Same HSN Classification of Inputs and Finished Products Cannot Automatically Deny Inverted Duty Refund: GSTAT Kolkata Clarifies Scope of Section 54(3)(ii), Rule 89(5) and CBIC Circular 135/05/2020-GST

Introduction

The Kolkata Bench of the Goods and Services Tax Appellate Tribunal (GSTAT) has recently examined an important issue concerning refund of accumulated Input Tax Credit (ITC) under the inverted duty structure provisions of the Central Goods and Services Tax Act, 2017 (CGST Act).

The matter involved two appeals filed by the Revenue against orders of the first appellate authority allowing refund claims made by M/s HP Cotton Casuals Private Limited for February and March 2024.

The principal dispute was whether refund under Section 54(3)(ii) of the CGST Act could be denied merely because the broad HSN classification of the inputs and finished products was similar. The Revenue also challenged the verification of invoices, treatment of capital goods, alleged mismatches with GSTR-2B, treatment of zero-rated supplies, and the period-wise computation of refund.

The Tribunal ultimately dismissed both Revenue appeals and upheld the refund claims.

Background of the Case

M/s HP Cotton Casuals Private Limited is engaged in the manufacture of wearing apparel. Its activities include bleaching, dyeing, printing, cutting, stitching, branding, labelling and packing of garments and cotton fabric.

The taxpayer's principal input was fabric, generally taxable at 5%, while other inputs such as printing chemicals, packaging materials and stores attracted GST at rates of 12% and 18%. Its finished products, including suits, tops, shorts, night suits and joggers falling under Chapters 61 and 62, were taxable at 5%.

Because certain inputs were subject to GST at higher rates than the finished products, the taxpayer regularly accumulated ITC and claimed refunds under the inverted duty structure mechanism contained in Section 54(3)(ii) of the CGST Act.

For the relevant periods, the taxpayer claimed:

• ₹34,47,623 for March 2024; and

• ₹7,86,037 for February 2024.

The original adjudicating authority rejected both claims.

The taxpayer thereafter succeeded before the first appellate authority, which set aside the rejection orders and allowed the refunds. The Revenue then approached the GSTAT, Kolkata Bench.

Revenue's Principal Grounds

The Revenue challenged the appellate orders on several grounds.

First, it argued that the taxpayer's claim of being engaged in manufacturing had not been adequately established through documentary evidence.

Second, the Revenue relied upon paragraph 3.2 of CBIC Circular No. 135/05/2020-GST dated 31 March 2020, contending that refund under the inverted duty structure mechanism was unavailable where the input and output goods were the same or fell under the same HSN classification.

Third, the Revenue alleged that certain capital-goods invoices and invoices allegedly relating to personal use had been wrongly considered while determining Net ITC.

Fourth, it alleged discrepancies between the invoices contained in the taxpayer's Annexure-B and the invoices reflected in GSTR-2B.

The Revenue also questioned the treatment of ITC relating to zero-rated supplies and argued that the refund should be determined strictly for each tax period rather than by relying upon annual turnover figures.

Taxpayer's Defence

The taxpayer disputed each of these grounds.

It submitted that Section 54(3)(ii) does not restrict inverted duty structure refunds only to manufacturers. The provision applies to a "registered person" satisfying the statutory conditions.

The taxpayer nevertheless produced evidence demonstrating that it was carrying out substantial processing activities. According to its submissions, raw or semi-finished materials underwent bleaching, dyeing, printing, cutting, stitching, branding, labelling and packing before being sold as finished branded apparel.

It also relied upon its trade licence, which described the business as manufacturing.

On the HSN issue, the taxpayer argued that paragraph 3.2 of Circular No. 135/05/2020-GST was being read out of context. According to the taxpayer, that paragraph dealt with a specific situation where the same goods were purchased at one point in time at a higher GST rate and subsequently supplied after the GST rate on those very goods had been reduced.

The taxpayer contended that its circumstances were materially different because it was undertaking processing and using various other inputs taxed at higher rates in the manufacture of finished products taxable at 5%.

GSTAT's Key Observation: Manufacture Is Not the Decisive Test Under GST

One of the most significant observations of the Tribunal was that the debate over whether the taxpayer was a "manufacturer" or "trader" was not, by itself, determinative of its eligibility for refund.

The Tribunal referred to Section 9(1) of the CGST Act and observed that GST is levied on the supply of goods or services, rather than merely on the activity of manufacture.

Accordingly, the Tribunal held that the taxpayer's eligibility for refund should not depend upon whether it is characterised as a trader or manufacturer.

This is an important conceptual distinction.

Under the earlier indirect tax regime, the concept of manufacture played a central role in determining the incidence of certain duties. Under GST, however, the taxable event is generally the supply.

Therefore, the Tribunal considered the Revenue's emphasis on the taxpayer's manufacturing status to be misplaced when examining the statutory entitlement to an inverted duty structure refund.

Circular No. 135/05/2020-GST and the "Same Goods" Issue

The second major issue concerned paragraph 3.2 of Circular No. 135/05/2020-GST.

The Revenue argued that where input and output goods are the same, refund under Section 54(3)(ii) is unavailable even where there has been value addition.

The Tribunal examined the structure and wording of paragraph 3 of the Circular.

The heading itself refers to:

"Refund of accumulated input tax credit (ITC) on account of reduction in GST Rate."

Paragraph 3.1 deals with an example where a person purchases goods at 18% and the GST rate on the same goods is subsequently reduced to 12%. Paragraph 3.2 clarifies that such accumulation does not qualify as inverted duty structure merely because the same goods were purchased at a higher rate and supplied later at a lower rate.

The Tribunal therefore held that the Circular addresses a particular factual situation involving a reduction in the rate of GST on the same goods over time.

According to the Tribunal, that was not the situation before it.

In the present case, the final products continued to be taxable at the applicable rate and the dispute did not arise because of a subsequent reduction in the GST rate on the same goods.

Consequently, the Revenue's reliance on paragraph 3.2 of the Circular was held to be factually misplaced.

Reliance on the Madras High Court's Decision in Vindhya Spinning Mills

The Tribunal also considered the judgment of the Madras High Court in M/s Vindhya Spinning Mills Private Limited v. Assistant Commissioner of CGST and Central Excise, Sivakasi Division, Thiruthangal [2026 TAXONATION 1720 (MADRAS)].

The High Court had considered a similar issue involving refund under the inverted duty structure.

The Court held, among other things, that the statutory provision does not distinguish between major and minor inputs. Where accumulation of ITC results from inputs carrying a higher rate of tax than the output supplies, the statutory entitlement to refund has to be examined in accordance with Section 54(3)(ii) and the prescribed formula.

The High Court also emphasised the role of Rule 89(5) of the CGST Rules in calculating the amount of refund.

The Kolkata GSTAT found the reasoning relevant to the controversy before it and held that the Revenue's reliance on Circular No. 135/05/2020-GST could not defeat the statutory mechanism where the factual conditions for refund were otherwise satisfied.

What About Capital Goods and Allegedly Ineligible Invoices?

The Revenue also argued that certain invoices related to capital goods and personal-use expenditure and therefore should not have formed part of the refund computation.

The taxpayer responded that capital goods had already been excluded from Net ITC and that the original adjudicating authority itself had verified this position.

It also stated that the invoices alleged to relate to personal use had been explained and were reflected in the relevant records.

The Tribunal noted that the original adjudicating authority had undertaken verification and that the first appellate authority had also examined the documentary material.

Importantly, the Tribunal found that the Revenue had not produced sufficient evidence to dislodge those factual findings.

The Tribunal therefore declined to interfere with the appellate authority's conclusions.

GSTR-2B Mismatches

Another ground raised by the Revenue concerned alleged mismatches between Annexure-B and GSTR-2A/GSTR-2B.

The taxpayer submitted that these discrepancies had already been reconciled and explained in its response to the Show Cause Notices.

The first appellate authority had also recorded findings concerning the matching of input invoices with GSTR-2A, GSTR-2B and Annexure-B.

The Tribunal found that the appellate authority had considered the documentary evidence and that the Revenue had not produced material evidence sufficient to rebut those findings.

Thus, the Tribunal rejected the Revenue's challenge on this aspect as well.

ITC Relating to Zero-Rated Supplies

The Revenue further questioned whether ITC attributable to zero-rated supplies had been appropriately excluded from the refund computation.

The taxpayer argued that Rule 89(5) itself provides a ratio-based statutory formula for determining the eligible refund and that the formula takes the relevant turnover into account.

The Tribunal noted that the first appellate authority had considered the taxpayer's explanation and accepted its position.

Since the Revenue did not establish any specific computational error sufficient to overturn that finding, the Tribunal did not find merit in the Revenue's objection.

Period-Wise Computation of Refund

The Revenue also contended that refund under the inverted duty structure must be calculated separately for each tax period and not on a cumulative annual basis.

On examination of the records, however, the Tribunal found that the original adjudicating authority had in fact calculated the refund using period-specific data and the formula prescribed under Rule 89(5).

Accordingly, the Tribunal found no violation of Rule 89(5) on this count.

The Tribunal therefore rejected the Revenue's argument that the refund had improperly been determined on a cumulative annual basis.

Tribunal's Overall Finding

After examining the submissions and records, the GSTAT concluded that the first appellate authority had adequately considered the relevant documentary evidence.

The Tribunal specifically noted that the Revenue had not produced sufficient evidence, beyond its submissions, to rebut the factual findings recorded by the first appellate authority.

It therefore found no infirmity in the appellate orders allowing the taxpayer's refund claims.

The two appeals filed by the Revenue, APL/43/KLK/2026 and APL/44/KLK/2026, were consequently dismissed.

The parties were directed to bear their own costs.

GSt Case Law The Commissioner of CGST & Central Excise, Kolkata North Commissionerate Versus HP Cotton Casuals Private Limited

Citation-2026 TAXONATION 2438 (GSTAT KOLKATA)

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