Supreme Court Clarifies GST Summons vs Proceedings
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Gujarat HC: Refund of Compensation Cess ITC Allowed on Coal Used for Exports
1. Issue Involved
- The central issue before the Gujarat High Court was whether a taxpayer is entitled to claim a refund of unutilized input tax credit (ITC) of compensation cess paid on coal used in manufacturing goods that are exported (zero-rated supplies), when such exports are made on payment of IGST and the final goods themselves are exempt from compensation cess.
- The petitioner also challenged the validity of 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, alleging they were contrary to Section 11 of the Goods and Services Tax (Compensation to States) Act, 2017 and violative of Article 14 of the Constitution of India.
Facts of the Case
- The petitioner, Atul Limited, is a public limited company engaged in the manufacturing and sale of various chemical products, which are supplied to Special Economic Zone (SEZ) units as well as exported outside India. For manufacturing these products, the petitioner used coal to generate electricity through a captive power plant.
- The purchase of coal attracted compensation cess, which the petitioner paid and availed as input tax credit (ITC).
- Since the finished goods manufactured by the petitioner were zero-rated supplies and not liable to compensation cess, the cess ITC remained unutilized. For the financial year 2019-20, the petitioner claimed a refund of accumulated cess credit amounting to ₹3,39,02,063/- under Section 11 of the Cess Act, read with Section 16 of the IGST Act and Section 54 of the CGST Act.
- The department, however, issued a show cause notice proposing to reject the refund, citing that, as per the circulars, refund of compensation cess credit is admissible only in cases where exports are made without payment of IGST (under LUT/Bond), and not when exports are made with payment of IGST.
- The petitioner’s refund claim and subsequent appeal were rejected, leading to the filing of these writ petitions challenging both the orders and the restrictive interpretation of the circulars.
3. Observations of the Court
- The Court observed that Sections 9 and 11 of the Cess Act provide for application of provisions of the GST laws, including assessment, ITC, and refunds, mutatis mutandis to compensation cess. Thus, the refund mechanism applicable to GST also applies to compensation cess.
- It was noted that Section 16 of the CGST Act allows entitlement to ITC on all inward supplies used in the course or furtherance of business, and Section 54(3) permits refund of unutilized ITC in cases of zero-rated supplies. Similarly, Section 16 of the IGST Act allows refund of ITC on zero-rated supplies, and Section 11(2) of the Cess Act incorporates these provisions.
- The Court found that the circulars misinterpreted the statutory provisions by restricting refunds of compensation cess ITC to cases of zero-rated supplies without payment of IGST. Such a restriction was not found in the statute and was therefore arbitrary. The Court emphasised that the proviso to Section 11(2) of the Cess Act, which restricts utilisation of compensation cess credit only for payment of cess, does not bar refunds of such unutilised credit in export scenarios where cess is not levied on final goods.
- The Court relied extensively on its earlier judgment in Patson Papers Pvt. Ltd. vs. Union of India (SCA No. 26250 of 2022), which dealt with an identical factual situation and had held in favour of granting a refund of compensation cess credit.
4. Judgment of the Court
- The Gujarat High Court held that the petitioner is entitled to a refund of unutilized compensation cess ITC on coal used for manufacturing goods exported as zero-rated supplies, even though such exports were made on payment of IGST.
- The impugned orders rejecting refund were quashed and set aside, and the respondents were directed to process and sanction the refund claims of the petitioner in accordance with law. The petitions were allowed following the principle laid down in Patson Papers Pvt. Ltd.
5. Case Law Relied Upon
The Court relied primarily on the precedent set in:
- Patson Papers Pvt. Ltd. vs. Union of India, Special Civil Application No. 26250 of 2022 (Gujarat High Court), where it was held that refund of compensation cess ITC is permissible for zero-rated supplies irrespective of whether exports are made with or without payment of IGST, as statutory provisions prevail over circular restrictions.
6. Key Learnings from the Judgment
This case reinforces several key principles:
- Statutory provisions prevail over circulars – Circulars cannot impose conditions or restrictions not envisaged in the law.
- Refund eligibility of compensation cess ITC – Refund is permissible for zero-rated supplies even when exports are made on payment of IGST.
- Mutatis mutandis application of GST law – Provisions of the CGST and IGST Acts relating to ITC and refund extend to compensation cess under the Cess Act.
- The proviso to Section 11(2) of the Cess Act only restricts utilisation of cess credit for payment of cess; it does not prohibit refund of such credit.
- Judicial precedents like Patson Papers are binding in similar factual circumstances, ensuring uniformity in decisions.
7. Conclusion
The Gujarat High Court conclusively held that exporters are entitled to a refund of unutilized compensation cess ITC on inputs like coal used in the manufacture of goods exported as zero-rated supplies, regardless of whether exports are made with payment of IGST.
The restrictive interpretation placed by the department based on circulars was declared arbitrary and contrary to statutory provisions. This ruling provides significant relief to exporters and underscores the principle that export promotion benefits under GST must be interpreted liberally to further the objective of zero-rated supplies.
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