Refund of GST Compensation Cess ITC on coal allowed for zero-rated exports; proviso to Section 11(2) inapplicable

HC held that refund of unutilised input tax credit of GST Compensation Cess paid on coal is admissible where the finished goods are exported as zero-rated supplies with payment of IGST. Relying on prior decisions, HC held that since cess is not leviable on zero-rated supplies, the petitioner cannot utilise the cess credit, and the bar under the proviso to Section 11(2) of the Compensation Cess Act does not apply. The respondents were directed to process and sanction the refund of the cess amount claimed, and the impugned orders rejecting such refund were quashed. The petitions were allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether refund of unutilised input tax credit of GST Compensation Cess paid on coal is admissible when the final products are zero-rated exports on payment of IGST but are not liable to Compensation Cess.

1.2 Whether, by virtue of sections 9 and 11 of the Goods and Services Tax (Compensation to States) Act, 2017, the provisions of the GST Act and IGST Act relating to input tax credit and refund apply mutatis mutandis to Compensation Cess.

1.3 Whether the departmental reliance on Circular No. 45/19/2018-GST and Circular No. 125/44/2019-GST to deny refund of unutilised Compensation Cess was legally sustainable.

1.4 Whether, in light of prior binding decisions, the issue stood concluded (no longer res integra) requiring the Court to follow the earlier view and grant relief.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Refund of unutilised Compensation Cess ITC on coal used in manufacture of zero-rated exports, and mutatis mutandis application of GST/IGST provisions to Cess

Legal framework (as discussed in the judgment)

2.1 The Court referred to and relied upon the reasoning in the earlier decisions where the following provisions were analysed:

2.1.1 Section 54(3) of the CGST Act, permitting a registered person to claim refund of any unutilised input tax credit at the end of any tax period in specified situations, including zero-rated supplies made without payment of tax.

2.1.2 Section 16 of the IGST Act defining and governing "zero rated supply", allowing availment of input tax credit for making zero-rated supplies, and providing for refund of unutilised input tax credit under section 54 of the CGST Act.

2.1.3 Section 11(2) of the GST (Compensation to States) Act, 2017 applying, mutatis mutandis, the provisions of the IGST Act (including those relating to input tax credit, assessment, non-levy, short-levy, interest, appeals, offences and penalties) to the levy and collection of Compensation Cess, subject to the proviso that input tax credit of Cess shall be utilised only towards payment of Cess on outward supplies.

2.1.4 The Court also adopted the earlier analysis that coal is leviable to Compensation Cess, whereas the finished goods exported by the assessee are not liable to such Cess, and that exports constitute zero-rated supplies on which IGST was paid (and refunded) but no Compensation Cess was payable at the time of export.

Interpretation and reasoning

2.2 Following its earlier decisions, the Court accepted the position that:

2.2.1 The assessee purchased coal on payment of Compensation Cess, used such coal in the manufacture of goods which were exported as zero-rated supplies; therefore, the assessee was entitled to input tax credit of the Cess paid on coal.

2.2.2 Though IGST was paid at the time of export and was refunded, no Compensation Cess was chargeable or paid on the exported finished goods, as they were exempt from levy of Compensation Cess.

2.2.3 By virtue of section 11(2) of the Cess Act read with section 16 of the IGST Act and section 54(3) of the CGST Act, refund of unutilised input tax credit of Cess on inputs used for zero-rated supplies is permissible, notwithstanding that the final products are not liable to Compensation Cess.

2.2.4 The proviso to section 11(2) of the Cess Act only restricts utilisation of Cess credit for payment of Cess on outward supplies; where no Cess is leviable on exports, such Cess credit cannot be utilised, and thus remains unutilised, thereby attracting the refund mechanism under section 54(3) of the CGST Act read with section 16 of the IGST Act and section 11(2) of the Cess Act.

2.2.5 The fact that the exports were made on payment of IGST does not, in the circumstances where no Cess is leviable on the output, bar refund of unutilised input tax credit of Cess paid on coal used in the manufacture of such exported goods.

Conclusions

2.3 The Court concluded that the petitioner is entitled to refund of unutilised input tax credit of Compensation Cess paid on coal used in manufacture of goods exported as zero-rated supplies, even though IGST was paid on export and no Compensation Cess was payable on the exported goods.

2.4 The Court directed that refund of the Cess amount claimed on unutilised tax credit be processed and sanctioned for all relevant periods covered by the petitions.

Issue 3: Validity of reliance on Circular No. 45/19/2018-GST and Circular No. 125/44/2019-GST to deny refund of Cess

Legal framework (as discussed in the judgment)

3.1 The Court, through incorporation of the reasoning in the earlier decision, considered:

3.1.1 Para 5 of Circular No. 45/19/2018-GST, which clarifies eligibility of refund of unutilised input tax credit of Compensation Cess paid on inputs (e.g. coal) where the final zero-rated product (e.g. aluminium) is not leviable to Compensation Cess, and states that:

- refund of unutilised credit including Compensation Cess is available when zero-rated supply is made under bond/LUT without payment of IGST;
- when zero-rated supply is made on payment of IGST, credit of Compensation Cess cannot be utilised for payment of IGST due to the proviso to section 11(2) of the Cess Act.

3.1.2 Para 42 of Circular No. 125/44/2019-GST, reiterating that input tax credit of Compensation Cess may be availed for making zero-rated supplies and refund of unutilised ITC, including Compensation Cess, is available where zero-rated final product is not leviable to Compensation Cess, with a similar statement on non-utilisation of Cess credit for payment of IGST.

Interpretation and reasoning

3.2 The Court, adopting its prior interpretation, held that:

3.2.1 The departmental authorities misinterpreted the above circulars by reading them to completely bar refund of unutilised Compensation Cess where zero-rated supplies were made on payment of IGST.

3.2.2 The circulars only clarify that Cess credit cannot be utilised for payment of IGST in view of the proviso to section 11(2) of the Cess Act; they do not negate the statutory entitlement to refund of unutilised input tax credit of Cess under section 54(3) of the CGST Act, section 16 of the IGST Act and section 11(2) of the Cess Act.

3.2.3 When exports are zero-rated supplies on which no Compensation Cess is leviable and hence no Cess is paid on the outward supply, the Cess credit on inputs remains unutilised. In such a situation, the statutory provisions, as applied mutatis mutandis, allow refund of such unutilised Cess credit, and the circulars cannot be interpreted to deny a refund that is otherwise permissible under the Acts.

Conclusions

3.3 The Court held that rejection of the petitioner's refund claims on the basis of Circular No. 45/19/2018-GST and Circular No. 125/44/2019-GST was unsustainable, as those circulars had been misinterpreted by the authorities.

3.4 The impugned refund rejection orders and appellate orders founded on such misinterpretation of the circulars were quashed and set aside.

Issue 4: Effect of prior binding decisions and status of the issue as res integra

Interpretation and reasoning

4.1 The Court noted that:

4.1.1 Learned counsel for the petitioner relied on the earlier decisions holding that refund of unutilised Compensation Cess paid on coal used in manufacture of exported goods is admissible in similar factual situations.

4.1.2 Counsel for the respondents expressly conceded that, in view of those earlier decisions, the issue was no longer res integra and appropriate orders may be passed.

4.1.3 The Court referred to and followed its prior reasoning and directions, including the specific holding that the respondents had rejected refund claims "in a wrong manner by misinterpreting" the circulars, and that petitioners in such cases "can claim" refund of Compensation Cess on coal used for manufacturing goods exported as zero-rated supplies.

4.1.4 The Court also recorded that the factual matrix in the present petitions was "absolutely identical" and the law "squarely applicable" to the present case.

Conclusions

4.2 The Court treated the controversy as concluded by its earlier judgments and applied the same legal position to the present petitions.

4.3 All petitions were allowed; the respondents were directed to process the refund applications and sanction the refund of the Compensation Cess amount claimed on unutilised input tax credit, and all impugned orders were quashed and set aside, with no order as to costs.

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