Introduction
The Karnataka High Court, in Writ Petition No. 22068 of 2024 (T-RES), decided on 12th December,2025, in the case of South Indian Oil Corporation Ltd. V. Union of India & Ors., held that refund of accumulated Input Tax Credit under Section 54 (3)(ii) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST”) is admissible even where the input and output goods are identical, provided the inverted duty structure arises due to concessional tax rate on output supplies, and further clarified that such refund cannot be denied merely on the ground of identity of goods.
Facts of the Case
South Indian Oil Corporation Ltd. (hereinafter referred to as “the Petitioner”) is engaged in the business of manufacturing and trading edible oils. In the course of its business operations, the Petitioner procured crude edible oil as input, on which Goods and Services Tax (GST) at the rate of 18% was levied. Subsequently, the Petitioner sold refined edible oil as output, which was taxable at a concessional GST rate of 5% as per the applicable Government notification. As a result, the rate of tax on inputs was higher than the rate of tax on output supplies, leading to an accumulation of unutilised Input Tax Credit (ITC), thereby creating an inverted duty structure. In view of accumulation of ITC, the Petitioner filed refund applications under Section 54(3)(ii) of the CGST Act, 2017, seeking refund of accumulated ITC. The GST Department rejected the refund claims, primarily on the ground that input goods and output goods were essentially the same, and therefore refund under the inverted duty structure was not permissible. The appeal filed before the Appellate Authority was also dismissed, thereby affirming the rejection. Aggrieved by the said orders, the Petitioner approached the High Court of Karnataka by filing a writ petition under Article 226 and 227 of the Constitution of India, invoking Article 265 as well and, challenged the legality and correctness of the rejection orders.
Issues Before The High Court
- Whether refund of accumulated ITC is admissible under Section 54(3)(ii) of the CGST Act when the input goods and output goods are identical, but the output supply is taxed at a lower concessional rate?
- Whether Circular No. 135/05/2020-GST can be relied upon to deny such a refund.
- Whether the substituted Circular No. 173/05/2022-GST operates retrospectively.
- Whether the petitioner is entitled to interest under Section 56 of the CGST Act.
Contentions Of The Parties
Petitioner’s Contentions
The petitioner argued that Section 54(3)(ii) of the CGST Act allows refund of unutilized Input Tax Credit (ITC) where such accumulation arises due to the rate of tax on inputs being higher than the rate of tax on output supplies. It was contended that refund cannot be denied merely because the input and output goods are identical, especially when the output is supplied under a concessional notification, resulting in an inverted duty structure. The petitioner relied on CBIC Circular No. 135/05/2020-GST dated 31 March 2020, which clarifies that refund of accumulated ITC is admissible even when input and output goods are the same, provided the output supplies are taxed at a concessional rate and are neither nil-rated nor fully exempt. It was further submitted that the rejection of refund was arbitrary, illegal, and contrary to statutory provisions as well as binding departmental circulars. It was also argued that where multiple inputs are used and attract different tax rates, the expression “Net ITC” includes credit availed on all such inputs during the relevant period, irrespective of their individual tax rates. The petitioner placed reliance on various judicial precedents to support the contention that beneficial circulars operate retrospectively and that administrative circulars cannot override statutory provisions. Additionally, the petitioner sought interest under Section 56 of the CGST Act for the delay in granting the refund.
Respondents’ Contentions
On the other hand, the respondents argued that the principal input and output goods were the same and were taxed at the same rate of 5%, and therefore the case did not fall within the scope of an inverted duty structure. It was contended that Circular No. 135/05/2020 clearly provided that refund of accumulated ITC is not admissible where input and output supplies are identical. The respondents further submitted that both the adjudicating authority and the appellate authority had correctly relied upon the said circular, and hence, the impugned orders were legal, valid, and required no interference by the High Court.
Decision And Findings
While arriving at its conclusions, the High Court placed reliance on the decision on M/s. Indian Oil Corporation Ltd. v. The Assistant Commissioner of Central Tax, in W.P. No. 14414 of 2024, decided on 20.08.2024. Based on the principles laid down therein, the court allowed the writ petition and cancelled the orders passed by both the adjudicating authority and the appellate authority, which had earlier rejected the refund claims. The Court directed the respondents to process and grant the refund of accumulated Input Tax Credit (ITC) to the petitioner as per law. It also held that if the refund is not given within the prescribed time, the petitioner will be entitled to interest under Section 56 of the CGST Act. The Court noted that Circular No. 135/05/2020 had wrongly imposed a restriction by denying refund when the input and output goods were the same. This restriction was later removed by Circular No. 173/05/2022. The Court held that the later circular is beneficial and only clarifies the law, and therefore it should be applied retrospectively. In support of this view, the court further relied upon the decision of the Calcutta High Court in Shivaco Associates and Anr. v. Joint Commissioner of State Tax, Directorate of Commercial Taxes and Ors., 2022 SCC OnLine Cal 459, wherein it was held that administrative circulars issued under the CGST Act cannot override or restrict the statutory provisions of the Act and cannot curtail the benefits granted under the Act. The Court further explained that Section 54(3)(ii) of the CGST Act does not prohibit refund merely because the input and output goods are identical. What matters is whether the input tax credit has accumulated due to a higher tax rate on inputs than on output supplies. The Court also clarified that when more than one input is used, the term “Net ITC” includes credit taken on all such inputs during the relevant period. Overall, the judgment clearly reinforces that the law is more important than administrative circulars, and any beneficial clarification should be applied even to past cases.
AMLEGALS Remarks
This judgment highlights the evolving judicial approach towards refund of accumulated ITC in cases involving an inverted duty structure. The Court has adopted a practical and fair interpretation of Section 54(3)(ii) of the CGST Act, ensuring that legitimate refunds are not denied on technical or artificial grounds. By holding that statutory provisions prevail over administrative circulars and that beneficial and clarificatory circulars operate retrospectively, the Court has strengthened taxpayer protection and promoted certainty in tax administration. The decision also brings much-needed clarity on the scope of “Net ITC”, especially in cases involving multiple inputs, thereby reducing ambiguity and future disputes. Overall, the ruling reinforces the principles of fairness, legality, and equity in taxation, and serves as an important precedent for similar refund claims under the GST regime.
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