2025 (5) TMI 1343 - HC - GST

Entitlement for refund of unutilized Input Tax Credit (ITC) qua Cess - zero-rated supplies - goods manufactured for export - Validity of Circular No.125/44/2019-GST-as well as para-5 of the Circular No.45/19/2018-GST issued under Section 168 - challenged the show cause notice and the order of sanction of refund - HELD THAT - While applying the provisions of the Section 54(3) of the GST Act read with Section 16(3) of the IGST Act and Section 11(2) of the Cess Act admittedly the compensation cess was not paid at the time of export of goods by the petitioner the petitioner therefore is entitled to refund of input tax credit of the compensation cess paid on purchase of the coal utilized for the purpose of manufacture of the goods which are exported as zero rated supply on payment of IGST by the petitioner. Therefore reliance placed by the respondent on para-42 of the Circular No.125/44/2019 dated 18/11/2019 is misplaced because the said circular was issued clarifying the eligibility to claim refund of unutilized input tax credit of compensation cess paid on input where the zero rated final product is not leviable with compensation cess. However the circular refers to the provision of Section 16(2) of the IGST Act that the registered person making zero rated supply of aluminum products under bond or LUT may claim refund of unutilized credit including that of compensation cess paid on coal. The circular further clarifies that when the registered person make a zero rated supply of product on payment of integrated tax they cannot utilize the credit of the compensation cess paid on coal for payment of Integrated tax in view of the proviso to Section 11(2) of the Cess Act as the said proviso allows the utilization of the input tax credit of cess only for the payment of cess on the outward supplies. However when the petitioner has paid the IGST under Section 16(3) of the IGST Act on the zero rated supply and refund is claimed by the payment of such IGST the petitioner admittedly would not be able to utilize input tax credit of cess as cess is not payable on the zero rated supply. Therefore proviso to Section 11(2) of the Act would not be applicable in the facts of the case and the petitioner would be entitled to refund of the unutilized input tax credit on cess paid on purchase of coal utilized for the purpose of manufacture of goods which are exported. Thus the petitions succeed and accordingly the same are allowed. The respondents are directed to process the refund applications of the petitioners to sanction the refund of the Cess amount claimed by the petitioners as unutilized Input Tax credit. So far as the Special Civil Application No.19279 of 2023 is concerned order dated 28/07/2023 passed by the Officer of the Commissioner (Appeals) is hereby quashed and set aide and order sanctioning the refund is restored.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

- Whether the petitioners are entitled to refund of unutilized Input Tax Credit (ITC) of GST compensation Cess paid on inputs (coal) used in the manufacture of goods exported on payment of Integrated Goods and Services Tax (IGST).

- The interpretation and applicability of Circular No.125/44/2019-GST dated 18/11/2019 and para-5 of Circular No.45/19/2018-GST dated 30/05/2018 issued under Section 168 of the Central Goods and Services Tax Act, 2017 (GST Act) regarding refund of compensation Cess ITC in cases of zero-rated supplies made on payment of IGST.

- The interplay between the provisions of Section 54(3) of the CGST Act, Section 16 of the IGST Act, and Section 11(2) of the GST (Compensation to States) Act, 2017 (Cess Act) in determining the entitlement to refund of compensation Cess ITC.

- Whether the proviso to Section 11(2) of the Cess Act, which restricts utilization of compensation Cess ITC only towards payment of Cess on outward supplies, applies to zero-rated supplies made on payment of IGST.

- The correctness of the respondent authorities' rejection of refund claims based on the above circulars and provisions.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to refund of unutilized Input Tax Credit of compensation Cess paid on inputs used for manufacture of exported goods on payment of IGST

Relevant legal framework and precedents:

- Section 54(3) of the CGST Act allows refund of unutilized input tax credit at the end of any tax period subject to conditions, including that no refund of unutilized ITC shall be allowed except in cases of zero-rated supplies made without payment of tax or inverted duty structure.

- Section 16 of the IGST Act defines zero-rated supply as export of goods or services and provides that a registered person making zero-rated supply shall be eligible to claim refund of unutilized input tax credit on supply of goods or services without payment of integrated tax under bond or Letter of Undertaking (LUT).

- Section 11(2) of the Cess Act provides that the provisions of the IGST Act apply mutatis mutandis to levy and collection of compensation Cess on inter-State supplies, but input tax credit of Cess shall be utilized only towards payment of Cess on outward supplies.

- Circular No.45/19/2018 and Circular No.125/44/2019 clarify that refund of unutilized ITC of compensation Cess is available when zero-rated supplies are made without payment of tax (under bond or LUT), but not when zero-rated supplies are made on payment of IGST.

Court's interpretation and reasoning:

The Court noted that the petitioners had paid compensation Cess on coal used as input for manufacture of exported goods, which themselves are exempt from compensation Cess. The petitioners exported goods on payment of IGST and claimed refund of unutilized ITC of compensation Cess paid on inputs.

Respondent authorities rejected the refund claims relying on the circulars which state that refund of compensation Cess ITC is not admissible where zero-rated supplies are made on payment of IGST, as compensation Cess ITC can only be utilized for payment of Cess on outward supplies.

The Court analyzed the statutory provisions and circulars and observed that Section 54(3) of the CGST Act permits refund of unutilized ITC only in cases of zero-rated supplies made without payment of tax or inverted duty structure. However, the circulars clarify that when zero-rated supplies are made on payment of IGST, refund of compensation Cess ITC is not allowed because the Cess ITC cannot be utilized for payment of IGST.

Nevertheless, the Court found that in the present case, the petitioner had not paid any compensation Cess at the time of export since the finished goods are exempt from compensation Cess. Therefore, the compensation Cess ITC on inputs remained unutilized and was not utilized for payment of any tax on outward supplies.

The Court held that the proviso to Section 11(2) of the Cess Act restricting utilization of compensation Cess ITC only towards payment of Cess on outward supplies is not applicable where no Cess is leviable on the outward supplies (i.e., exported goods exempt from Cess). Hence, the petitioner is entitled to refund of unutilized input tax credit of compensation Cess paid on inputs used for manufacture of goods exported on payment of IGST.

Key evidence and findings:

- The petitioner paid compensation Cess on coal used as input.

- The exported goods were exempt from compensation Cess and exported on payment of IGST.

- The petitioner received refund of IGST paid on export from Customs authorities.

- The petitioner's refund claim pertains solely to unutilized ITC of compensation Cess on inputs.

Application of law to facts:

The Court applied the provisions of Section 54(3) of the CGST Act, Section 16 of the IGST Act, and Section 11(2) of the Cess Act, along with circular clarifications, to conclude that refund of unutilized compensation Cess ITC is admissible where the outward supply is zero-rated on payment of IGST but exempt from compensation Cess, as the Cess ITC remains unutilized and cannot be applied to IGST payment.

Treatment of competing arguments:

The respondents argued that the circulars are binding and deny refund of compensation Cess ITC in cases of zero-rated supplies on payment of IGST, relying on the proviso to Section 11(2) of the Cess Act and Section 54(3) of the CGST Act.

The Court distinguished the facts by noting that the circulars pertain to cases where compensation Cess is leviable on the outward supply and the petitioner's goods are exempt from Cess, thus the proviso does not apply.

Conclusions:

The petitioner is entitled to refund of unutilized input tax credit of compensation Cess paid on inputs used in manufacture of goods exported on payment of IGST where no compensation Cess is payable on the exported goods.

Issue 2: Interpretation and applicability of Circular No.125/44/2019 and Circular No.45/19/2018

Relevant legal framework and precedents:

The circulars clarify the treatment of refund claims of unutilized compensation Cess ITC in zero-rated supplies, distinguishing between supplies made under bond or LUT without payment of tax and supplies made on payment of IGST.

Court's interpretation and reasoning:

The Court observed that the circulars permit refund of unutilized compensation Cess ITC only when zero-rated supplies are made without payment of tax (under bond or LUT). When zero-rated supplies are made on payment of IGST, the circulars deny refund of compensation Cess ITC on the basis that such ITC can only be utilized for payment of Cess on outward supplies.

However, the Court found that the circulars' reliance on the proviso to Section 11(2) of the Cess Act applies only when Cess is leviable on the outward supply. In the present case, the exported goods are exempt from compensation Cess, so no Cess is payable outwardly, and the petitioner cannot utilize compensation Cess ITC for payment of IGST.

Therefore, the circulars were held to be misapplied by the respondent authorities in rejecting the refund claims of the petitioner.

Key evidence and findings:

- Circular No.45/19/2018 para-5 clarifies refund eligibility of compensation Cess ITC on inputs when final product is not subject to compensation Cess.

- Circular No.125/44/2019 para-42 reiterates that refund of compensation Cess ITC is allowed only when zero-rated supplies are made without payment of tax.

Application of law to facts:

The Court applied the circulars in light of statutory provisions and facts, concluding that the circulars do not bar refund of compensation Cess ITC where the outward supply is exempt from compensation Cess, even if IGST is paid on export.

Treatment of competing arguments:

The respondents contended that the circulars are binding and deny refund of compensation Cess ITC when IGST is paid on exports. The Court rejected this broad application, emphasizing the exemption of compensation Cess on the exported goods.

Conclusions:

The circulars do not preclude refund of unutilized compensation Cess ITC on inputs used in manufacture of goods exported on payment of IGST where the exported goods are exempt from compensation Cess.

Issue 3: Application of proviso to Section 11(2) of the Cess Act restricting utilization of compensation Cess ITC only towards payment of Cess on outward supplies

Relevant legal framework and precedents:

Section 11(2) of the Cess Act states that input tax credit in respect of compensation Cess shall be utilized only for payment of Cess on outward supplies.

Court's interpretation and reasoning:

The Court held that this proviso applies only when compensation Cess is leviable on outward supplies. In the present case, since the exported goods are exempt from compensation Cess, no Cess is payable on outward supplies, rendering the proviso inapplicable.

Therefore, the petitioner cannot utilize compensation Cess ITC for payment of IGST on exports, and the ITC remains unutilized, entitling the petitioner to refund.

Key evidence and findings:

- The exported goods are not subject to compensation Cess.

- The petitioner paid IGST on export and claimed refund of unutilized compensation Cess ITC on inputs.

Application of law to facts:

The Court applied the proviso narrowly, limiting its scope to cases where compensation Cess is payable on outward supplies.

Treatment of competing arguments:

The respondents argued for broad application of the proviso to deny refund. The Court rejected this, emphasizing the exemption status of the goods.

Conclusions:

The proviso to Section 11(2) of the Cess Act does not bar refund of unutilized compensation Cess ITC where the outward supplies are exempt from compensation Cess.

3. SIGNIFICANT HOLDINGS

The Court held:

"As per the provision of Section 54(3) of the GST Act read with Section 16(3) of the IGST Act and Section 11(2) of the Cess Act, the petitioner can claim the refund of unutilized input tax credit for purchase of coal used for manufacture of goods exported being zero rated supply. The petitioner has paid IGST on the goods exported by it, however, the petitioner was not required to pay any compensation cess as the goods manufactured by the petitioner are exempted from the levy of compensation cess. Therefore, while applying the above provisions, admittedly the compensation cess was not paid at the time of export of goods by the petitioner, the petitioner, therefore, is entitled to refund of input tax credit of the compensation cess paid on purchase of the coal utilized for the purpose of manufacture of the goods which are exported as zero rated supply on payment of IGST by the petitioner."

"Reliance placed by the respondent on para-42 of the Circular No.125/44/2019 dated 18/11/2019 is misplaced because the said circular was issued clarifying the eligibility to claim refund of unutilized input tax credit of compensation cess paid on input, where the zero rated final product is not leviable with compensation cess. However, the circular refers to the provision of Section 16(2) of the IGST Act that the registered person making zero rated supply of aluminum products under bond or LUT may claim refund of unutilized credit including that of compensation cess paid on coal. The circular further clarifies that when the registered person make a zero rated supply of product on payment of integrated tax, they cannot utilize the credit of the compensation cess paid on coal for payment of Integrated tax in view of the proviso to Section 11(2) of the Cess Act, as the said proviso allows the utilization of the input tax credit of cess, only for the payment of cess on the outward supplies. However, when the petitioner has paid the IGST under Section 16(3) of the IGST Act on the zero rated supply and refund is claimed by the payment of such IGST, the petitioner admittedly would not be able to utilize input tax credit of cess as cess is not payable on the zero rated supply. Therefore, proviso to Section 11(2) of the Act would not be applicable in the facts of the case and the petitioner would be entitled to refund of the unutilized input tax credit on cess paid on purchase of coal utilized for the purpose of manufacture of goods which are exported."

Core principles established include:

- Refund of unutilized input tax credit of compensation Cess is admissible on inputs used in manufacture of goods exported on payment of IGST where the exported goods are exempt from compensation Cess.

- The proviso to Section 11(2) of the Cess Act restricting utilization of compensation Cess ITC only towards payment of Cess on outward supplies does not apply where no Cess is leviable on the outward supply.

- Circulars clarifying refund eligibility must be read in context of the statutory provisions and factual matrix, and cannot be applied rigidly to deny refund where provisions permit it.

Final determinations on each issue are:

- The petitioners are entitled to refund of unutilized input tax credit of compensation Cess paid on inputs used for manufacture of goods exported on payment of IGST.

- The respondent authorities' rejection of refund claims based on Circular No.125/44/2019 and Circular No.45/19/2018 is set aside.

- The refund orders rejecting claims are quashed and the orders sanctioning refund are restored.