Higher GST on Packaging Inputs Than Output Supply of Edible Oil: Karnataka HC directs Accumulated ITC Refund [Read Order]

The Karnataka High Court has directed grant of refund of accumulated Input Tax Credit (ITC) to an edible oil supplier, holding that refund under the inverted duty structure cannot be denied merely because the principal input and output supplies attract the same rate of GST (Goods and Services Tax).

The petitioner, South Indian Oil Corporation procures edible oils such as sunflower oil, rice bran oil, cottonseed oil and palm oil that fall under HSN Code 15 on payment of GST at 5%.

They purchase oil in bulk and thereafter pack it into containers of 250 ml, 500 ml, 1 litre and 5 litre for sale - to both, business-to-business and retail, with the same rate of 5% GST applicable.

South Indian Oil Corporation accumulated unutilised ITC on account of certain inputs and ancillary materials that were used in packing and distribution - these inputs attracting higher GST rates of 18% and 28%, while the output supply of packed edible oil remained taxable at 5%.

Although the petitioner filed refund applications under Section 54(3)(ii) of the CGST Act on the ground of inverted duty structure, the same were met with show cause notices that proposed rejection of refund. The adjudicating and appellate authorities rejected the petitioner’s contentions by relying on Circular No. 135/05/2020-GST dated 31.03.2020.

The petitioner has challenged the orders before the High Court, represented by Venkatanarayana G.M., meanwhile Akash B. Shetty appeared for the Revenue.

Justice S.R. Krishna Kumar at the outset noted that the present petition draws parallels to the decision of the Delhi High Court in Indian Oil Corporation Ltd. vs Commissioner of CGST (2024) wherein it was held that Clause (ii) of the proviso to Section 54(3) does not proscribe refund where ITC accumulates due to higher tax on certain inputs, even if the principal input and output are taxed at the same rate.

In Indian Oil (supra), it was held that the statutory provisions do not carve out any exception towards the rate of GST rates in a situation where the input and output goods are identical, the High Court held that ITC refund cannot be denied when accumulation arises on account of higher tax on other inputs.

Accordingly, the Court allowed the petition, set aside the impugned orders and directed the revenue to refund the amounts claimed by the petitioner in the refund applications together with applicable interest within a period of three months from the date of receipt of a copy of the order.

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