Karnataka HC ruling likely to strengthen case for ITC refund claims

Tax experts said the judgment reiterates that refund claims cannot be denied merely because the principal input and output supplies are the same- a ground frequently used by tax authorities

The Karnataka High Court’s ruling in the South Indian Oil Corporation case is expected to provide relief to businesses seeking GST refunds. According to experts, the judgment could benefit sectors such as edible oils, textiles, packaging-intensive fast-moving consumer goods businesses, and electronics, where accumulation of input tax credit (ITC) is common. This is largely due to a rate mismatch, as GST on inputs such as containers, seals, labels and consumables is often higher than the GST rate on the output product. 

Tax experts said that the judgment reiterated that refund claims could not be denied merely because the principal input and output supplies were the same -- a ground frequently used by the tax authorities. 

In an order dated December 12, 2025, the Karnataka High Court set aside refund rejection orders against South Indian Oil Corporation and directed the GST authorities to grant refund of the unutilised ITC. The court held that Section 54(3)(ii) of the Central GST (CGST) Act does not prohibit inverted duty structure (IDS) refund merely because the input and output goods were identical. The detailed order was released recently. 

Harpreet Singh, partner, indirect tax at Deloitte, said this observation was particularly significant, as refund claims were often denied by the department on this very ground. “Taxpayers facing such challenges may rely on this ruling to substantiate and defend their IDS refund claims,” Singh added. 

The petitioner is engaged in procuring edible oils such as sunflower, rice bran, cottonseed and palm oil in bulk and repacking them into smaller retail containers of 250 ml to 5 litres. While the outward supply of packed edible oils attracts GST at 5 per cent, the company accumulated ITC since several inputs used in the repacking process were taxed at higher rates, resulting in IDS.

 

Under GST law, IDS refund is available when the rate of tax on inputs is higher than the rate applicable on outward supplies, leading to accumulation of unutilised ITC. However, refund claims have often been rejected where authorities argue that the benefit is not available if the input and output supplies are the same.

 

The High Court also noted that the restrictive clarification under CBIC Circular issued in 2020, which had stated that refund would not apply where input and output supplies were the same, was subsequently deleted through 2022 Circular. The court held that the revised circular to be beneficial and clarificatory in nature, and therefore applicable retrospectively.

 

According to Abhishek A Rastogi, the judgment reiterated a foundational constitutional principle -- executive circulars could not curtail substantive statutory benefits. The court recognised that departmental reliance on earlier circular language to deny refunds amounted to reading limitations into the Act that the legislature never enacted.

 

“Such reasoning aligns with prior High Court precedents and restores doctrinal clarity that delegated instructions must yield to the parent statute,” Rastogi added. Equally notable is the court’s direction to grant refunds with statutory interest, emphasising that interest liability is automatic once refund becomes due and is delayed beyond the prescribed period. This aspect sends a strong signal against administrative inertia in processing refund claims, he said.