CBIC Circular 135/2020 Applies Only to Rate-Reduction Scenarios, Not to Genuine Inverted Duty Structures: GSTAT Kolkata Dismisses Revenue's Appeal in Landmark First Ruling on Refund Under Section 54(3)(ii)

The Goods and Services Tax Appellate Tribunal, Kolkata Bench — in what is among the earliest substantive orders passed by the newly constituted Tribunal — has dismissed the Revenue's appeal and upheld the refund of accumulated Input Tax Credit under inverted duty structure for a garment manufacturer. The ruling firmly holds that Circular No. 135/05/2020-GST dated 31.03.2020 is confined to rate-reduction scenarios and has no application where ITC accumulation arises from ancillary inputs taxed at a rate higher than the output supply. The order was passed by Shri Sunil Kumar Singh (Judicial Member) and Shri Bijoy Kumar Kar (Technical Member) in APL/43/KLK/2026 and APL/44/KLK/2026 on 10.09.2026.

M/s HP Cotton Casuals Private Limited, a Kolkata-based entity engaged in manufacturing readymade garments through bleaching, dyeing, printing, cutting, stitching, branding and packing, had filed refund claims for accumulated ITC under Section 54(3)(ii) of the CGST Act for the months of February and March 2024 (Rs. 7,86,037/- and Rs. 34,47,623/- respectively). The principal input — "finish than" (fabric) — attracted GST at 5%, while ancillary inputs such as printing chemicals, packaging materials and stores attracted 12% and 18%. The finished garments (suits, tops, shorts, night suits, joggers under HSN 61 and 62) were taxable at 5%, creating a genuine inverted structure on the ancillary inputs.

The original adjudicating authority rejected both claims on the sole ground that input and output fell under the same HSN and were "the same goods," relying on Para 3.2 of Circular No. 135/05/2020-GST. The first appellate authority reversed this, finding that the respondent was a manufacturer carrying out value addition and that the inputs and outputs were not "the same goods." The Revenue appealed to the GSTAT.

The Revenue raised six grounds: (a) the appellate authority accepted the manufacturer claim without document verification; (b) Para 3.2 of Circular 135/2020 bars refund where input and output are the same goods; (c) certain capital goods and personal-use invoices were erroneously included; (d) GSTR-2B mismatches were not addressed; (e) zero-rated ITC was not segregated; and (f) the refund was computed on an annual rather than period-wise basis.

The GSTAT rejected every ground. On the foundational issue, the Tribunal held that "the concept of manufacture is no more relevant in the GST era since the levy of GST is not on the point of manufacture but on the point of supply" — making it immaterial whether the respondent was a trader or manufacturer. On Circular 135/2020, the Tribunal read Para 3 in its entirety and held that the heading itself ("Refund of accumulated input tax credit on account of reduction in GST Rate") limits its scope to rate-reduction situations, and the phrase "though attracting different tax rates at different points in time" in Para 3.2 confirms that it applies only when the same goods attract different rates at different times — not where different inputs attract different rates from the output. The Tribunal relied squarely on the Madras High Court's ruling in Vindhya Spinning Mills Private Limited v. Assistant Commissioner of CGST, Sivakasi Division (W.P.(MD) Nos. 16757 & 16758 of 2025, decided 14.07.2026), which held that Section 54(3)(ii) does not distinguish between principal and ancillary inputs and that an executive circular cannot override the plain terms of the statute.

On the verification-related grounds, the Tribunal found that the first appellate authority had conducted a detailed invoice-wise matching exercise with GSTR-2A/2B, that the OAA itself had verified exclusion of capital goods from Net ITC, and that the Rule 89(5) formula inherently apportions ITC across adjusted total turnover including zero-rated supplies, making separate segregation unnecessary. The Revenue failed to produce any documentary evidence to rebut these findings and relied solely on oral submissions.

The appeals were dismissed with parties bearing their own costs. The order was pronounced in open court.