QUESTION
I have
filed refund of a client under inverted duty structure and in terms of Circular
No. 125/44/2019 dt. 18.11.2019 and Circular No. 135/05/2020 Dt. 31.03.2020. Now
i have been in receipt of SCN stating that Inverted duty Structure is not
created yet on goods/inputs still in Stock hence refund claim is liable to be
rejected to that extent. Now my question is whether the contention of department
is correct. Suppose i have Purchase of Rs. 10.00 @ 18% GST in April 2020 and
Sale of Rs. 1 Lac @ 12%. I applied for refund as per given formula. But now the
department is saying that refund of Inputs used in that sale only will be give
so considering profit margin of 10% refund shall be Rs. 90000*18% (-) Rs.
100000*12% i.e. Rs. 4200/- only. Now in the next month suppose there is sale of
Rs. 9.00 Lacs and there is no purchase or Purchase of Rs. 1.00 Lacs only. In
this case the department is only considering the purchase made in the period for
which refund application is filed. Now, if we go by this system, assessee will
never be able to get the refund of due amount specially in case of seasonal
industry such as Harvester Combine Manufacturing where there is sale in 3-4
months only and purchase is done over a period of whole year. What shall be
remedy and what should be the grounds of appeal if the assesses wishes to
contest the decision of Jurisdictional Officer.
ANSWER
Facts of the case: Refund for inputs has been filed under Inverted Duty
structure. Application has been rejected and SCN issued stating that Inverted
duty Structure is not created yet on goods/inputs still in Stock hence refund
claim is liable to be rejected to that extent. The department is saying that
refund of Inputs used in that sale only will be considered for refund.
Law Applicable: CGST RULE 89
(5) In the case of refund on account of inverted duty structure, refund of input
tax credit shall be granted as per the following formula:-
Maximum Refund Amount = {(Turnover of inverted rated supply of goods and
services) x Net ITC ' Adjusted Total Turnover} - tax payable on such inverted
rated supply of goods and services.
Explanation:- For the purposes of this sub-rule, the expressions '
(a) Net ITC shall mean input tax credit availed on
inputs during the relevant period
other than the input tax credit availed for which refund is claimed under
sub-rules (4A) or (4B) or both; and
(b) Adjusted Total turnover" and "relevant period" shall have the same meaning
as assigned to them in sub-rule (4)
Interpretation: Amount of refund under Inverted Duty Structure is
to be calculated as per the formula specified in Rule 89.
Net ITC in Rule 89 means input tax credit availed on inputs during the
relevant period other than the input tax credit availed for which refund is
claimed under sub-rules (4A) or (4B) or both; and
The intention of law is to allow refund of ITC availed on Inputs, i.e. opening
stock or purchases used. It nowhere uses the word 'only purchases' during the
relevant period.
Therefore inputs here include opening stock as well as purchases purchased at
higher rate of tax as compared to rate of tax on finished goods.
Conclusion: In your case
Refund has been rejected on the ground that inputs for which refund has been
claimed are still in stock and thus are not covered under Inverted duty
structure.
The ITC of opening stock will be added and ITC of closing stock will be deducted
in the calculation of the amount of credit availed during the period.
Refund of ITC on such inputs can be claimed only when they are used in making
outward supply subject to lower rate of tax as compared to rate of tax on
inputs. (Reply dt.27.10.2020)