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)