ORDER

This appeal has been filed under Section 107 of the Central Goods and Services Tax Act, 2017 by M/s. Shivalik Silica, 427, Krishna Nagar, Bharatpur-321001 (hereinafter also referred to as “the appellant”) against the Order-in-Original No. 20/2019-20, dated 18-6-2019 (hereinafter as the impugned order) passed by the Assistant Commissioner, Central Goods and Services Tax Division-F, Bharatpur (hereinafter called as the “adjudicating authority”).

2. Brief facts of the case :

2.1 The appellant having GSTIN No. 08ABLFS0642L1ZU is engaged in activity of supply of Silica Sand, for this they extracts sand stone from earth and thereafter sells the sand stone as silica stone powder (after grinding of crude sand stone) which attracts GST @ 5% as per tariff classification of their product i.e. sand stone under HSN 2505. For the purpose of excavation/production of sand stone/sand stone powder, the appellant has used capital goods and input services, but the input is nothing in this case except sand stone. The input services and capital goods used in the production and supply of the goods in the course of business by the appellant, attracts higher rate of tax than the rate of tax on their output supplies which resulted accumulation of input tax credit for which the appellant has filed refund in respect of input tax credit of  ₹ 28,19,021/- (CGST ₹ 6,38,981/- + SGST ₹ 6,38,981/- + IGST  ₹ 15,41,059/-) for the months of August, 2017 to March, 2018 accumulated on account of Inverted Tax Structure.

2.2 On scrutiny of refund application, submitted by the appellant the adjudicating authority noticed some deficiencies for which deficiency memo dated 13-8-2018 under GST RFD-03 was issued to the appellant in the matter and the same was replied along with the copies of demanded documents by the appellant which was received on 17-5-2019. On further scrutiny of the records and  invoices on the strength of which the appellant has claimed input tax credit, it has been found that the said ITC have been availed on input services and capital goods which is not included in Net ITC for the purpose of refund amount as per Rule 89(5) of the CGST Rules, 2017 as amended vide Notification No. 26/2018-C.T., dated 13-6-2018.

2.3 Accordingly, the adjudicating authority issued a show cause notice dated 24-5-2019 to the appellant proposing therein rejection of refund of  ₹ 28,19,021/-. The appellant did not avail the opportunity of personal hearing. Further, the adjudicating authority find that no documents relating to their input rather they have submitted copies of documents which pertain to input service and capital goods. Since, the ITC amount on input service and capital goods is not included in the Net ITC for the purpose of refund amount as per Rule 89(5) of the CGST Rules, 2017 as amended vide C.B.I. & C. Notification No. 26/2018, dated 13-6-2018 hence refund on account of inverted tax structure appeared not admissible to the appellant as per formula and expression of Net ITC given under the said Rule. Accordingly, the application for refund was rejected and confirmed vide FORM-GST-RFD-06, dated 18-6-2019 by the adjudicating authority.

3. Being aggrieved with the impugned order dated 18-6-2019, the appellant has filed the appeals on the following grounds which are summarized as under :-

• that the Appellant is engaged in the business of supply of silica sand having GST rate of 5% (CGST/SGST 2.5%). It may be noted that while the Appellant’s output liability towards supply of silica sand is 5%, however appellant has availed various inputs which are taxable at a rate higher than 5% (i.e. 12%, 18% or 28%). Consequently, Appellant has not been able to utilize the whole input tax credit towards inputs since the GST rate on output supply (5%) is lower than the higher GST rate of inputs.
• that Section 54(3)(ii) of the CGST Act inter alia provides that where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies, then in such case, a registered person can claim refund of unutilized ITC at the end of any tax period. Relevant part of Section 54(3)(ii) is excerpted below for your easy reference :

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

Provided that no refund of unutilized input tax credit shall be  allowed in cases other than –

(i)         ————

(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 :

• that further it may be noted that Rule 89(5) of the CGST Rules, prescribed methodology for computing the refund claim. Relevant paras of Rule 89(5) is excerpted below for your easy reference :

(5) In the case of refund on account of inverted duty structure,  refund of input tax credit shall be granted as per the following  formula :-

Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x 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 sub-rules (4A) or (4B) or both; and

(b)        “Adjusted Total turnover” shall have the same meaning as  assigned to it in sub-rule (4).

–           that in light of the above provisions, the appellant filed eight refund application(s) separately, along with requisite documents/details including invoices, for the impugned period, of the input tax credit availed towards inputs and input services during the said period pertaining to the accumulation of input tax credit on account of rate of tax on inputs and input services being higher than the rate of tax on output supplies (‘inverted duty structure’) as provided in the GST law vide Section 54(3)(ii). Month-wise refund claimed during the impugned period has been tabulated below for your easy reference :

S. No.	Month	Refund		ARN
IGST	CGST	SGST	Total
1.	Jul., 17	–	–	–		–
2.	Aug., 17	1,66,477	1,54,658	1,54,658		-0808176936967, dated July 2, 2018
3.	Sep., 17	2,87,716	2,03,169	2,03,169		-080917901928J, dated July 2, 2018
4.	Oct., 17	–	17,939	24,359		-0810175627516, dated July 2, 2018
5.	Nov., 17	3,10,870	1,90,850	1,90,850		-0811175951260, dated July 2, 2018
6.	Dec., 17	28,330	15,635	15,635		-0812178346242, dated July 2, 2018
7.	Jan., 18	2,44,454	–	–		-080118566553Z, dated July 4, 2018
8.	Feb., 18	3,63,885	56,730	50,310		-080218536288VV, dated July 4, 2018
9.	Mar., 18	1,39,327	–	–		-080318934002G, dated July 4, 2018
Total	15,41,059	6,38,981	6,38,981	28,19,021

that the Appellant submits that though in the initial refund application, the Appellant claimed refund of input services along with inputs, however subsequent to the Clarification issued by the Government vide Circular No. 79/53/2018-GST, dated December 31, 2018, the Appellant recomputed the refund claim and removed the refund claim towards input services and submitted the revised  refund computation sheet along with invoices only relating to  inputs vide its letter dated April 30, 2019. It may be noted that  reduced refund claim after removing refund claim of input services, was computed as ₹ 25,61,699/- (IGST ₹ 17,54,255/-, CGST  ₹ 4,03,722/- and SGST ₹ 4,03,722/-). Month-wise recomputed refund claim has been tabulated below :

S. No.	Month	Refund
IGST	CGST	SGST	Total
1.	Jul., 17	–	–	–
2.	Aug., 17	1,60,057	21,958	21,958
3.	Sep., 17	2,87,716	19,017	19,017
4.	Oct., 17	0	53,688	53,688
5.	Nov., 17	3,10,870	34,149	34,149
6.	Dec., 17	28,330	21,053	21,053
7.	Jan., 18	3,94,488	39,919	39,919
8.	Feb., 18	3,64,402	74,349	74,349
9.	Mar., 18	2,08,392	1,39,589	1,39,589
Total	17,54,255	4,03,722	4,03,722	25,61,699

• that the Department in its impugned order has alleged that no document/invoices relating to inputs has been found in the application, whereas all invoices are relating to either capital goods or input  services.
• that the Appellant submits that the Department has erred in analyzing the invoices which are related to inputs and not capital goods or input services. The Appellant submits that considering the nature of business i.e. mining and selling of silica sand, various tools and parts/spares of the machinery requires replacements on frequent basis. The Appellant procures such machinery tools and parts/spares and replace them with the faulty parts/tools. The Appellant has primarily claimed refund claim on such procurement of inputs in the present refund applications.
• that the Appellant submits that the term ‘inputs’ has been defined under Section 2(59) of the CGST Act, which provides that “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. Accordingly, any goods which are not capital goods, will be considered as inputs which are used in the course or furtherance of business. Whereas, Section 2(19) of the CGST Act, inter alia, defines the term ‘capital goods’ as ‘means goods, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business’.
• that on perusal of the above definition of capital goods, it emerges that any good(s) which is not capitalized in the books of accounts of the person claiming ITC, shall not be covered under the definition of capital goods. Therefore, it is important that any goods requires to be capitalized first in the books of accounts, in order to consider the same as capital goods in terms of Section 2(19) of CGST Act. It is equally important to note herewith that the Income-tax Act, 1961 and accounting principles provides guidelines/provision(s) for considering any goods to be treated as capital goods or which requires capitalization in the books of accounts. Therefore, the question whether a goods requires capitalization or not in the books of accounts, is dealt with the Income-tax Act, 1961 read with accounting principles. Accordingly, if any goods is capitalized in the books of accounts as per Income-tax Act, 1961, will qualify as ‘capital goods’ in terms of Section 2(19) of CGST Act.
• that the Appellant submits that in the present case, the tools or parts/spares of the machinery is replaced due to wear and tear. Such tool/parts do not value add to the machinery and thus is not liable to get capitalize in the books of accounts of the Appellant in terms of Income-tax Act, 1961 and/or accounting principles. Therefore, once such goods are not capitalized in the books of accounts as per Income-tax Act, 1961, the same would not qualify as ‘capital goods’ in terms of Section 2(19) of CGST Act and hence would be considered as ‘inputs’ in terms of Section 2(59) of CGST Act.
• that in this regard, the Appellant submits that the Government has also clarified the issue of interpretation/treatment of term ‘inputs’ in the context of refund claims, vide Circular No. 79/53/2018-GST, dated December 31, 2018 wherein under para 12 and para 13, it has been explicitly clarified that any expenditure on which has been charged as a revenue expense in the books of account, cannot be held to be capital goods. Relevant part of paras 12 and 13 of the said Circular has been excerpted below for the easy reference :

Misinterpretation of the meaning of the term “inputs”;

12 ….. ..… There are also instances where stores and spares charged to revenue are considered as capital goods and therefore the ITC availed on them is not included in Net ITC, even though the value of these goods has not been capitalized in his books of account by the claimant.

13. In relation to the above, it is clarified that the input tax credit of the GST paid on inputs shall be available to a registered person as long as he/she uses or intends to use such inputs for the purposes of his/her business and there is no specific restriction on the availment of such ITC anywhere else in the GST Act. The GST paid on inward supplies of stores and spares, packing materials etc. shall be available as ITC, as long as these inputs are used for the purpose of the business and/or for effecting taxable supplies, including zero-rated supplies, and the ITC for such inputs is not restricted under Section 17(5) of the CGST Act. Further, capital goods have been clearly defined in Section 2(19) of the CGST Act as goods whose value has been capitalized in the books of account and which are used or intended to be used in the course or furtherance of business. Stores and spares, the expenditure on which has been charged as a revenue expense in the books of account cannot be held to be capital goods

• that from the foregoing, the Appellant submits that the tools or parts spares which are replaced in the machinery (and are not capitalized in the books of accounts) will be construed ‘inputs’ in terms of Section 2(59) of CGST Act. Accordingly, being inputs, ITC on the same can be claimed as refund in terms of Rule 89(5) of CGST Rules. In this regard, the Appellant has submitted all invoices relating to parts/tools/spares of the machinery which are replaced during the impugned period along with the refund application. Besides, the Appellant uses gas for operating plant and machinery and certain printing and stationery for daily works, for which the Appellant has filed the refund. Invoices of the same were also submitted to the Department.
• that the Appellant submits that without analyzing/examining the nature of invoices and its treatment in the books of accounts, the Department has wrongly alleged that the invoices are relating to capital goods or input services and not of inputs. Further, the Department has also erred in alleging that the Appellant has considered ITC while computing the refund claim under Rule 89(5), whereas the Appellant vide its letter dated April 30, 2019 and May 14, 2019 has explicitly stated that the Appellant has withdrawn/reduced the refund claim to the extent claimed towards input services and a new refund computation sheet with reduced refund claim was submitted wherein only ITC on inputs was considered.
• that in light of the above submissions, it is ample clear that the Department has clearly overlooked the invoices/documents/account-ing treatment of the expenses and hence could not be able to establish the fact that the invoices were actually pertains to input and not capital goods or input services. The Appellant vehemently submits that the impugned order is liable to be set aside on this ground alone without even going into the merits.
• that impugned order is arbitrary/without basis and in complete violation of the principles of natural justice.

The appellant has also placed reliance on the following decisions :-

M/s. Inbios Petroleum Limited v. CTO, Kerala [2012-ST2-GJX-556-MAD]

M/s. Prism Metal Corporate v. State of Maharashtra [2014-ST1-GJX-0352-STMAH], M/s. Bharat Construction Company v. Commr. of Commercial Tax, [2013-ST2-GJX-1046-MP], Unit Construction Company v. Commissioner of Commercial Taxes [2014-ST-2GJX-1296-ORI]

M/s. Kediya Industries v. Commr. of C.Ex., Ahmedabad, 2010 (254) E.LT. 121 (Tri. – Ahmd.).

4. Personal hearing in the case was held on 21-8-2020 at 1330 Hrs. through video conference, wherein, Shri Vishal Jain, Chartered Accountant on behalf of the appellant, appeared for personal hearing through video conference and explained the case in detail and reiterated the submission already made in the grounds of appeal. He has stated that he has further submitted the additional submissions through mail and requested to decide the case at the earliest.

5. I have carefully gone through the case records and submission made by the appellant in the appeal memorandum as well as additional written submission submitted at the time of personal hearing through e-mail on 21-8-2020. I find that the adjudicating authority has rejected the refund claim amounting to ₹ 28,19,021/- on the ground that the appellant has availed input tax credit on input services and capital goods which is not included in Net ITC for the purpose of refund amount as per Rule 89(5) of the CGST Rules, 2017 as amended vide Notification No. 26/2018-C.T., dated 13-6-2018 and not submitted the documents of inputs. Whereas, appellant’s submission is that initially they filed refund claim of ITC on input services along with inputs due to the ambiguity on the term ‘input’ referred to in the Section 54(3)(ii) of the CGST Act, 2017. However, in the clarification issued by the Government, it has been clarified that refund of ITC on input services will not be available in case of inverted duty structure. Subsequent to the clarification issued by Govt. vide Circular No. 79/53/2018-GST, dated December 31, 2018 they recomputed the refund claim and removed the claim towards input services and submitted the revised refund computed sheet along with invoices relating to only inputs vide their letter dated April 30, 2019 and after removing the refund claim of input services the revised refund claim was computed as ₹ 25,61,699/- (IGST ₹ 17,54,255/-, CGST ₹ 4,03,722/- and SGST ₹ 4,03,722/-). Thus, appellant has reduced their claim to ₹ 25,61,699/- and the revised claim is to be treated for ₹ 25,61,699/- only.

6. The issue involved in the present case is that whether the goods on which credit is accumulated and refund is claimed is ‘input or capital goods’, the appellant has submitted declaration dated 27-6-2018 regarding refund claim filed for the period July, 2017 to March, 2018 that it does not include any amount of Goods and Services Tax paid on procurement of inputs, which has been capitalized or treated as expense in their books of accounts. They also declared that refund of input tax credit on account of input services and capital goods has not been claimed in their revised computation whereas, the adjudicating authority has treated the items as capital goods and rejected the claim.

7. Section 54(3) of the CGST Act, 2017 reads as under :

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

Provided that no refund of unutilized input tax credit shall be allowed in cases other than –

(i)      zero-rated supplies made without payment of tax;

(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 :

Provided further that no refund of unutilized input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty :

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both claims refund of the integrated tax paid on such supplies.

8. Rule 89(5) of the CGST Rules, 2017 prescribes the formula for the maximum refund amount permissible to the assessee on account of inverted duty structure is as under.

Maximum Refund Amount

 =

 {(Turnover of inverted rated supply of goods) x Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods

Explanation. – For the purposes of this sub-rule, the expressions “Net ITC” and “Adjusted Total turnover” shall have the same meaning as assigned to them in sub-rule (4).

Net ITC means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which the refund is claimed under sub-rule (4A) or (4B) or both.

9. As per provisions of Section 2(59) of CGST Act “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. Thus any goods which are not capital goods will be considered as inputs.

10. As per provisions of Section 2(19) of the CGST Act, 2017 “ ‘capital goods’ means goods, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business” Thus any goods which is not capitalized in the books of accounts of the person claiming ITC shall not be treated as capital goods.

11. Further, the C.B.I. & C. has also issued the clarification on the issue of interpretation of inputs in the context of refund claims vide Paras 12 and 13 of the Circular No. 79/53/2018-GST, dated 31-12-2018 which read as under :-

“12. It has been represented that on certain occasions, departmental officers do not consider ITC on stores and spares, packing materials, materials purchased for machinery repairs, printing and stationery items, as part of Net ITC on the grounds that these are not directly consumed in the manufacturing process and therefore, do not qualify as input. There are also instances where stores and spares charged to revenue are considered as capital goods and therefore the ITC availed on them is not included in Net ITC, even though the value of these goods has not been capitalized in his books of accounts by the claimant”.

13. “In relation to the above, it is clarified that the input tax credit of the GST paid on inputs shall be available to a registered person as long as he/she uses or intends to use such inputs for the purposes of his/her business and there is no specific restriction on the availment of such ITC anywhere else in the GST Act. The GST paid on inward supplies of stores and spares, packing materials etc., shall be available as ITC as long as these inputs are used for the purpose of the business and/or for effecting taxable supplies, including zero-rated supplies, and the ITC for such inputs is not restricted under Section 17(5) of the CGST Act. Further, capital goods have been clearly defined in Section 2(19) of the CGST Act as goods whose value has been capitalized in the books of accounts and which are used or intended to be used in the course or furtherance of business. Stores and spares, the expenditure which has been charged as a revenue expense in the books of accounts, cannot be held to be capital goods”.

12. The said clarification was reiterated vide Para 62 of the Circular No. 125/44/2019-GST, dated 18-11-2019.

“It has been represented that on certain occasions, departmental officers do not consider ITC on stores and spares, packing materials, materials purchased for machinery repairs, printing and stationery items, as part of Net ITC on the grounds that these are not directly consumed in the manufacturing process and therefore, do not qualify as input. There are also instances where stores and spares charged to revenue are considered as capital goods and therefore the ITC availed on them is not included in Net ITC, even though the value of these goods has not been capitalized in his books of account by the applicant. It is clarified that the ITC of the GST paid on inputs, including inward supplies of stores and spares, packing materials etc., shall be available as ITC as long as these inputs are used for the purpose of the business and/or for effecting taxable supplies, including zero-rated supplies, and the ITC for such inputs is not restricted under Section 17(5) of the CGST Act. Further, capital goods have been clearly defined in Section 2(19) of the CGST Act as goods whose value has been capitalized in the books of account and which are used or intended to be used in the course or furtherance of business. Stores and spares, the expenditure on which has been charged as a revenue expense in the books of account, cannot be held to be capital goods”.

13. Thus, if the goods whose value is not capitalized in the books of accounts and the expenditure which has been charged as revenue expenditure in the books of accounts cannot be treated as capital goods and is to be treated as inputs. These facts has to be verified from the books of accounts.

14. I find that looking to the nature of business of the appellant i.e. mining and selling of silica sand, various tools and parts/spares of the machinery are required replacement on frequent basis and as long as these are not capitalized in their books of accounts and has been charged as revenue expenditure in their books of accounts will be treated as inputs in terms of Section 2(59) of the CGST Act, 2017. I find that appellant has also submitted declaration dated 27-6-2018 that the claim does not include any amount of goods and service tax paid on procurement of inputs, which has been capitalized or treated as expense in their books of accounts.

15. In view of the definition of inputs as provided under Section 2(59) of CGST Act, 2017 and the definition of capital goods as provided under Section 2(19) of CGST Act, 2017 and clarification issued by the Board vide Circular No. 79/53/2018-GST, dated 31-12-2018 and Circular No. 125/44/2019-GST, dated 18-11-2019, the goods on which the credit is accumulated and the refund is claimed by the appellant is to be treated as inputs subject to verification of the invoices and books of accounts by the adjudicating authority.

16. In view of the above discussion and findings, and as per legal provisions I find force in the contention of the appellant. Accordingly, I set aside the impugned Order No. 20/2019-20, dated 18-6-2019 and allow the appeal filed by the appellant with direction to submit all the copies of related input invoices and other relevant documents/records to the adjudicating authority for verification and for processing the refund claim according to the provisions as prescribed under the CGST Act/Rules, 2017