NO CESS IS PAYABLE ON COAL USED AS AN INPUT FOR MANUFACTURING FINISHED GOODS USED FOR DOMESTIC SUPPLY

[Mr. M. GOVINDARAJAN]

While introducing the GST the Central Government enacted ‘Goods and Services Tax (Compensation to States) Act, 2017 (‘Cess Act’ for short).  The objective of the Act is to provide for compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax in pursuance of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016.

From legislative scheme of the Cess Act it appears that the cess is an impost to counterbalance the loss of revenue of the States on account of subsumption of various taxes commencement of the GST regime. Hence, cess is a levy which partakes the character of all the levies, which now are subsumed in GST.  Cess is akin to the components of GST, which is a constitutionally approved amalgam of State taxes, which existed prior to the commencement of the GST regime. The Goods and services Tax Compensation Cess Rules, 2017 were also framed and made effective from 01.07.2017 wherein the Central Goods and Services Tax Rules, 2017 were adapted.

Cess is not payable on exempted goods.  The term ‘exemption’ is not defined in the Cess Act whereas it is defined in the Central Goods and Services Tax Act, 2017 (‘CGST Act’ for short) which is also applicable mutatis mutandis to the Cess Act.

The High Court, Calcuatta in ‘THE PRINCIPLE COMMISSIONER, CGST & CX, KOLKATA NORTH COMMISSIONERATE & ANR., ELECTROSTEEL CASTINGS LIMITED VERSUS JOINT COMMISSIONER (APPEAL) , CENTRAL TAX, KOLKATA APPEAL – I & ANR., THE ASSISTANT COMMISSIONER, CGST & CX, KHARDAH DIVISION KOLKATA NORTH COMMISSIONERATE & ORS. - 2022 (6) TMI 553 - CALCUTTA HIGH COURT, held that no cess is payable on coal used as an input for manufacturing finished goods used for domestic supply.

In the above case the petitioner.  The petitioner is engaging in the manufacture of ductile iron spun pipes and fittings for which the petitioner uses coal as an important input.  The finished goods are subject to Cess @ Rs.400/- per tonne in terms of Sl. No. 39 of Notification No. 1/2017-Compensation Cess (Rate), dated 28.06.2017.

The petitioner, during September 2018 reversed input tax credit of Cess to the tune of Rs.7.02 crores on account of domestic supply of finished goods not liable to Cess and Non-GST turnover during the relevant period by treating the same to be exempt supplies in terms of Section 11 of the Cess Act read with Section 17 (2) and 2 (47) of CGST Act. The said reversal has been reflected in the return GSTR – 3B for the month of September 2018. 

CBIC issued a circular vide No. 45/19/2018-GST, dated 30.05.2018 in which it was clarified that a registered person making zero rated supply of final products (which are not subject to Cess) under bond or LUT may claim refund of unutilized credit including that of compensation cess paid on coal.  Therefore the petitioner filed a refund claim of refund of input tax credit of cess to the tune of Rs.3.75 crores in Form RFD – 01 during March, 2019.  The refund is for the month of September 2018.  The petitioner computed the refund amount in accordance with Section 11 and Section 9 of the Cess Act read with section 16 of the Integrated Goods and Services Tax  Act, 2017 (‘IGST Act’ for short) and Section 54 of the CGST Act.

The formula for refund of input tax credit  in case of zero-rated supply of goods or services without payment of tax under LUT, as contained in Rule 89 (4) of the CGST Rules categorically provides for exclusion of value of exempt supplies other than zero rated supplies while calculating adjusted total turnover. In computing the refund amount, the Assessee excluded supply of finished goods not subject to Cess and Non-GST turnover during the relevant period, while arriving at the adjusted total turnover. Net input tax credit amount was taken after reversal of input tax credit of Cess amounting to Rs.7.02 crores. 

The Revenue sanctioned refund to the tune of Rs.2.03 crores and rejected the balance amount Rs.1.17 crores.  The petitioner, being aggrieved against the order of Authority filed an appeal before the Appellate Authority.  The Appellate Authority allowed the appeal filed by the petitioner and directed the Department to refund the balance amount of Rs.1.17 crores vide their order dated 17.02.2021.  Since the amount has not been refunded to the petitioner by the Department the petitioner filed the present petition before the High Court with the prayer to direct the Department to refund the amount of Rs.1.17 crores with applicable interests.

The Revenue was aggrieved against the order of the Appellate Authority and filed writ petition before High Court in WPA 17567/2021 with the prayer to quash the order of the Appellate Authority directing the Department to refund the amount to the petitioner.  The High Court heard both writ petitions together since both the Writ Petitions are inter-dependent.  The Revenue submitted the following before the High Court-

• The impugned order has not considered the definition of ‘non-taxable supply’ as defined in the CGST Act, 2017.
• The sanctioning authority has rightly included the domestic supply in Adjusted Total Turnover and has rightly rejected a part of the refund claim of the assessee company.
• The impugned order of the Appellate authority on the basis of which Assessee Company has claimed the aforesaid refund is not sustainable.

The assessee petitioner submitted the following before the High Court-

• The High Court should not interfere with the aforesaid impugned order of the Appellate Authority by exercising its constitutional writ jurisdiction as an Appellate authority over the same.
• There is no jurisdictional excess or error in passing the impugned order by the Appellate authority.
• There is no error apparent on the face of record.
• The view taken by the CGST authorities defeats the legislative intent and the formula prescribed in Rule 89 (4) of the CGST Rules.
• The reversal itself has been done by the authority on the basis that supply of finished goods not subject to Cess are exempt supplies for the purpose of Cess Act and which has not been questioned by the revenue authorities.
• While in determination of refund amount, the supply of finished goods not subject to Cess has been included in the adjusted total turnover although the formula prescribed in Rule 89(4) of the CGST Rules categorically provides for exclusion of the value of exempt supplies other than zero rated supplies while computing adjusted total turnover. This contrary stand of the Revenue authorities is wholly unsustainable.

The High Court framed the issue to be decided in both the petitions is as to whether for the purpose of computing refund of credit of compensation cess to be made under Section 54 (3) of the CGST Act read with Rule 89 (4) of the CGST Rules as applicable mutatis mutandis to the Cess Act, the domestic turnover of final products which are not taxable under the Cess Act, could be excluded to at the adjusted total turnover under Rule 89(4) of the CGST Rules having regard to the definition of ‘Adjusted Total Turnover’ contained in Clause (E) of the said Rule.

The High Court observed that-

• Refund of ITC of Cess in cases of zero rated supply of goods is governed by the provisions of Section 9(2) and Section 11 of the Cess Act read with Section 54 of the CGST Act read with Rule 89 (4) of the CGST Rules.
• The formula prescribed under Rule 89 (4) of the CGST Rules categorically excludes value of exempt supplies other than zero rated supplies while calculation of adjusted total turnover.
• The expression ‘exempt supply’ has not been defined in CESS Act. 
• The definition of exempt supply contained in Section 2 (47) of the CGST Act shall apply mutatis mutandis for computation of refund of input tax credit  of Cess by application of provisions of Section 11, Section 9 and Section 2 (2) of the Cess Act.
• When it is an admitted fact that refund of unutilized credit of compensation cess would be available by applying the formula prescribed under Rule 89 of the CGST Rules, the definition of exempted supplies under Section 2 (47) of the CGST Act has to be read harmoniously with the provisions of Compensation Act and goods subject to nil rate of compensation cess are to be construed as exempt supplies.

The High Court analyzed the provisions of CESS Act and also the relevant provisions of CGST Act and the rules framed there under and also IGST Act.  The High Court held that the domestic supply of finished goods which are not liable to Compensation Cess are to be reckoned as exempted supplies for the purpose of calculation of refund in terms of Rule 89 (4) of the CGST Rules.  Section 2 (47) of the CGST Act defines ‘exempt supply’ as supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under Section 11, or under Section 6 of the IGST Act, 2017 and includes non-taxable supply. Thus, finished goods supplied by the Assessee domestically which attract nil rate of Cess in terms of Sl. No. 56 of the said Notification should be construed as exempt supplies and is therefore required to be excluded from adjusted total turnover for the purpose of computation of refund of ITC of Cess in terms of Rule 89 (4) of the CGST Rules.

The High Court was of the view that the Appellate authority while passing the impugned order has neither committed any procedural irregularity nor any jurisdictional error nor any violation of principles of natural justice and the impugned order is based on cogent reasons and is speaking one.   The High Court dismissed the writ petition filed by the Department.  The High Court further directed the Department to refund the amount as ordered by the Appellate Authority along with applicable interest till the date of payment within 8 weeks from the date of communication of the order.