ITC Eligibility Cannot Be Re-Adjudicated in Refund Proceedings Without Section 73/74 Order: GSTAT Ernakulam Applies Convergys Principle to GST Regime for the First Time

In what is arguably the most significant substantive ruling from the newly constituted GSTAT Ernakulam Bench, the Tribunal has held that an application for refund under Section 54(3) of the CGST Act cannot be rejected on grounds of ineligible Input Tax Credit in the absence of a formal determination under Section 73 or 74. The ruling, delivered on 08.09.2026 in Augustan Textile Colours v. Commissioner of State Tax, Keralam (Final Order No. 02/EKM/KERALAM/2026), explicitly imports the CENVAT-era principle established by the CESTAT Delhi in Convergys India (2009) — that there cannot be two different yardsticks, one for permitting credit and the other for eligibility for granting refund — into the GST framework.

The appellant, a garment manufacturer with inputs taxed at 18% and outputs at 5%, had claimed an inverted duty structure refund of Rs. 18,41,280 for July–September 2019. The adjudicating authority partially rejected Rs. 9,72,027, and the first appellate authority sustained rejection of Rs. 7,07,173. The Tribunal found the proceedings vitiated at multiple levels. First, the show cause notice was held fatally vague — containing only a bland statement that the refund was "ineligible on account of wrong ITC claim" without any invoice-wise details, nature of ineligibility, or computation. Citing the Supreme Court's ruling in Brindavan Beverages, the Tribunal held that the noticee was not given proper opportunity to meet the allegations.

Second, the Tribunal found that the appellate authority had transgressed the boundaries of the SCN by introducing an entirely new ground — that the inputs were "not related in furtherance of business as prescribed under Section 2(59) and 2(60)" — which was nowhere in the original notice. Third, and most significantly, the Tribunal held that under the statutory scheme, any determination of ITC eligibility is permissible only under Section 73/74, and until such a determination is made, the ITC is presumed to be in order. The refund process cannot be "converted into collateral proceedings for re-adjudicating the very eligibility of that credit." This finding was supported by Paragraphs 20 and 21 of CBIC Circular No. 125/44/2019-GST, which require that where rejection of refund is founded upon ineligibility of ITC, notice must be issued under Section 54 read with Sections 73 or 74.

The Tribunal traced the legal genealogy from Convergys (CESTAT Delhi, 2009) through Morgan Stanley (CESTAT Mumbai, 2014), ADP (CESTAT Hyderabad, 2019), and Qualcomm (Telangana HC, 2021), finding that the principle has been consistently upheld across all judicial fora. While acknowledging that all these decisions were rendered under the CENVAT regime, the Tribunal held that "the fundamental legal principle remains" and "continues to hold the field" under the CGST Act as well. The appeal was allowed with consequent relief.

2026-juristway.com-1198-GSTAT(Ernakulam)-GST  |  GSTAT Ernakulam  |  APL/23/ERN/2026  |  Final Order No. 02/EKM/KERALAM/2026  |  08.09.2026