2025 (11) TMI 1326 - HC - GST

Exporter Supplying Zero-Rated Goods Entitled to ITC Refund Under Sections 16(1), 54(3) and Rule 89, Deemed Export Provisions Inapplicable

HC held that the petitioner-unit is an exporter making zero-rated supplies under section 16(1) of the IGST Act, not a deemed exporter, as its suppliers ... 100% EOU - Refund of unutilised input tax credit in case of zero-rated supplies made without payment of tax - Supplies made by the registered person to a 100% EOU - deemed exports - rejection on the ground that the petitioners did not file the refund claim under Rule 89(4A) of the GST Rules - rejection by applying para 2.2 of the Circular No. 172/04/2022-GST dated 06.07.2022 issued by the respondents with the retrospective effect - exercising suo motu powers for reviewing the orders sanctioning the refund claim of the petitioners u/s 107(2) of the GST Act - HELD THAT:- It appears from the facts of the case that the petitioners are not the deemed exporters but are the exporter of the goods resulting into zero-rated supply as per section 16(1) of the IGST Act and all the inward supplies to the petitioners are made with payment of GST charged by the suppliers who have not taken benefit of any notification as deemed exporter. It is also not in dispute that the petitioners are exporting the goods at zero-raX ted supply without payment of taxes under Letter of Undertaking and the input tax credit of the inputs, capital goods and services got accumulated for which refund claim was filed. It is also not in dispute in facts of the case that the suppliers of the raw materials to the petitioners who manufactured the finished products have not shown such supplies as deemed export but the supplies have been shown as regular B2B supplies i.e. in regular form only. The suppliers of the goods to the petitioners have never followed the procedure as per Circular No. 14/14/2017 dated 6.11.2017 nor any invoices are endorsed as an EOU unit by the petitioners as per the procedure prescribed in the said circular - Therefore, in facts of the case, zero-rated supplies made by the petitioners is not coming in the purview of the deemed exports because the petitioners have exported the goods and therefore, entitled to refund of the unutilised input tax credit as per the provisions of section 54(3) of the GST Act read with Rule 89(4) of the GST Rules. The petitioners have not claimed any refund of the input tax credit on the deemed export supply. It appears that the respondents have lost sight of the fact that the petitioners are the exporters of the finished goods and the refund claim is filed by the petitioners being 100% EOU of zero-rated supply without payment of tax. The petitioners are therefore, not governed by para no. 2.2 of the Circular dated 06.07.2022 - the reasonings assigned by the appellate authority for applicability of Rule 89(4A) of the GST Rules is also contrary to the provisions of the GST Act, more particularly, section 2(39) of the GST Act which defines “deemed exports” to mean such supplies of goods as may be notified under section 147 and section 147 empowers the Central Government to notify the supply of goods as deemed export where the goods supplied do not leave India and payment for such supplies is either received in Indian rupees or in convertible foreign exchange, if such goods are manufactured in India. Therefore, the supply of raw materials by the suppliers of the petitioners would amount to deemed export if the suppliers of the raw materials to the petitioners would have claimed the refund of the tax paid on such supplies. The petitioners are entitled to refund claim of the ITC and the goods are exported without payment of tax under Rule 89(1)/89(4) of the GST Rules - petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a refund claim filed by an exporter (100% EOU) for unutilised input tax credit under Section 54(3) read with Rule 89(4) of the CGST Rules was rightly disallowed because the claim was not filed under Rule 89(4A) (or proviso to Rule 89(1)) applicable to deemed exports. 2. Whether paragraph 2.2 of Circular No. 172/04/2022-GST (06.07.2022) - excluding ITC availed by recipients of deemed export supplies from 'Net ITC' for computation of refund under Rule 89(4)/89(5) - could be applied retrospectively to deny refunds in respect of export transactions completed before issuance of the circular. 3. Whether the revenue was justified in exercising suo motu review under Section 107(2) of the CGST Act to direct an appeal against refund sanctioning orders and thereby cause withdrawal of sanctioned refunds. 4. Whether the revenue could invoke recovery proceedings under Section 73/74 of the CGST Act (issue show cause notices) to recover refunds already sanctioned without first preferring an appeal or otherwise adjudicating the correctness of the refund order. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Applicability of Rule 89(4) v. Rule 89(4A)/proviso to Rule 89(1) to refund claims by 100% EOU exporters Legal framework: Section 54(3) CGST Act grants refund of unutilised input tax credit (ITC) for zero-rated supplies made without payment of tax. Rule 89(4) prescribes formula for refund for zero-rated supplies without payment of tax under bond/LOU. Rule 89(4A) and proviso to Rule 89(1) concern supplies in respect of which the supplier has availed deemed-export benefits (Notification No.48/2017) and allocation of refund between supplier/recipient. Precedent treatment: Parties relied on various authorities addressing recovery, review and refund principles; Court considered these authorities but focused on statutory definitions and the factual matrix rather than treating any precedent as controlling to alter statutory interpretation here. Interpretation and reasoning: The Court analyzed the factual matrix: petitioners were exporters making zero-rated supplies without payment of tax under LOU; inward supplies to petitioners were regular B2B supplies with GST paid by suppliers who did not avail deemed-export notifications nor followed procedures under Circular No.14/2017. The statutory definition of 'deemed exports' (Section 2(39) read with Section 147) and the prescription of procedures in Notification No.48/2017 and Circular No.14/2017 show that supplies qualify as 'deemed exports' only if the supplier/recipient follows the notified regime and the supplier avails the benefit of notification. Where suppliers have not treated supplies as deemed exports, the recipient-exporter's entitlement is governed by Section 54(3) and Rule 89(4) (zero-rated supply refund formula) rather than Rule 89(4A)/proviso to Rule 89(1). Ratio vs. Obiter: Ratio - where the exporter has exported goods as zero-rated supply without payment of tax under LOU, and inward supplies were regular taxable supplies (supplier did not claim deemed-export benefit or follow deemed-export procedures), the exporter is entitled to refund under Section 54(3) read with Rule 89(4). Obiter - broader implications on classification of supplier conduct in varying factual permutations not decided. Conclusion: The respondents were not justified in disallowing the petitioners' refund claim on the ground that it should have been filed under Rule 89(4A) or proviso to Rule 89(1). The petitioners' refund claims under Rule 89(4)/Section 54(3) were correctly maintainable on the facts. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Applicability / retrospective effect of Circular No. 172/04/2022-GST (para 2.2) Legal framework: Circulars under Section 168 CGST Act are clarificatory/guidance issued by CBIC. Para 2.2 states that ITC availed by recipients of deemed-export supplies for claiming refund of tax paid on deemed exports is not ITC under Chapter V and therefore excluded from 'Net ITC' for computation under Rule 89(4)/89(5). Precedent treatment: Both sides treated the circular as clarificatory; respondents contended it elucidates existing law and can be applied to pendency of claims; petitioners urged ultra vires and retrospective application issues. The Court did not decide general vires or retrospective effect of the circular here. Interpretation and reasoning: The Court held that para 2.2 is inapplicable on the facts because petitioners were not recipients claiming refund as deemed-export recipients and had not availed ITC under a deemed-export claim. The circular's clarification concerns inclusion/exclusion of ITC where recipient has availed deemed-export refund; it does not govern refunds claimed by exporters who exported under LOU and whose inward supplies were treated as ordinary taxable supplies by suppliers. Given this factual inapplicability, the Court declined to adjudicate on the broader question of prospective/retrospective applicability or vires of the circular. Ratio vs. Obiter: Ratio - Circular para 2.2 does not apply to a case where the exporter (100% EOU) claims refund under Rule 89(4) and the inward suppliers did not claim deemed-export benefit; therefore the circular cannot be used to deny such refund. Obiter - the Court expressly left open the question whether the circular is ultra vires or can be applied retrospectively in other fact situations. Conclusion: Para 2.2 of the circular was not applicable to petitioners' refund claims; challenge to the circular's vires/effect not decided and kept open for appropriate cases. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Validity of suo motu review under Section 107(2) leading to appeal to recover refunds Legal framework: Section 107(2) empowers Commissioner to call for and examine records of proceedings and direct subordinate officer to apply to Appellate Authority within six months for determination of specified points arising out of the decision/order. Precedent treatment: Parties placed rival authorities on review/appeal and recovery; Court confined its analysis to applicability of refund provisions and the facts. The Court noted the review/appeal mechanism exists but treated questions arising from its exercise as academic once merits of refund claim were decided in favour of petitioners. Interpretation and reasoning: Having held that petitioners were entitled to refunds under Section 54(3)/Rule 89(4) and that circular para 2.2 did not apply, the Court considered further contentions on review under Section 107(2) and consequent appeal academic in the present proceedings. The Court did not pronounce a general rule invalidating Section 107(2) reviews but quashed the specific review/appeal-derived orders that resulted in withdrawal of the refund because those orders were founded on the incorrect premise that Rule 89(4A) applied. Ratio vs. Obiter: Ratio - where the basis for review/appeal is erroneous legal premise regarding applicability of a rule (as found here), orders obtained through such review/appeal directing recovery must be set aside. Obiter - no general pronouncement on limits of Section 107(2) exercise beyond the facts. Conclusion: The specific review orders and consequential appellate orders directing withdrawal/recovery of the petitioners' refunds were quashed because they proceeded on incorrect application of Rule 89(4A)/circular; general questions about the scope of Section 107(2) were left open. ISSUE-WISE DETAILED ANALYSIS - Issue 4: Use of Section 73/74 show cause / recovery proceedings to recover sanctioned refunds without appeal Legal framework: Sections 73/74 provide mechanism to determine tax not paid/short paid/erroneously refunded and allow issuance of show cause notices and recovery. Remedies of appeal (Section 107) and review (Section 108) also exist for departmental orders. Precedent treatment: Both parties cited authorities on independence of recovery proceedings and interplay between appeal/review and recovery. The Court acknowledged competing jurisprudence but refrained from deciding the broader legal tension in this batch since resolution on entitlement made further discussion academic. Interpretation and reasoning: The Court observed that where a refund sanctioning order is substantively correct (as held here for petitioners), issuance of recovery notices under Sections 73/74 predicated on an erroneous legal foundation is unsustainable. Because petitioners were held entitled to refunds on merits, the recovery notices/orders in the specific matters were quashed. The Court did not lay down an exhaustive rule on whether Sections 73/74 can always be invoked without prior appeal; that question was expressly left open for appropriate fact patterns. Ratio vs. Obiter: Ratio - on the facts, recovery proceedings under Sections 73/74 based on the incorrect premise that refund was erroneously granted (due to misapplied Rule 89(4A)/circular) cannot stand and must be quashed. Obiter - no definitive adjudication on the independent operation of Sections 73/74 as a general principle. Conclusion: Show cause notices and recovery orders issued to recover the petitioners' refunds in these proceedings were quashed; broader questions about invoking Sections 73/74 independently of appeal/review remain open. DISPOSITION AND RELIEF (FACT-SPECIFIC) 1) Orders withdrawing or directing recovery of the petitioners' refunds for specified periods were quashed and set aside; corresponding show-cause notices and appeal-derived orders were also quashed to the extent they relied on the incorrect application of Rule 89(4A)/Circular para 2.2. 2) The Court directed respondents to pay the refunds as per the petitioners' claims in accordance with law within twelve weeks from receipt of the judgment copy. 3) Questions on vires and retrospective applicability of Circular No.172/04/2022-GST, and general legal issues concerning exercise of powers under Sections 73/74 and Section 107(2), were not decided and were left open for determination in appropriate cases.