5671Q1Z7 — M/s Madanlal Murarilal — filed a refund application on 30 March 2024 seeking a refund of accumulated input tax credit amounting to ₹10,75,233 in SGST for the period April 2022 to September 2022. The claim was made on the basis of an inverted duty structure under Section 54(3)(ii) of the CGST Act, 2017.
The original refund sanctioning authority declined the claim by reasoning that both the inward and outward supplies of the assessee were tea — the same commodity — attracting GST at an identical rate of 5% (being 2.5% CGST and 2.5% SGST, or 5% IGST as applicable). On that basis, the authority concluded that the statutory conditions for a refund under Section 54(3)(ii) of the CGST Act were not fulfilled.
The assessee challenged this rejection before the Additional Commissioner (Appeals), CGST, Siliguri Appeal Commissionerate, which reversed the original order and allowed the refund claim vide its appellate order dated 4 September 2024. The Revenue, aggrieved by that decision, carried the matter further before the GST Appellate Tribunal, Kolkata Bench, by way of an appeal under Section 112(3) of the CGST Act, 2017.
2. What the First Appellate Authority Decided and Why
(i) Interpretation of "Inputs" Under the CGST Framework
The Additional Commissioner (Appeals) placed considerable weight on CBIC Circular No. 128/44/2019-GST dated 18 November 2019. Paragraph 62 of that circular clarified the scope of the term "inputs" in the following terms:
"It has been represented that on certain occasions, departmental officers do not consider ITC on stores and spares, packing materials, materials purchased for machinery repairs, printing and stationery items, as part of Net ITC on the grounds that these are not directly consumed in the manufacturing process and therefore, do not qualify as input. It is clarified that the ITC of the GST paid on inputs, including Inward supplies of stores and spares, packing materials etc., shall be available as ITC as long as these Inputs are used for the purpose of the business and/or for effecting taxable supplies, including zero-rated supplies, and the ITC for such inputs is not restricted under Section 17(5) of the CGST Act. Further, capitalized goods have been clearly defined in section 2(19) of the and which are used or intended to be used in the course or furtherance of business. Stores and spares, the expenditure on which has been charged as a revenue expense in the books of account, cannot be held to be capital goods."
This clarification established that packing materials used in the course of business qualify as inputs for the purpose of input tax credit, provided they are not excluded under Section 17(5) of the CGST Act.
(ii) Reliance on Judicial Precedents by the First Appellate Authority
The first appellate authority drew upon several High Court decisions. In Indian Oil Corporation Limited Vs. Commissioner of Central Goods and Services Tax & Ors. — [2024] 122 GSTR 318 (Delhi); W.P.(C) 10222/2023 & C.M. 39561/2023, decided on 05.12.2023 — the Delhi High Court had held that the word "inputs" as used in the plural in Section 54(3)(ii) indicated that the refund of accumulated ITC was not confined to credit accumulated on a single input alone. The court further held that the provision does not mandate a comparison between the tax rate on only the principal input and the tax rate on the output supply. The court also affirmed that a circular issued under Section 168(1) of the CGST Act cannot introduce restrictions that are absent from the Act itself, though it equally recognised that accumulated ITC arising purely from a reduction in the GST rate on the same goods over time would not qualify for refund.
The first appellate authority also referred to Shivaco Associates & Anr. Vs. Joint Commissioner of State Tax, Directorate of Commercial Taxes & Ors. — [2024] 122 GSTR 303 (Cal); WPA No. 54 of 2022, decided on 11.03.2022 — where the Calcutta High Court had permitted a refund claim even where the input and output supplies were the same commodity but attracted different tax rates. The court in that case found that the restriction imposed through the circular curtailed a statutory benefit that the assessee was otherwise entitled to claim.
Additional support was drawn from the Rajasthan High Court's ruling in Baker Hughes Asia Pacific Limited Vs. Union of India — [2022] 140 taxmann.com 326 — and the Gauhati High Court's ruling in BMG Informatics Pvt. Ltd. Vs. Union of India & Ors. — W.P.(C) No. 3878/2021 and connected matters, decided on 02.09.2021 — both of which declined to apply the restrictive circular and held it to be unsustainable.
Concluding that the present facts were similar to those examined in the above cases, the first appellate authority allowed the refund.