2025 (5) TMI 921 - HC - GST

Levy of GST in form of compensation Cess at the rate of 160% on branded tobacco products i.e. scented/flavoured chewing tobacco manufactured by the petitioners for export through merchant exporters which are subject to GST at 0.1% as per N/N. 40/2017 and 41/2017 dated 23/10/2017 - export of goods - zero rated supply - HELD THAT - There is no dispute between the parties regarding the supply of goods by the petitioners to merchant exporters to be considered as export of goods in the hands of the petitioners and therefore provision of section 16 of the IGST Act would also apply to the supplies made by the petitioners to merchant exporters as zero rated supply. As per N/N. 42/2001 dated 26.06.2001 conditions and procedure for export of excisable goods are prescribed without payment of duty. Similarly after the GST Act coming into force the basic concept of export of goods without payment of duty or tax is continued and as per Circular No. 37/11/2018-GST dated 15.03.2018 supply of goods to merchant exporters is considered as an export of goods in consonance with decision of Hon ble Apex Court in case of Amritsar Sugar Mills Co. Ltd. 1965 (12) TMI 110 - SUPREME COURT and in case of Lord Krishna Sugar Mills 1966 (3) TMI 66 - SUPREME COURT wherein it is held that in a transaction of taking goods out of Utter Pradesh in facts of the case to a place out of India more than one supply can qualify as export supply and therefore supply by the petitioners to the merchant exporters would qualify as export supply. It is also required to be noted that even if the petitioners are saddled with payment of Compensation Cess at the rate of 160% merchant exporters shall get refund of the same as per the provisions of section 16 of the IGST Act read with section 54 (3) of the GST Act and therefore such payment of Compensation Cess would be revenue neutral and in such circumstances levy of Compensation Cess at the rate of 160% on supply of goods to merchant exporters by the petitioners would not be sustainable as held in case of Coca-Cola India Pvt. Ltd. 2007 (4) TMI 17 - SUPREME COURT . Government of India issued N/N. 40/2017 dated 23.10.2017 while exercising powers conferred by sub-section (1) of section 11 of the CGST Act on recommendation of the GST Council to exempt intra-State supply of taxable goods by a registered supplier to a registered recipient for export from so much of the central tax leviable thereon under section 9 of the GST Act as in excess of the amount calculated at the rate of 0.05 per cent so far as levy of CGST is concerned and similar notification is issued by the State Government resulting into payment of maximum tax at the rate of 0.01%. Similar Notification is also issued being Notification No. 41/2017 while exercising powers under section 6 of the IGST Act to grant exemption on IGST leviable upon export in excess of amount calculated at the rate of 0.1% meaning thereby that maximum 0.1% IGST is payable - However no notification is issued by the Central Government or State Government under the Compensation Cess Act and therefore the petitioners are made liable to pay Compensation Cess at normal rate i.e. 160% on the supply of goods to merchant exporters for export. It is true that in absence of any notification the respondent authorities were justified in passing the impugned order for levy of Compensation Cess at the normal rate of 160% on the supply made by the petitioners to merchant exporters. However considering the provisions of section 11 of the Compensation Cess Act which provides for applicability of provisions of CGST and IGST Act mutatis mutandis for levy of Cess as per section 8 of Compensation Cess Act notification issued under the provisions of GST and IGST Act are required to be applied for levy of Cess also - when there is no revenue loss there is no purpose of levy of Compensation Cess at the normal rate of 160% as the same is required to be refunded to the merchant exporter on export of goods as per provisions of section 54 (3) of the GST Act read with section 16 of the IGST Act. There is a fallacy in reasoning of the adjudicating authority that as option is given to assessee either to avail benefits of Exemption Notification No. 40/2017 and Notification No. 41/2017 or to pay tax at normal rate the petitioners are liable to pay Compensation Cess at normal rate only in absence of any such notification or option being given by the Government. When there is no recommendation by GST Council to grant exemption from payment of Compensation Cess at par with GST and IGST on supply of goods for export or supply to merchant exporter we also strongly urge the GST Council to consider the issue of granting exemption from levy of Compensation Cess at par with GST and IGST as recommended by it in 22nd Meeting so as to see that there is no working capital blockage for manufacturer or exporters including EOUs due to requirement of upfront payment of Compensation Cess at normal rate on supply of goods by the petitioners to merchant exporters for export which ultimately is required to be refunded considering the fact that no tax is leviable on the export of goods. The impugned action of levy of Compensation Cess at the rate of 160% on the supply of goods i.e. branded tobacco products by the petitioners to merchant exporters for export is required to be kept in abeyance and the matter is referred to GST Council to decide the issue as to whether exemption is required to be granted on levy of Compensation Cess on supply of goods to merchant exporters for export at par with exemption granted for levy of GST and IGST in excess of 0.1% so as to enable the petitioners to avail input tax credit or refund as the case may be as per the provisions of section 16 (3) of the IGST Act read with section 54 (3) of the GST Act. Conclusion - i) The supplies made by the petitioners to merchant exporters qualify as export of goods under section 2(5) of the IGST Act and therefore are zero-rated supplies under section 16 of the IGST Act. ii) In absence of a notification exempting Compensation Cess on supplies to merchant exporters the petitioners are liable to pay Compensation Cess at the normal rate; however such levy causes working capital blockage and is ultimately a revenue neutral exercise as refunds are claimable by merchant exporters. Petition allowed by way of remand.

Summary

The core legal questions considered by the Court in these petitions under Article 227 of the Constitution of India primarily revolve around the applicability and levy of Compensation Cess on supplies of branded tobacco products made by the petitioners to merchant exporters for export. The issues include:

1. Whether the supplies made by the petitioners to merchant exporters qualify as export of goods under the IGST Act and hence as zero-rated supplies exempt from Compensation Cess levy.

2. Whether the exemption notifications issued under the GST Act and IGST Act providing concessional GST rate of 0.1% on supplies to merchant exporters extend to Compensation Cess under the Compensation Cess Act, despite no explicit exemption notification for Compensation Cess.

3. The interpretation and applicability of various statutory provisions including the Central Excise Act, GST Act, IGST Act, and Compensation Cess Act, along with relevant notifications and circulars, in the context of export supplies via merchant exporters.

4. The validity of the impugned order-in-original demanding Compensation Cess at the full rate of 160% on such supplies, including the imposition of interest and penalty under extended period provisions.

5. The constitutional validity of the levy of Compensation Cess under these facts, particularly concerning Articles 14 and 19(1)(g) of the Constitution.

6. The availability and efficacy of alternative remedies and the appropriateness of invoking writ jurisdiction under Article 227.

Issue-wise Detailed Analysis:

1. Whether supplies to merchant exporters qualify as export of goods and zero-rated supply:

The Court examined the definition of "export of goods" under section 2(5) of the IGST Act, which means taking goods out of India to a place outside India. It was undisputed that the petitioners supply goods to merchant exporters who subsequently export the goods. The Court relied on established precedents including the Supreme Court decisions in Amritsar Sugar Mills Co. Ltd. and Lord Krishna Sugar Mills, which held that in a chain of transactions leading to export, more than one supply can qualify as export supply if the goods are actually delivered outside India. The Court emphasized the principle of "actual delivery" to effectuate the intention to export, rejecting a narrow or purely constructive delivery interpretation.

The procedural compliance under Rule 19 of the Central Excise Rules, 2002, including removal of goods under ARE-1 forms and sealing, was noted to confirm that goods were cleared directly from the factory to the port without intermediate storage, further supporting the characterization of the supply as export. The GSTIN and tax invoice details of the petitioner were also recorded in the shipping bill filed by the merchant exporter, evidencing the integral connection of the supply chain.

Thus, the Court concluded that supplies made by the petitioners to merchant exporters qualify as export of goods and hence zero-rated supplies under section 16 of the IGST Act.

2. Applicability of exemption notifications under GST and IGST Acts to Compensation Cess:

The petitioners relied on Notifications No. 40/2017-Central Tax (Rate) and No. 41/2017-Integrated Tax (Rate) dated 23.10.2017, which exempt GST in excess of 0.1% on supplies to merchant exporters, to argue that a similar exemption should apply to Compensation Cess. The GST Council's 22nd meeting minutes were referenced, where it was recommended that supplies to merchant exporters be taxed nominally at 0.1% to alleviate working capital blockage, with adequate safeguards.

The respondents contended that no exemption notification for Compensation Cess exists, and the levy of Compensation Cess is independent and distinct from GST and IGST. They relied on the Supreme Court decision in Unicorn Industries, which held that exemptions applicable to Central Excise duty do not automatically extend to National Calamity Contingent Duty (NCCD) or cess.

The Court noted that the Compensation Cess Act incorporates the provisions of the GST and IGST Acts mutatis mutandis for levy and collection of the cess. However, the absence of a specific notification exempting Compensation Cess on supplies to merchant exporters creates a legal lacuna. The Court observed that while the impugned order correctly applied the law as it stands, the anomaly caused by the absence of a Compensation Cess exemption notification, despite the GST and IGST exemption notifications, results in an inequitable situation.

The Court highlighted that payment of Compensation Cess at 160% by the petitioners would be refundable to the merchant exporters under section 54 of the GST Act and section 16 of the IGST Act, rendering the levy a revenue neutral exercise but causing working capital blockage and hardship.

3. Interpretation of statutory provisions and application of law to facts:

The Court analyzed the relevant provisions of the IGST Act, Compensation Cess Act, GST Act, and the CGST Rules, particularly section 8 and 11 of the Compensation Cess Act which prescribe levy and collection of cess in accordance with the GST and IGST Acts mutatis mutandis.

It was found that the value of supply between related parties, where the recipient is eligible for full input tax credit, is deemed to be the open market value declared in the invoice as per Rule 28 of the CGST Rules and Circular No. 199/11/2023-GST. This supports the petitioners' contention that the value for Compensation Cess computation should be considered as nil or nominal when full input tax credit is available, further reinforcing the argument against levy of full Compensation Cess on supplies to merchant exporters.

The Court also referred to Circular No. 1/1/2017-Compensation Cess clarifying that provisions of zero-rated supply under section 16 of the IGST Act apply mutatis mutandis to Compensation Cess, entitling exporters to refund or exemption under bond/LUT.

However, since the petitioners did not export under LUT or bond but supplied to merchant exporters with payment of nominal GST, the absence of a corresponding exemption notification for Compensation Cess leaves them liable to pay the full cess.

4. Treatment of competing arguments and policy considerations:

The petitioners argued that the levy of full Compensation Cess is arbitrary, discriminatory, and violates Article 14 of the Constitution, as similar supplies are exempted from GST and IGST but not from Compensation Cess, causing inequity and working capital blockage.

The respondents maintained that exemption from Compensation Cess is a policy matter, and the Court should not interfere with fiscal policy decisions. They emphasized the availability of alternative remedies through appeal and the optional nature of concessional rate notifications.

The Court acknowledged the respondents' stance on policy but underscored the statutory incorporation of GST provisions into the Compensation Cess Act, implying that similar treatment should apply to cess unless specifically excluded. The Court noted the anomaly and urged the GST Council to address the issue to avoid hardship and inequity.

5. Validity of impugned order and penalty:

The impugned order held the petitioners liable to pay Compensation Cess at 160%, interest, and penalty under extended period provisions for non-payment and non-declaration. The petitioners contended absence of fraud, willful misstatement, or suppression of facts, and that the entire transaction is revenue neutral due to refund mechanisms.

The Court observed that invoking extended period provisions and penalty requires proof of deliberate suppression or evasion, which was not established. The petitioners had disclosed supplies and paid GST at nominal rates, and the non-payment of Compensation Cess arose from a genuine interpretation issue. Hence, penalty and interest may not be justified.

6. Alternative remedy and writ jurisdiction:

The respondents argued that the petitioners have an alternative remedy of appeal under the GST Act and writ jurisdiction should not be exercised. The petitioners submitted that the writ petitions are maintainable due to the exorbitant demand and the absence of a remedy to address the anomaly in levy of Compensation Cess.

The Court held that while alternative remedies exist, writ jurisdiction can be exercised in exceptional cases involving substantial questions of law and serious hardship. Given the nature of the dispute and the potential for irreparable financial impact, the Court entertained the petitions and stayed the operation of the impugned order pending GST Council's reconsideration.

Significant Holdings:

"The supplies made by the petitioners to merchant exporters qualify as 'export of goods' under section 2(5) of the IGST Act and therefore, are zero-rated supplies under section 16 of the IGST Act."

"The levy and collection of Compensation Cess under the Compensation Cess Act are governed mutatis mutandis by the provisions of the GST and IGST Acts, and therefore, exemption notifications issued under the GST and IGST Acts ought to be extended to Compensation Cess unless specifically excluded."

"In absence of a notification exempting Compensation Cess on supplies to merchant exporters, the petitioners are liable to pay Compensation Cess at the normal rate; however, such levy causes working capital blockage and is ultimately a revenue neutral exercise as refunds are claimable by merchant exporters."

"The anomaly created by the absence of a Compensation Cess exemption notification despite GST and IGST exemption notifications should be addressed by the GST Council to avoid hardship and inequity."

"The impugned order demanding Compensation Cess at full rate, interest, and penalty is kept in abeyance pending GST Council's reconsideration, and the respondents are restrained from initiating further proceedings if the petitioners comply with conditions prescribed under the GST exemption notifications."

"The Court strongly urges the GST Council to consider recommending exemption from levy of Compensation Cess on supplies to merchant exporters on par with GST and IGST exemptions to prevent working capital blockage and ensure uniformity in tax treatment."

The Court thus preserved the petitioners' rights by staying the demand and referring the issue to the GST Council, recognizing the legal and policy complexities involved and emphasizing the need for a harmonized approach to levy of Compensation Cess in export transactions involving merchant exporters.