2025 (7) TMI 1768 - HC - GST

Refund claims for unutilized input tax credit on compensation cess allowed under zero-rated supplies rule

Atul Limited & Anr. Versus Union Of India & Ors.

The HC held that the rejection of the refund claim for unutilized input tax credit on compensation cess was incorrect, as the petitioner's zero-rated ... Refund of unutilized input tax credit - zero rated supply - rejection of refund claim on the ground that refund of cumulative cess credit group claim was available only in respect of zero-rated supplies made without payment of IGST - HELD THAT:- It is not in dispute that this Hon’ble Court has categorically held that the respondent has rejected the refund claim in a wrong manner by misinterpreting the Circular No. 45/19/18 dated 30.05.2018 and Circular No. 125/44/19 dated 18.11.2019. It is further held that the petitioner in such cases can claim for purchase of coal used for manufacturing of goods exported being zero-rated supplies. It was further held that the petitioner may have paid the 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 tax. The facts and law enumerated in the case of Patson Papers [2025 (5) TMI 1343 - GUJARAT HIGH COURT], would be squarely applicable to the facts of the present case. In Patson Papers, the company was engaged in the business of manufacturing of dyes and there was purchased of coal for the manufacturing process. The Company was involved in production of finished goods, which was not liable to GST. Finished goods were exported being zero rated supply. Therefore, the petitioner in the case of Patson Papers, had applied for refund of compensation cess on purchase of coal for manufacturing of the finished goods. In the instant case, the Company is also engaged in manufacturing and sale of various chemical products on supply to SEZ as well as for export and for the production of the same, coal was purchased from open market and generated its own captive power via captive power plant. Therefore, cess charge invoice supplies were demanded by way of refund case, the same was rejected by relying on Circular No. 45/19/2018-GST dated 30.05.2018 as well as Circular No. 125/44/2019-GST dated 18.11.2019. The respondent is directed to process refund application of the petitioner to sanction the refund of the CESS amount claimed on unutilized tax credit. The impugned orders in both writ petitions passed by the respondent are quashed and set aside - petition allowed. ISSUES: Whether paragraph 5 of Circular No. 45/19/2018-GST dated 30.05.2018 and paragraph 42 of Circular No. 125/44/2019-GST dated 18.11.2019 are contrary to Section 11 of the Goods and Services Tax (Compensation to States) Act, 2017 and violate Article 14 of the Constitution of India.Whether a registered person engaged in manufacture and export of goods, who has paid compensation cess on inputs (coal) used in manufacturing but not on the final exported goods (which are zero-rated supplies with IGST payment), is entitled to refund of unutilized input tax credit of the compensation cess under the relevant GST laws.Whether the refund claim of compensation cess credit can be rejected on the ground that refund of cumulative cess credit is available only in respect of zero-rated supplies made without payment of IGST.Whether the proviso to Section 11(2) of the Cess Act, which restricts utilization of input tax credit of cess only towards payment of cess on outward supplies, applies to deny refund of unutilized input tax credit of compensation cess paid on inputs used for manufacture of exported goods on which IGST was paid. RULINGS / HOLDINGS: The Court held that paragraph 5 of Circular No. 45/19/2018-GST and paragraph 42 of Circular No. 125/44/2019-GST were misinterpreted by the revenue authorities and are contrary to Section 11 of the Cess Act; thus, they are 'wholly without jurisdiction, manifestly arbitrary and violating Article 14 of the Constitution of India.'The petitioner is entitled to claim refund of unutilized input tax credit of compensation cess paid on coal used for manufacture of goods exported as zero-rated supplies with payment of IGST, as the final products are exempted from compensation cess levy.The refund claim cannot be rejected on the basis that refund of cumulative cess credit is available only for zero-rated supplies made without payment of IGST, since the petitioner paid IGST on exports but was not liable to pay compensation cess on the exported goods.The proviso to Section 11(2) of the Cess Act, which restricts utilization of input tax credit of cess only towards payment of cess on outward supplies, does not apply in the facts of the case where IGST was paid on zero-rated exports and no compensation cess was payable on such exports; hence, the petitioner is entitled to refund of unutilized input tax credit of compensation cess paid on inputs. RATIONALE: The Court applied the statutory framework comprising Section 9, 11 of the Goods and Services Tax (Compensation to States) Act, 2017 ('Cess Act'), Sections 16 and 54 of the Integrated Goods and Services Tax Act, 2017 ('IGST Act'), and Sections 16 and 54 of the Central Goods and Services Tax Act, 2017 ('CGST Act'), along with Rules 89 of the CGST Rules, 2017.Section 11(2) of the Cess Act provides that the provisions of the IGST Act, including those relating to input tax credit and refunds, shall apply mutatis mutandis to the levy and collection of compensation cess.Section 16 of the IGST Act defines zero-rated supply, permitting input tax credit availing and refund claims for zero-rated supplies, including exports.Section 54(3) of the CGST Act allows refund of unutilized input tax credit in cases of zero-rated supplies made without payment of tax or under bond/letter of undertaking.The impugned circulars were interpreted to restrict refund of compensation cess credit only to zero-rated supplies made without payment of IGST; however, the Court held this interpretation as erroneous because the proviso to Section 11(2) of the Cess Act restricts utilization of input tax credit of cess only for payment of cess on outward supplies but does not preclude refund of unutilized input tax credit where no compensation cess is payable on the exported goods.The Court relied on precedent wherein identical facts were considered, confirming entitlement to refund of unutilized input tax credit of compensation cess paid on inputs used for manufacture of zero-rated exported goods on which IGST was paid.The Court emphasized that the petitioner's goods are exempt from compensation cess, and although IGST was paid on exports, no compensation cess was payable, entitling the petitioner to refund of unutilized input tax credit of compensation cess on inputs.