TaxTMI 
TaxTMI 
TaxTMI 
The Hon’ble Gujarat High Court in the case of Shah Paperplast Industries Ltd. & Anr., Nilesh Chandravadan Shah Director. Versus Union of India & Ors., Central Board of Indirect Taxes And Customs, Additional Commissioner CGST And Central Excise Appeals, Assistant Commissioner Central GST And Excise. - 2025 (11) TMI 1326 - GUJARAT HIGH COURT held that CBIC’s Circular No. 172/04/2022-GST dated July 06, 2022, which restricts refund of tax paid on ‘deemed exports,’ cannot be invoked to deny refund of unutilized input tax credit (“ITC”) to actual exporters under Section 54(3), where neither the supplier nor recipient has claimed deemed export benefits, and all supplies have been shown as regular B2B exports.
Facts:
Shah Paperplast Industries Ltd. & Anr. ('the Petitioner') are 100% Export Oriented Units (“EOU”) manufacturing and exporting tissue paper, wrapping paper, and disposable plastic products.
The Union of India & Ors. ('the Respondent') are tax authorities responsible for grant and review of GST refunds and interpretation of relevant circulars.
The Petitioners purchased raw materials from registered suppliers under the GST Act, used them in finished goods, and exported the products without payment of tax, claiming unutilized ITC as refund for zero-rated supplies under Section 54(3) r/w Rule 89(4).
The Petitioners contended that they had not availed any refund as “deemed exporters” and that their suppliers had neither claimed refund as deemed exporters under Notification 48/2017 nor treated the supplies as deemed export; all supplies were regular exports, invoices not endorsed for deemed export procedure, and ITC/refund was claimed solely for zero-rated actual exports.
The Respondent contended that under Circular No. 172/04/2022-GST dated July 6, 2022 and Rule 89(4A), any refund of tax paid on ‘deemed exports’ could not be counted as ITC for calculating refund; invoked the circular to review and withdraw refunds already granted, further arguing that errors or wrongful refunds could be reviewed under Section 107(2) and recovered by issuing show cause notice under Section 73.
The Petitioners were aggrieved by refund withdrawal orders and their review in departmental appeal and filed special civil applications challenging the circular and subsequent withdrawal of sanctioned refund, seeking quashing of adverse orders and restoration of refund entitlement.
Issue:
Whether actual exporters who have neither availed nor claimed refund as ‘deemed exporters’ under Notification No. 48/2017 dated October 18, 2017 can be denied refund of unutilized ITC under Section 54(3) read with Rule 89(4), solely because supplies to them might qualify as deemed export under the Circular; and whether such a circular can be retrospectively applied or used to recover refunds already granted under regular B2B export mechanism?
Held:
The Hon’ble Gujarat High Court in Shah Paperplast Industries Ltd. & Anr., Nilesh Chandravadan Shah Director. Versus Union of India & Ors., Central Board of Indirect Taxes And Customs, Additional Commissioner CGST And Central Excise Appeals, Assistant Commissioner Central GST And Excise. - 2025 (11) TMI 1326 - GUJARAT HIGH COURT held as under:
- Observed that, the Petitioner, as 100% EOUs, are actual exporters of goods, and their refund claims pertained exclusively to unutilized ITC on zero-rated exports under Section 54(3) of the CGST Act and Rule 89(4) of the CGST Rules
- Noted that, neither the Petitioners nor their suppliers claimed any benefits or refunds as 'deemed exporters' under Notification No. 48/2017 or followed prescribed procedures for deemed export supplies; all underlying transactions involved regular B2B supplies for goods that were subsequently exported.
- Held that, Circular No. 172/04/2022-GST, restricting refund for deemed exports where suppliers claim the benefit, cannot be utilized to reject refund claim of actual exporters who have never availed deemed export benefits, since this circular only applies to deemed exports and not zero-rated supplies by exporters themselves
- Noted that, had the suppliers claimed the refund as deemed exporters regarding ITC paid on such deemed export supplies, or shown such supplies as 'deemed export' and not as regular B2B supplies, then para 2.2. of the circular would have been applicable. However, since petitioners alone claimed regular export refunds and suppliers neither claimed nor treated supplies as deemed exports, the circular's restrictions have no application.
- Quashed the orders withdrawing the sanctioned refund for the relevant periods and their subsequent recovery, directing the authorities to forthwith pay lawful refunds to the Petitioners within 12 weeks.
- Declined to adjudicate on the general question of the validity or retrospective application of the circular beyond the case at hand, leaving such challenge open for future proceedings.
Our Comments:
The judgment draws directly from Supreme Court precedent Union of India & Ors. Versus VKC Footsteps India Pvt Ltd. - 2021 (9) TMI 626 - Supreme Court, which held that refund entitlements are governed strictly by statutory provisions, not by interpretative circulars or executive instructions. The Supreme Court accepted the legislative power to restrict refund entitlements but cautioned that such restrictions must appear in the statutory text, not as conditions imposed by circulars or notifications beyond what Parliament has enacted. In VKC Footsteps, the challenge was on Section 54(3) and Rule 89(5), denying refund of input services wherein the Supreme Court upheld the legislative restriction, but the Gujarat HC in the present case distinguished this, emphasizing that no restriction on “actual exporters” is prescribed by statute regarding ITC refund unless the supplier claims deemed export refund rights.
In the case of GRASIM INDUSTRIES LTD. Versus COMMISSIONER OF CENTRAL EXCISE, BHOPAL - 2011 (8) TMI 689 - Supreme Court, which established that review and recovery mechanisms under Section 73 of the CGST Act or Section 11A of the Excise Act apply independently and only to erroneous or unauthorized refunds. Properly sanctioned entitlements cannot be overturned retroactively or administratively absent a statutory error.
While the department cited Circular No. 172/04/2022-GST and Rule 89(4A), the Court rejected this application where factual and procedural circumstances did not trigger deemed export benefit, accepting the Petitioners’ argument that all transactions and refund claims were regular exports falling squarely in Section 54(3) and Rule 89(4).
Relevant Provisions:
Section 54(3) of the CGST Act, 2017
“Section 54. Refund of tax.-
(1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed:
(2) ...
(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:
Provided that no refund of unutilised input tax credit shall be allowed in cases other than-
(i) zero rated supplies made without payment of tax;
(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:
Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.
Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49, may claim such refund in such form and manner as may be prescribed.”
Rule 89(4) of the CGST Rules, 2017
89. Application for refund of tax, interest, penalty, fees or any other amount.-
“(4) In the case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking in accordance with the provisions of sub-section (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), refund of input tax credit shall be granted as per the following formula -
Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷ Adjusted Total Turnover
Where, -
(A) 'Refund amount' means the maximum refund that is admissible;
(B) 'Net ITC' means input tax credit availed on inputs and input services during the relevant period
(C) 'Turnover of zero-rated supply of goods' means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, whichever is less,
(D) 'Turnover of zero-rated supply of services' means the value of zero-rated supply of services made without payment of tax under bond or letter of undertaking, calculated in the following manner, namely:-
Zero-rated supply of services is the aggregate of the payments received during the relevant period for zero-rated supply of services and zero-rated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period reduced by advances received for zero-rated supply of services for which the supply of services has not been completed during the relevant period;”
Circular No. 172/04/2022-GST dated July 6, 2022
“1. Whether the Input Tax Credit (ITC) availed by the recipient of deemed export supply for claiming refund of tax paid on supplies regarded as deemed exports would be subjected to provisions of Section 17 of the CGST Act, 2017?
The refund in respect of deemed export supplies is the refund of tax paid on such supplies. However, the recipients of deemed export supplies were facing difficulties on the portal to claim refund of tax paid due to requirement of the portal to debit the amount so claimed from their electronic credit ledger. Considering this difficulty, the tax paid on such supplies, has been made available as ITC to the recipients vide Circular No. 147/03/2021-GST dated 12.03.2021 only for enabling them to claim such refunds on the portal. The ITC of tax paid on deemed export supplies, allowed to the recipients for claiming refund of such tax paid, is not ITC in terms of the provisions of Chapter V of the CGST Act, 2017. Therefore, the ITC so availed by the recipient of deemed export supplies would not be subjected to provisions of Section 17 of the CGST Act, 2017.
2. Whether the ITC availed by the recipient of deemed export supply for claiming refund of tax paid on supplies regarded as deemed exports is to be included in the “Net ITC” for computation of refund of unutilised ITC under rule 89(4) & rule 89 (5) of the CGST Rules, 2017?
The ITC of tax paid on deemed export supplies, allowed to the recipients for claiming refund of such tax paid, is not ITC in terms of the provisions of Chapter V of the CGST Act, 2017. Therefore, such ITC availed by the recipient of deemed export supply for claiming refund of tax paid on supplies regarded as deemed exports is not to be included in the “Net ITC” for computation of refund of unutilised ITC on account of zero-rated supplies under rule 89(4) or on account of inverted rated structure under rule 89(5) of the CGST Rules, 2017.”
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