SEZ units eligible for IGST refund under Section 54 CGST Act despite appellate authority's restrictive interpretation

The Gujarat HC allowed a petition challenging denial of IGST refund to a SEZ unit. The court held that Section 54 of CGST Act does not expressly deny refund of output tax or ITC to SEZ units, making them eligible for refunds like other registered persons. The HC rejected the appellate authority's interpretation that only suppliers can claim ITC refunds under Section 54(3) read with CGST Rules. Following precedents in Britannia Industries and IPCA Laboratories cases, the court directed authorities to grant the refund after proper verification and obtaining undertaking from petitioner that if supplier has claimed refund, the amount would be recoverable with interest. The orders denying refund were quashed.

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Issues Involved:
1. Eligibility of SEZ units to claim a refund of unutilized Input Tax Credit (ITC) under Section 54(3) of the CGST Act.
2. The procedural requirements for claiming refunds by SEZ units.
3. The role of Input Service Distributors (ISD) in distributing ITC and the eligibility of SEZ units to claim refunds for such distributed ITC.
4. The legal standing of the respondent's argument against the eligibility of SEZ units for ITC refunds.

Detailed Analysis:

1. Eligibility of SEZ Units to Claim Refund of Unutilized ITC:
The petitioner, an SEZ unit engaged in manufacturing and exporting goods, faced issues with unutilized ITC due to supplies received from non-SEZ suppliers who levied IGST. The petitioner filed refund applications under Section 54(3) of the CGST Act and Rule 89(4) of the CGST Rules for the periods of September 2018 to December 2019 and January 2020 to November 2021. The refunds were initially rejected by the Assistant Commissioner and subsequently by the Commissioner (Appeals). The petitioner argued that the CGST Act does not distinguish between SEZ units and other registered persons regarding ITC eligibility. The High Court noted that SEZ units are not expressly excluded from ITC refunds under Section 54, and thus, the petitioner's claim for refunds was valid.

2. Procedural Requirements for Claiming Refunds by SEZ Units:
The respondent contended that under Section 54(3) of the CGST Act and Rule 89(1) of the CGST Rules, only the supplier could claim the refund of ITC. The petitioner challenged this interpretation, asserting that SEZ units should be eligible for ITC refunds as they are not excluded under the GST framework. The High Court referred to the procedural guidelines and emphasized that the petitioner had specified that the supplier had not claimed the refund and had taken responsibility for any discrepancies. The Court found that the petitioner's procedural compliance was in line with the legal requirements and directed the refund to be processed accordingly.

3. Role of Input Service Distributors (ISD) in Distributing ITC:
The petitioner argued that it was not feasible for a supplier to file a refund application for ITC distributed by an ISD. The High Court referred to the definition of ISD under Section 2(61) of the CGST Act, which allows the distribution of ITC to various units. The Court acknowledged that the petitioner, being an SEZ unit, was entitled to claim refunds for ITC distributed by ISD, as it was not possible for the supplier to claim such refunds. This interpretation was supported by previous judgments, including M/s. Britannia Industries versus Union of India, which dealt with similar issues.

4. Legal Standing of the Respondent's Argument Against ITC Refunds:
The respondent argued that SEZ units should not claim refunds as they enjoy tax-free supplies under the SEZ Act and that the responsibility to verify refund claims should not fall on the department. The High Court rejected this argument, stating that SEZ units are eligible for ITC refunds under the GST framework. The Court emphasized that procedural mechanisms should not obstruct the legitimate claims of SEZ units and directed the department to process the refunds with appropriate verification and undertakings from the petitioner.

Conclusion:
The High Court quashed the orders rejecting the refund claims and directed the respondents to process the refunds for the petitioner's unutilized ITC within eight weeks, subject to proper verification and undertakings. The judgment reinforced the eligibility of SEZ units to claim ITC refunds and clarified the procedural aspects related to such claims.

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