Refund of ITC on ‘input services’ is not allowed under inverted duty structure: AAR

Categories: Advance Ruling
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Daewoo-TPL JV (“the Applicant”) is a joint venture between M/s. Daewoo Engineering & construction company Ltd. and  M/s. Tata Projects Ltd. formed with a sole objective to bid and secure the contract for design, engineering and construction of Long Bridge-Mumbai Trans Harbour Link project (“MTHL project”), which is in the nature of works contract.

Execution of MTHL project entails procurement of various inputs, input services & capital goods viz. cement, concrete, steel & steel structures, bridge accessories, formworks, plant & equipment, labour, etc., which attract GST at varied rates, depending on the nature of such procurement. However, GST rate applicable on outputs services is lower than rate applicable on goods /services utilized as input.

Issue involved:

The issue was raised in respect of the Applicant’s eligibility for refund of unutilized input tax credit (“ITC”).


The Hon’ble AAR, Maharashtra, observed the provisions of refund under Section 54 of the CGST Act, 2017 (“CGST Act”), definition of ‘input’ contained in Section 2(59) thereof and the definition of ‘Net ITC’ contained in Notification No. 26/2018-Central Tax dated June 13, 2018, and vide Order No. GST-ARA – 113/2018-19/B-41 dated April 24, 2019, held as under:

  • Section 54(3)(ii) of the CGST Act talks of “where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies”. It is clear that this clause speaks only in respect of credit availed on inputs being higher i.e. credit availed on tax paid on goods being higher.
  • Definition of ‘Net ITC’ only considers ITC on ‘inputs’ for computing the amount of eligible refund, therefore, any portion of ITC availed on ‘input service’ is not available as refund under CGST Rules, 2017 (“CGST Rules”).
  • The formula for computing refund was made retrospectively effective from July 1, 2017 vide Notification No. 26/2018 – Central Tax dated June 13, 2018.
  • Rejected the contention of the Applicant that “Section 54 in no manner provides or stipulates that amount of refund would be granted subject to restriction specified in rules”, while explaining that Section 54 has to be applied in accordance with the Rule 89 of the CGST Rules and there is nothing in the given rule that overrides Section 54;

The Hon’ble AAR denied to answer the query w.r.t. formula for calculating the refund amount being outside the purview of Section 97 of the CGST Act i.e. conditions mentioned for seeking an advance ruling.

Citation: [TS-531-AAR-2019-NT]

Important legal provisions:

Section 54(3)(ii) of CGST Act reads as follows:

“(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilized ITC at the end of any tax period:


(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:”

Rule 89(5) of CGST Rules reads as follows: 

“(5) In case of refund on account of inverted duty structure, refund of ITC shall be granted as per following formula

Maximum refund amount= {(Turnover of inverted rated supply of goods and services)* Net ITC/Adjusted Total Turnover}- tax payable on such inverted rated supply of goods and services

Explanation:- For the purposes of this sub-rule, the expressions –

(a) “Net ITC” shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under subrules (4A) or (4B) or both; and …..”