In a significant ruling that provides much-needed relief to
exporters and units supplying to Special Economic Zones (SEZs), the Gujarat
High Court has affirmed that businesses are entitled to a refund of
accumulated Cess credit even if their zero-rated supplies were made with
the payment of Integrated Goods and Services Tax (IGST).
This decision settles a long-standing point of contention
where tax authorities were denying refunds based on a narrow interpretation of
refund provisions, effectively penalizing compliant exporters.
The Case in Focus: Atul Limited
The landmark judgment arose from a petition filed by Atul
Limited, a company specializing in the manufacture and sale of chemical
products. The company’s business includes zero-rated supplies, such as
exports outside India and supplies made to SEZ units.
The Core Issue:
v To manufacture its products, the company
runs a captive power plant which requires Coal as a primary
input.
v On the inward supply of coal, the
petitioner paid a statutory Cess of ₹400 per ton and rightfully claimed the Input Tax
Credit (ITC) for this amount.
v The petitioner accumulated a balance of
this unutilised Cess credit, totaling ₹2,30,206, and filed a claim for its refund, as
is customary for zero-rated supplies.
The GST Department's Objection
The GST Department rejected Atul Limited’s refund claim based
on a technical interpretation of the refund provisions:
- Department's
Stance:
The tax authorities contended that the refund of accumulated Cess credit
could only be claimed for zero-rated supplies made without the
payment of IGST (i.e., under Letter of Undertaking or LUT).
- Petitioner's
Situation:
In contrast, Atul Limited had opted to make its zero-rated supplies with
the payment of IGST (by utilizing the accumulated credit first,
including Cess, and then claiming a refund of the IGST paid).
Since the company had claimed the Cess credit on supplies
made with IGST payment, the Department deemed the refund inadmissible.
The Petitioner’s Legal Argument
Before the Gujarat High Court, the petitioner challenged the
rejection, emphasizing that the denial contradicted the fundamental principles
of the GST regime:
v Section 16(1) of the GST Act: The company argued that this section
unequivocally allows the tax credit for all inward supplies that are
used for the furtherance of business, which includes the coal used for
power generation.
v Principle of Mutatis Mutandis: The provisions governing the availment
and refund of tax credits under the IGST Act, which facilitate exports, must
apply equally to the refund of Cess credits.
v Reliance on Precedent (Patson Papers): Crucially, the petitioner submitted
that this issue was already settled by the Gujarat High Court itself in the
earlier case of Patson Papers Pvt Ltd. vs. Union of India. In
that judgment, the Court had already allowed the refund for unutilised Cess
credits on coal, irrespective of whether the zero-rated supply was made with or
without the payment of IGST.
The Gujarat High Court’s Directive
The Gujarat High Court, agreeing with the petitioner's
contentions, observed that the issue was indeed covered by the ratio
established in the Patson Papers Pvt. Ltd. case.
Acknowledging that the principle of allowing refunds for
unutilised Cess credit on coal, regardless of the IGST payment mechanism, was
already settled law, the Court ruled in favour of Atul Limited.
Final Order: The Court directed the GST authorities to process the
refund of the unutilised Cess amount claimed by the company on its
zero-rated supplies.
Broader Impact on Export Businesses
This ruling is a significant win for the entire exporting
community, especially those in manufacturing sectors who use inputs subject to
Cess (like coal).
v Elimination of Discrimination: The decision effectively eliminates the
artificial distinction created by the Department regarding the refund
eligibility of Cess credit based on the mode of export (with or without IGST
payment).
v Ease of Business: It reinforces the fundamental export
principle that taxes on inputs should not be exported. By allowing the refund
of unutilised Cess, the ruling ensures that working capital is not
unnecessarily blocked, thereby enhancing the financial liquidity and competitiveness
of Indian exporters in the global market.
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