2025 (1) TMI 1084 - HC - GST

Refund of Input Tax Credit for compensation cess on zero-rated supplies upheld; circulars treat cess like other GST levies

Bombay HC allowed the petition and directed refund of Input Tax Credit for compensation cess on zero-rated supplies, holding that compensation cess is ... Refund of Input Tax Credit (ITC) for compensation cess leviable under Section 8 of the Goods and Services Tax (Compensation to States) Act, 2017 - the rejection is upheld on the basis that the words input tax defined under Section 2 (62) of the CGST Act would not include Composition Cess - HELD THAT:- It appears that Respondent No. 2 has got confused by equating composition Levy with Compensation Cess. Composition Levy is something that is covered under Section 10 of the CGST Act. Compensation Cess on the other hand is leviable under Section 8 of the Compensation Cess Act. This apart, according to Respondent No. 2, since Compensation Cess is not specifically mentioned in the definition of “input tax”, the same has been denied to the Petitioner. This issue is squarely covered by two Circulars. The first Circular is dated 26th July 2017. In paragraph 8 of this Circular, it is made clear that the Exporter will be eligible for refund of Compensation Cess paid on goods exported by him (on similar lines as refund of IGST under Section 16 (3) (b) of the IGST Act). This has been further made clear by a subsequent circular of the Central Board of Indirect Taxes and Customs dated 18th November 2019. Once again, by this Circular, in paragraph 42, it is made clear that a registered person making a zero rated supply under LUT may claim refund of unutilized credit including that of Compensation Cess. Of course, it is needless to state that the Input Tax Credit taken for Compensation Cess can be allowed for utilization of Input Tax Credit of Cess only for payment of Cess on the outward supplies, and not any other tax. From these Circulars, it is absolutely clear that the Petitioner is entitled to a refund even of Compensation Cess. These Circulars have been glossed over by the Additional Commissioner in the impugned order. The Additional Commissioner (Respondent No. 2), after setting out the relevant portion of the Circular dated 26th July 2017 merely states that there is no provision for refund of Input Tax Credit other than those defined and included under Section 2 (62) and Section 2 (63) of the CGST Act, which does not include Compensation Cess - this finding, and which is the only finding on which the refund is rejected, is wholly unsustainable in light of the clarifications issued by the aforesaid two Circulars. Conclusion - The refund is allowed. Compensation Cess should be treated similarly to other taxes under the GST framework for the purposes of refund on zero-rated supplies. The circulars issued by the tax authorities are authoritative and provide necessary clarifications that must be adhered to by the adjudicating authorities. Petition disposed off. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question addressed in this judgment is whether the Petitioner is entitled to a refund of Input Tax Credit (ITC) for Compensation Cess under Section 8 of the Goods and Services Tax (Compensation to States) Act, 2017.2. ISSUE-WISE DETAILED ANALYSISIssue: Entitlement to Refund of Compensation CessRelevant Legal Framework and Precedents:The legal framework involves the interpretation of the Compensation Cess Act, the CGST Act, and the IGST Act. Specifically, the definition of 'input tax' under Section 2(62) of the CGST Act is pivotal, as it determines what constitutes input tax eligible for refund. The case also references two circulars issued by the Central Board of Indirect Taxes and Customs, dated 26th July 2017 and 18th November 2019, which clarify the refund entitlement for Compensation Cess.Court's Interpretation and Reasoning:The court found that the rejection of the refund was unsustainable. It clarified that the definition of 'input tax' under Section 2(62) of the CGST Act does not explicitly exclude Compensation Cess. The court noted that Respondent No. 2 confused Composition Levy with Compensation Cess, leading to an erroneous interpretation. The court emphasized that the circulars explicitly state that exporters are eligible for a refund of Compensation Cess on goods exported under a Letter of Undertaking (LUT).Key Evidence and Findings:The court relied heavily on the circulars, which clearly stated that provisions for zero-rated supply under the IGST Act apply mutatis mutandis to Compensation Cess. The circulars were pivotal in establishing that the Petitioner is entitled to the refund.Application of Law to Facts:The Petitioner, engaged in exporting beverages, had paid GST and Compensation Cess on purchases and sought a refund for the unutilized ITC on zero-rated supplies. The court applied the provisions of the IGST Act and the clarifications from the circulars to conclude that the Petitioner was entitled to the refund.Treatment of Competing Arguments:The court dismissed the argument that Compensation Cess is not included in the definition of 'input tax' by highlighting the misinterpretation of the term and the oversight of the circulars by the Additional Commissioner. The court found that the Respondent's reliance on a narrow interpretation of the CGST Act was incorrect.Conclusions:The court concluded that the Petitioner is entitled to a refund of the Compensation Cess, as the circulars clearly support the Petitioner's claim. The orders rejecting the refund were quashed, and the Respondents were directed to grant the refund with interest.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning:'The rejection of the refund is wholly unsustainable in law. The definition of the words 'input tax' in Section 2(62) of the CGST Act does not exclude Compensation Cess.''The Exporter will be eligible for refund of Compensation Cess paid on goods exported by him [on similar lines as refund of IGST under Section 16(3)(b) of the IGST Act].'Core Principles Established:The judgment establishes that Compensation Cess should be treated similarly to other taxes under the GST framework for the purposes of refund on zero-rated supplies. The circulars issued by the tax authorities are authoritative and provide necessary clarifications that must be adhered to by the adjudicating authorities.Final Determinations on Each Issue:The court determined that the Petitioner is entitled to a refund of the Compensation Cess amounting to Rs. 9,06,854/-, along with interest as per Section 56 of the CGST Act. The orders by Respondent No. 2 and Respondent No. 3 were quashed, and the Respondents were instructed to process the refund within four weeks.