Refund Eligibility Must Look Beyond the Main Commodity
A business may buy and sell its main commodity at the same GST rate and still accumulate input tax credit because other goods used to make the outward supply attract a higher tax. Packaging provides a simple example. In the dispute considered here, bulk tea and packaged tea attracted GST at 5%, while packaging materials attracted GST at 18%. Comparing only the tax rates on tea left out an important part of the business’s purchases. The refund question required examination of all relevant inputs, including the packaging used to supply the tea.
This issue arose in Santosh Jaiswal v. Madanlal Murarilal, 2026-VIL-244-GSTAT-KLK, decided on 14.10.2026 in Appeal No. APL/128/KLK/2026, before the GST Appellate Tribunal, Kolkata Bench. The Bench comprised Shri Satya Gopal Chattopadhyay, Member (Judicial), and Shri Anindya Mitra, Member (Technical). The Department challenged an appellate order allowing a tea trader’s refund of accumulated ITC arising from an inverted duty structure. Its principal objection was that the inward and outward supplies were the same commodity and attracted the same GST rate.
The Tribunal rejected that limited comparison. Packaging materials, PET jar containers, and printed flexible packaging materials were also inputs, and their higher tax rate had contributed to the accumulation of credit. The decision explains an important principle under Section 54(3)(ii) of the CGST Act, 2017: the tax rate on the principal input does not, by itself, determine whether an inverted duty structure exists. The other eligible inputs and the reason for accumulation must also be examined.
A Refund Cannot Be Rejected Merely Because the Business Buys and Sells Tea
M/s Madanlal Murarilal was engaged in trading tea under HSN 0902. On 30.03.2024, it applied for a refund of accumulated SGST credit of Rs.10,75,233 for April 2022 to September 2022. The claim was based on the ground that credit had accumulated due to an inverted tax structure. The Refund Sanctioning Authority rejected the claim because both inward and outward supplies of tea attracted GST at 5%. In its view, the matching rate precluded the taxpayer from claiming the refund.
The First Appellate Authority disagreed and allowed the claim in Order-in-Appeal No.232/SLG-GST/2024-25 dated 04.09.2024. It considered the treatment of packaging materials as inputs and judicial decisions holding that refund eligibility cannot be confined to a comparison between the principal input and the outward supply. The Department then approached the Tribunal under Section 112(3) of the CGST Act, 2017, seeking to reverse that relief.
The Department maintained that higher-taxed packaging alone could not justify the refund when the principal commodity attracted 5% at both stages. It also relied on Circular No.135/05/2020-GST dated 31.03.2020 and Circular No.173/05/2022-GST dated 06.07.2022. The controversy therefore concerned the legal approach to identifying inversion: whether the officer could stop at the matching rates on tea, or had to examine the packaging inputs that formed part of the taxpayer’s supply arrangement.
Packaging Used in Business Can Qualify as an Input
Section 2(59) of the CGST Act, 2017 defines an “input” as goods, other than capital goods, used or intended to be used in the course or furtherance of business. The definition is not confined to the principal commodity purchased by the taxpayer. Nor does it require every input to lose its separate identity through manufacturing. Goods used to pack and market the taxable product may fall within the definition when the relevant statutory conditions are satisfied.
For a packaged-tea business, containers, pouches and other packing materials serve a direct commercial purpose. They enable the trader to supply tea in the form in which customers purchase it. The Tribunal referred to its earlier decision recognising that packing materials, cartons and plastic containers were indispensable for marketing packaged tea. Their role could not be dismissed merely because tea remained the principal product. An input does not lose that character simply because its value is smaller than the value of the commodity it contains.
This approach is also consistent with paragraph 62 of Circular No. 125/44/2019-GST dated 18.11.2019, which recognises eligible credit on packing materials and other business inputs, subject to the relevant restrictions. The reported judgment appears to misnumber this circular as “128/44/2019-GST”; the correct reference for the quoted clarification is 125/44/2019-GST. The clarification supports treating packaging as an input, although its inclusion in a refund calculation must still comply with the applicable refund provisions.
The Principal Input Is Not the Entire Input Basket
The Department’s argument effectively introduced a principal-input test. Under that approach, the officer would identify the main commodity, compare its purchase tax rate with the outward-supply rate, and reject the refund if the rates matched. That method overlooked other eligible inputs. In the present case, the comparison between tea purchased at 5% and tea supplied at 5% did not account for packaging purchased at 18%.
Section 54(3)(ii) of the CGST Act, 2017 refers to accumulation arising from the rate of tax on inputs being higher than the rate on output supplies. It does not expressly direct the officer to consider only the input with the highest purchase value or the closest connection with the product’s name. The Tribunal therefore examined the broader input basket rather than allowing the principal commodity to control the entire inquiry.
This distinction matters beyond tea. A taxable product may require several goods for packing, presentation or supply. Their rates can differ even though they contribute to one outward supply. The inquiry must identify those eligible inputs and determine whether the rate structure caused credit to accumulate. The size or commercial prominence of the principal input cannot justify ignoring the tax paid on other qualifying inputs.
A Simple Example Shows Why Matching Tea Rates Are Inconclusive
Assume, purely for illustration, that a trader purchases bulk tea worth Rs.10,00,000, attracting GST of Rs.50,000 at 5%. The trader also purchases eligible packaging materials worth Rs.2,00,000, attracting GST of Rs.36,000 at 18%. The total input tax credit from these purchases is therefore Rs.86,000. The packaging credit forms a substantial part of the total, even though packaging is not the principal commodity.
Suppose the trader supplies the packaged tea for Rs.13,00,000, attracting output GST of Rs.65,000 at 5%. On these simplified figures, and assuming no other transactions or adjustments, a credit of Rs.21,000 remains after discharge of the output liability. The business has purchased and sold tea at the same rate, but the higher-taxed packaging has nevertheless contributed to an unused credit balance.
This example explains why the Department’s rate comparison was incomplete. It is not a calculation of the refund sanctioned in the judgment, nor does it establish that every remaining ledger balance must be refunded. The permissible refund must be computed under Rule 89(5) of the CGST Rules, 2017, subject to the applicable conditions and limits. The example demonstrates the underlying point: matching rates on the main commodity do not necessarily prevent accumulation caused by other inputs.
Administrative Circulars Cannot Reduce a Statutory Refund Right
Section 168(1) of the CGST Act, 2017 authorises directions to secure uniform implementation of the legislation. Such directions can guide officers on procedure and interpretation. However, that power does not authorise the Board to introduce an additional statutory disqualification. Where the legislation permits a refund, an administrative circular cannot defeat the claim by imposing a condition not contained in the legislation.
The Tribunal relied on the High Court decisions that explain this boundary. The Department could not convert the circular’s reference to the same input and output goods into a universal rule excluding an otherwise qualifying claim. The officer still had to examine Section 54(3)(ii) of the CGST Act, 2017, the actual inputs, their tax rates, and the reason for accumulation. Uniform administration means applying the legislation consistently; it does not mean consistently applying a restriction beyond the legislation.
The passage from Shivaco Associates and Another [2024] 122 GSTR 303 (Cal) - 2022-VIL-209-CAL, reproduced in the order, also referred to Jindal Stainless Limited and Dilip Kr. Ghosh v. Chairman, AIR 2005 SC 3485, in support of the limits on administrative circulars. These references reinforce the hierarchy between legislation and administrative instructions. They should not, however, be presented as independent decisions on the particular tea-packaging refund. Their relevance lies in the interpretative principle applied to the circular-based objection.
A Rate Reduction Over Time Differs From Higher Tax on Packaging
The Tribunal distinguished the present dispute from a situation where the GST rate on the same goods is reduced after purchase. In such a case, a trader may hold stock bought at the former higher rate and later sell it at the reduced rate. Paragraph 3 of Circular No.135/05/2020-GST dated 31.03.2020 addressed accumulated credit arising from a reduction in the GST rate. The present case concerned a different source of accumulation: packaging taxed at a higher rate than the packaged-tea supply.
The distinction is straightforward. A change in the tax rate over time concerns the treatment of purchases and sales across the date of that change. A higher tax on packaging concerns different inputs used alongside the main commodity. Here, the matching 5% rates on bulk tea and packaged tea did not explain away the 18% tax on the other inputs. The Department’s reliance on the circular therefore required examination of the actual situation addressed by it.
Further, Circular No.173/05/2022-GST dated 06.07.2022 should not be described as imposing an absolute prohibition whenever the input and output goods are the same. It clarifies that qualifying refunds may arise where a concessional notification produces a lower outward rate at the same point in time, subject to other conditions. The circular’s history itself therefore requires a distinction between different causes of accumulation, rather than a blanket same-goods rejection.
An Unchanged Commodity Does Not Automatically Exclude an Inverted Structure
In Shivaco Associates and Another v. Joint Commissioner of State Tax and Others, 2022-VIL-209-CAL; [2024] 122 GSTR 303 (Cal.), the Calcutta High Court examined the denial of an inverted-duty refund on the ground that the input and output supplies were the same goods. Its reasoning, reproduced extensively in the present order, focused on the statutory conditions rather than the identity of the commodity. The legislation did not make a change in the goods’ identity an additional requirement for refund.
The importance of that reasoning is that the legal inquiry concerns tax-rate inversion and resulting accumulation. Describing a transaction as the purchase and sale of the same commodity does not, by itself, answer those questions. The Tribunal applied this principle while considering the separate packaging inputs used by the tea trader. The Calcutta High Court’s decision also supplied jurisdictional judicial support for rejecting a circular-based restriction that curtailed the statutory benefit.
The reported order additionally referred to Baker Hughes Asia Pacific Limited v. Union of India and Others, D.B. Civil Writ Petition No.5714/2021, decided on 30.06.2022, and BMG Informatics Private Limited v. Union of India and Others, W.P.(C) No.3878/2021 and connected matters, decided on 02.09.2021. Those decisions formed part of the supporting judicial discussion concerning the same-goods restriction and the limits of circulars. The present case nevertheless remained a tea-packaging dispute, decided on its own facts and the authorities directly applied.
Higher-Taxed Supporting Inputs Cannot Be Ignored
Indian Oil Corporation Limited v. Commissioner of Central Goods and Services Tax and Others, 2023-VIL-847-DEL; [2024] 122 GSTR 318 (Delhi), decided on 05.12.2023, provided particularly relevant support. The Delhi High Court considered a refund claim in which the principal input, bulk LPG, and the outward supply, bottled LPG, both attracted GST at 5%. Other inputs attracted higher rates. Therefore, the matching rate on the principal input did not provide a complete basis for rejecting the claim.
The High Court explained that Section 54(3)(ii) of the CGST Act, 2017 did not confine the comparison to the principal input and principal output. The statutory reference to inputs required consideration of the relevant inputs contributing to the accumulation. This reasoning directly addressed the weakness in a method that selects one dominant purchase and disregards the remaining eligible goods.
The Department attempted to distinguish that decision by referring to different LPG rates. The Tribunal answered this objection by reproducing the High Court’s express statement that the principal input and bottled output in that case both attracted 5%. The asserted distinction therefore did not displace the relevant principle. A precedent must be compared with its recorded facts and reasoning, rather than distinguished through an incomplete description of its commodity rates.
A Materially Similar Refund Dispute Calls for Consistent Treatment
The Tribunal had already considered a closely comparable tea- packaging dispute in The Principal Commissioner v. M/S Tea Linker of Siliguri, 2026- VIL- 79- GSTAT- KOL, Appeal No. APL/25/KLK/2026, decided on 03.09.2026. That taxpayer purchased tea in bulk and supplied packaged tea in containers, packets, pouches and sachets. The Department raised substantially similar objections regarding the matching tax rates on tea and the interpretation of the refund circulars.
In that earlier decision, packing materials, cartons and plastic containers used for marketing packaged tea were recognised as inputs under Section 2(59) of the CGST Act, 2017. The Tribunal also considered the circulars and the decisions in Shivaco Associates and Indian Oil Corporation. It rejected the attempt to deny the refund merely because bulk tea and packaged tea attracted the same GST rate.
The present Bench found that the dispute before it was squarely covered by Tea Linker. That conclusion rested on the similarity of the relevant transactions and legal objections. It did not mean that every tea trader' s refund amount automatically stood established. Consistency requires applying the same legal principle to materially similar facts, while the invoices, credit, turnover and refund computation remain specific to each claimant.
Eligible Credit and the Refundable Amount Are Separate Questions
Recognition of packaging as an input resolves an important issue but does not make every credit balance refundable. Eligibility to take ITC and entitlement to receive a refund operate through related but separate provisions. A business must establish the admissibility of the credit and then satisfy the refund conditions. The higher rate on a packaging invoice cannot validate credit that is otherwise unavailable under the applicable law.
The refund computation must also follow Rule 89(5) of the CGST Rules, 2017, as applicable to the claim. The statutory formula and relevant records determine the amount payable. The present ruling should therefore not be extended into a general proposition covering every business expense. Its central finding concerned the higher- taxed packaging goods and their role in the inverted structure established in this case.
A useful reconciliation should connect purchase invoices, the nature and rate of each input, eligible credit, outward supplies and the refund working. This enables both the taxpayer and the officer to distinguish genuine accumulation caused by rate inversion from other reasons for a ledger balance. The judgment rejects an incomplete eligibility test; it does not remove the need for an accurate and supported refund calculation.
The Refund Must Follow the Full Input Picture
The Tribunal dismissed the Department’s appeal and upheld the refund of Rs.10,75,233 of SGST credit, directing payment within three months, without costs. No separate interest direction was issued. The matching 5% rates on bulk tea and packaged tea did not justify overlooking packaging inputs taxed at 18%. Refund eligibility required examination of the complete input basket and the actual reason for credit accumulation.
A related development deserves brief mention. At its 57th meeting held on 08.10.2026, the GST Council recommended including eligible input-service credit availed on or after 01.11.2026 in the computation of inverted-duty refunds. It also recommended including eligible capital-goods credit availed on or after 01.04.2027 in refunds for inverted-duty supplies and zero-rated supplies made without payment of tax. Capital-goods credit would be attributed over 60 months, at one-sixtieth per month, rather than refunded entirely upfront. These later measures must be applied according to the relevant amendments and commencement provisions; they do not govern the April–September 2022 claim decided here.
The distinction remains important: expanding the credit included in refund computation does not remove the underlying eligibility test. Under the recommended framework, higher tax on input services alone does not establish an inverted duty structure; the comparison continues to concern input goods and outward supplies. Taxpayers must therefore establish the qualifying inversion first and then calculate the refundable amount using the eligible credit and applicable formula. The present judgment illustrates why higher-taxed packaging goods cannot be ignored in that examination.
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