GSTAT Kolkata: Inverted Duty Refund Allowed to Garment Maker Though Input Fabric and Output Fall Under Similar HSN; Circular 135/2020 Para 3.2 Limited to Rate Cuts (HP Cotton Casuals)

Decided 10 September 2026. The Kolkata Bench of GSTAT has upheld inverted duty structure refunds of Rs 34,47,623 and Rs 7,86,037 to an apparel maker whose main input fabric is taxed at 5% but whose chemicals and packing materials are taxed at 12% and 18%. The Tribunal held that the manufacturer-versus-trader distinction is irrelevant under GST and that para 3.2 of Circular 135/05/2020 applies only to rate reductions.

Case at a glance

Facts of the case

The respondent makes garments by bleaching, dyeing, printing, cutting, stitching and packing fabric. Its main input is fabric at 5%, while printing chemicals, packing materials and stores are taxed at 12% and 18%. Its garments are taxed at 5%.

The original authority rejected the refunds on the ground that inputs and outputs fall under the same HSN. The first appellate authority allowed them on 09.05.2025. The department appealed, also raising verification issues on capital goods, GSTR-2B mismatches, export ITC and period-wise computation.

Issue before the Tribunal

Can an inverted duty refund be denied because the main input and output share an HSN, relying on para 3.2 of Circular 135/05/2020?

What the Tribunal held

• GST is levied on supply under section 9(1), not on manufacture. Whether the respondent is a trader or a manufacturer is immaterial for refund under section 54(3)(ii).
• Para 3.2 of Circular 135/2020, read with its heading, applies only where the same goods attract different rates at different times due to a rate reduction. It has no application here.
• Following the Madras High Court in Vindhya Spinning Mills (14.07.2026), the statute makes no distinction between principal and other inputs; refund is computed under Rule 89(5).
• The refunds were computed period-wise under Rule 89(5). On the verification grounds, the department offered only oral submissions. The appeals were dismissed.

Practical takeaways for taxpayers

1. Textile and garment units with higher-rated chemicals and packing can claim inverted duty refunds even if fabric and garments share a broad HSN.
2. Rebut reliance on para 3.2 of Circular 135/2020 by pointing to its limited, rate-reduction context.
3. Keep invoice-wise working showing exclusion of capital goods and input services from Net ITC under Rule 89(5).

Frequently asked questions

Does Circular 135/2020 bar IDS refund when input and output are similar?

GSTAT Kolkata held para 3.2 applies only to rate reductions on the same goods, not to this situation.

Must the claimant be a manufacturer?

No. The Tribunal held the trader-manufacturer distinction is irrelevant for refund under section 54(3)(ii).

Facing a similar GST dispute?

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This summary is based on the order of the GST Appellate Tribunal, Kolkata Bench in Appeal Nos. APL/43/KLK/2026 and APL/44/KLK/2026. It is general information, not legal advice; the outcome of any case depends on its own facts and the full text of the order.