Baker Hughes Asia Pacific Ltd. vs. Union of India – Rajasthan High Court on Refund under Inverted Duty Structure (2022)

⚖️ Baker Hughes Asia Pacific Ltd. vs. Union of India – Rajasthan High Court on Refund under Inverted Duty Structure (2022)

📌 Background

The oil and gas sector has always been critical to India’s economic growth. To reduce the tax burden and cascading effect in this industry, the Central Government issued Notification No. 3/2017-CT(R) dated 28.06.2017, prescribing a concessional GST rate of 5% on all supplies made for specified petroleum operations, subject to certain conditions.

• Assessee: Baker Hughes Asia Pacific Limited (BHAPL), a global oilfield service provider.
• Transaction pattern:
  • Procured inputs (goods) on which GST ranging from 5% to 28% was paid.
  • Supplied these inputs to Vedanta Ltd. at a concessional GST rate of 5% under the above notification.
• Result: Input Tax Credit (ITC) accumulated, since the tax paid on inputs was much higher than the output tax liability (OTL).
• Refund Claim: BHAPL claimed refund of accumulated ITC under Section 54(3)(ii) of the CGST Act on account of inverted duty structure (IDS).

The Department issued a show-cause notice citing Circular No. 135/05/2020-GST dated 31.03.2020, which denied refund in cases where input and output supplies are the same.

❓ Point of Dispute

Whether refund of accumulated ITC under inverted duty structure is available even if input and output supplies are identical (i.e., same goods), supplied at a concessional GST rate.

📑 Submissions by the Assessee

1. Reliance on Earlier Circular (125/44/2019-GST dated 18.11.2019)
   • Allowed refund even where inputs and outputs were identical.
   • Clarified that refund was available where concessional GST rates were prescribed for output supplies.
2. Subordinate Circular Cannot Override Statute
   • Section 54(3)(ii) does not make any distinction between cases where inputs and outputs are identical.
   • The impugned Circular 135 (dated 31.03.2020), being subordinate legislation, cannot override the parent Act.
3. Legislative Intent – Relief in Inverted Duty Cases
   • Refund provisions aim to reduce cascading effect and working capital blockage.
   • Denial merely because input and output goods are the same defeats the intent of Section 54(3).

📑 Submissions by the Revenue

1. No Value Addition = No Refund
   • Since BHAPL was supplying the same goods it purchased, without value addition, refund under inverted duty structure was not permissible.
2. Reliance on Para 3.2 of Circular 135/2020
   • Refund in IDS cases is not available where input and output supplies are the same.
   • The Circular restricted refunds to avoid misuse.

⚖️ Legal Principles and Court’s Analysis

1. Clarity of Section 54(3)(ii)
   • The provision allows refund of unutilized ITC in cases where tax rate on inputs is higher than tax rate on outputs.
   • No restriction exists in the statute excluding cases where input and output supplies are the same.
2. Circulars Cannot Override Statute
   • Circular 125 (2019) allowed such refunds.
   • Circular 135 (2020) sought to impose an additional restriction not present in Section 54(3).
   • Being subordinate legislation, Circular 135 was repugnant to the Act and thus not legally enforceable.
3. Application of Circulars Over Time
   • The refund claims were for the period Sept 2018 to Sept 2019, during which Circular 125 (2019) was in force.
   • Hence, even otherwise, Circular 135 (2020) could not retrospectively deny refunds for earlier periods.
4. Interpretation of IDS Refund
   • Section 54(3) does not require that goods must undergo processing or transformation.
   • Refund entitlement arises purely from the rate differential between inputs and outputs.

🏛️ Court’s Conclusion

• Refund under Section 54(3)(ii) is available even where input and output supplies are the same, provided the output supply is taxed at a concessional rate leading to accumulation of ITC.
• Circular 135/2020, to the extent it restricted refunds in such cases, was held contrary to the parent Act.
• The Court directed the Department to process BHAPL’s refund claims.

✅ Practical Impact on Businesses

• Refund Eligibility Clarified: Even if inputs and outputs are identical, refund under IDS remains available.
• Relief for Oil & Gas and Mining Sectors: These industries often procure goods at higher GST rates but supply them under concessional notifications.
• Circular vs. Statute: Reinforces principle that circulars cannot override statutory provisions.
• Working Capital Relief: Prevents unjustified blockage of ITC in sectors with concessional output rates.

🔑 Key Takeaways

1. Refund under inverted duty structure is available irrespective of whether inputs and outputs are identical.
2. Circulars are binding on authorities but cannot curtail statutory rights under Section 54(3).
3. Taxpayers supplying goods at concessional rates can claim refunds for accumulated ITC.
4. The ruling ensures uniform treatment for IDS refunds and prevents arbitrary denial by authorities.
5. Subsequent clarification by CBIC (Circular 173/05/2022-GST dated 06.07.2022) aligned with this judgment, confirming that para 3.2 of Circular 135 was never intended to deny refunds in such cases.

📢 Why This Case Matters

The Baker Hughes ruling provides significant clarity on refunds under inverted duty structure. It safeguards businesses from arbitrary denial of ITC refunds merely because input and output supplies are the same.

By affirming that statute prevails over circulars, the judgment strengthens taxpayer rights and ensures that legitimate refunds are not blocked, particularly in industries dependent on concessional rate notifications.

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