Unutilized Input Tax Credit Refund Under Inverted Duty Structure Cannot Be Restricted By CBIC Circular 135/05/2020

By | October 14, 2026
0 Comment
Unutilized Input Tax Credit Refund Under Inverted Duty Structure Cannot Be Restricted By CBIC Circular 135/05/2020

Issue

Whether a claim for refund of unutilized Input Tax Credit (ITC) under Section 54(3) under an inverted tax structure can be restricted by CBIC Circular No. 135/05/2020 when accumulation arises because certain inputs attract a higher tax rate than output supply, even if the primary input and output share the same rate.

Facts

  • The petitioner, a registered taxpayer under GST, accumulated unutilized Input Tax Credit (ITC) due to an inverted duty structure.
  • The accumulation occurred because certain input supplies attracted a higher rate of GST than the tax rate applicable to the final output supply, even though the main input and output carried identical tax rates.
  • The petitioner filed a refund application under Section 54(3) of the CGST/HGST/PGST Act, 2017 to claim the refund of unutilized ITC.
  • The tax authorities applied CBIC Circular No. 135/05/2020 (dated 31.03.2020), which restricted refund entitlements under the inverted duty structure.
  • The petitioner filed a writ petition challenging the applicability of the Circular and seeking a direction to process the refund claim strictly under Section 54(3) uninfluenced by the administrative clarification.

Decision

  • Inapplicability of Circular 135/05/2020: In favor of Assessee. The High Court held that Circular No. 135/05/2020 applies only to cases where ITC accumulation arises due to rate changes on input and output supplies at different points in time, and not where specific inputs carry a higher rate than output supplies.
  • Binding Precedent Followed: Following the decision of the Delhi High Court in Indian Oil Corporation Ltd., the Court held that the petitioner’s case falls outside the scope of the restriction in Circular No. 135/05/2020.
  • Directions for Refund Processing: The writ petition was allowed, directing the tax authorities to process the refund application under Section 54(3) in light of the Indian Oil Corporation Ltd. ruling within two months of receiving a fresh application.
  • Exclusion of Limitation Period: The time period spent during the pendency of the writ petition was ordered to be excluded when computing the limitation period for the refund claim.

Key Takeaways

  • Circulars Cannot Restrict Statutory Refund Rights: Administrative circulars cannot narrow or override the statutory entitlement to an ITC refund granted under Section 54(3) for an inverted tax structure.
  • Scope of Inverted Duty Accumulation: Refund of unutilized ITC under Section 54(3) is permissible as long as any inputs attract a higher rate of tax than the output supply, regardless of whether the principal input and final output carry the same tax rate.
  • Writ Jurisdiction Exclusion of Limitation: Time consumed in pursuing bona fide writ remedies before the High Court is excluded while calculating statutory limitation limits for processing tax refund claims.
HIGH COURT OF PUNJAB & HARYANA
Padmavati Ferrous Ltd.
v.
Union of India
Ashwani kumar Mishra, CJ.
and Rohit Kapoor, J.
CWP-25775-2024 (O & M)
SEPTEMBER  11, 2026
Sandeep Goyal, Sr. Adv. and Aditya Gupta, Adv. for the Petitioner. Ajay Kalra, Senior Standing Counsel and Sourabh Goel, Addl. A.G. for the Respondent.
ORDER
Ashwani Kumar Mishra, CJ.- The petitioner is aggrieved by Circular dated 31.03.2020 issued by the Ministry of Finance, Government of India, to the extent that it restricts the claim of refund in terms of the notification.
2. The primary contention of the petitioner is that the restriction imposed by the circular is inconsistent with the provisions of Section 54(3) of the Goods and Services Tax Act, 2017 (hereinafter referred to as “the Act of 2017”).
3. While entertaining this writ petition, interim orders were passed on 03.10.2024:-
“Learned counsel has invited attention to the judgments passed by the Rajasthan High Court, Calcutta High Court, Guwahati High Court and Madras High Court wherein the circular has not been held applicable and has been held repugnant to section 54(3)(ii) of the CGST Act.
Notice of motion.
Mr. Ajay Kalra, Sr. Standing Counsel accepts notice on behalf of respondents/Revenue and seeks time to file reply. May do so, on or before the next date of hearing with a copy in advance to the counsel opposite.
List again on 05.02.2025.”
4. It is further pointed out that a similar view, as taken by the three High Courts, referred to in the aforesaid order dated 03.10.2024, has also been adopted by the Delhi High Court in Indian Oil Corporation Ltd. v. Commissioner of Central GST 431/[2024] 101 GST 748/81 GSTL 252 (Delhi)/(2024) 122 GSTR 318.
5. Learned counsel for the respondents-Revenue, upon obtaining instructions, submits that none of the judgments, relied upon by the petitioner, have been challenged by the respondent-Department in Appeal before Hon’ble the Supreme Court.
6. In view of the admitted position, we are of the opinion that the present Writ Petition can also be disposed of in terms of the judgment of the Delhi High Court in Indian Oil Corporation Ltd. (supra), wherein the Delhi High Court has held as under, in paragraphs 27 and 28:-
“27. It is clear from a plain reading of paragraph 3.2 of the Circular 135/5/2020 that it seeks to clarify that in cases where input and output is the same but the tax has accumulated on account of the different tax rates at different points of time, refund under Section 54 of the CGST Act is not admissible. It is not necessary for this Court to examine whether such clarification falls foul of Section 54(3) of the CGST Act as it is apparent that the same is inapplicable in the facts of the present case. The clarification seeks to address an issue where the ITC is accumulated on account of different rates being applicable at different points of time. It does not seek to address any issue where the principal input and output is the same. In terms of the Circular 135/5/2020, if the rate of tax on input and output is the same and ITC is accumulated on account of different rates being applicable at different points of time, the case would not fall under Clause (ii) of the proviso to Sub-section (3) of Section 54 of the CGST Act. The use of the words, the input and output being the same, is essentially in the context of the rate on input and output being the same.
28. Circular No.135/05/2020 has no application where ITC, refund of which is sought, has accumulated on account of rate of taxes on certain inputs being higher than tax chargeable on the output supply, notwithstanding that the one of the main input and output is chargeable at the same rate of tax.”
7. The Writ Petition before the Delhi High Court was ultimately allowed vide order dated 05.12.2023.
8. Following the reasons recorded in the judgment of the Delhi High Court in Indian Oil Corporation Ltd. (supra), this Writ Petition also succeeds and is allowed. Consequently, the petitioner’s claim for refund shall be considered and decided under Section 54(3) of the Act of 2017, keeping in view the observations made in the judgment passed by the Delhi High Court in Indian Oil Corporation Ltd. (supra), within a period of two months from the date of filing of an appropriate application in this regard.
9. It is clarified that the period spent in pursuing the present Writ Petition shall not be counted for the purposes of computing limitation for filing the application for refund.
10. Pending application(s), if any, shall stand disposed of accordingly.