Patson Papers Private Limited Vs Union Of India & Ors

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. Heard learned advocate Mr. Hardik V. Vora for the petitioner in Special Civil Application No.26250 of 2022 and learned advocate Mr. Uchit Sheth for the petitioners in Special Civil Application No.20341 of 2022 and Special Civil Application No.19279 of 2023 and learned advocate Mr. Maunil G. Yajnik for the respondents.

2. All these three petitions pertain to the challenge to the Circular No.125/44/2019-GST-dated 18/11/2019 as well as para-5 of the Circular No.45/19/2018-GST-dated 30/05/2018 issued under Section 168 of the Central Goods and Services Tax Act, 2017 (GST Act) to the extent that they clarify that the refund of fund being utilized Input Tax Credit qua Cess will not be admissible if exports are made in payment of IGST.

3. It was therefore prayed by the petitioners that the petitioners are entitled to the Input Tax Credit on the Cess paid by the petitioner on inputs which are utilized for the purpose of goods manufactured for export.

4. As common issues are arising in all these petitions the same were heard analogously and are being disposed of by this common order.

5. For the sake of convenience, Special Civil Application No.20341 of 2022 is treated as a lead matter.

6. The petitioner is a public limited company engaged in the business of manufacture and sale of dyes, dye intermediates, chemicals etc. The petitioner purchased coal for use in its manufacturing process. The petitioner also paid Cess under the Cess Act in addition to the GST for purchase of the coal. It is the case of the petitioner that while coal purchased by the petitioner is liable to Cess, however, the finished goods manufactured by the petitioners are not liable to GST compensation Cess under the Cess Act. Therefore, when the finished goods manufactured by the petitioner are exported outside the country on payment of IGST as permitted by Section 16 of the IGST Act, the petitioner is entitled to the refund of such IGST, however, the petitioner is not required to pay Cess at the time of export of the goods and as the exports being zero rated supply and unutilized input tax credit being fully attributable to exports of the petitioner, the petitioner claimed refund of unutilized input tax credit comprising of the GST compensation Cess which was initially granted to the petitioner by the respondent-authorities.

7. However, subsequently, the show cause notices were issued proposing to reject the refund applications on the basis of the Circular No.125/44/2019 dated 18/11/2019 read with para-5 of Circular No.45/19/2018 dated 30/05/2018 wherein it is stated that the refund of unutilized Input Tax Credit qua Cess will be available only if the export is without payment of tax and as the petitioner has paid IGST on the goods which were exported, the refund of Cess as well as the relatable to the inputs utilized for production of the goods which are exported was held to be inadmissible. The petitioner in the reply clarified that the petitioner has not paid any GST compensation Cess on the goods exported and as such goods being zero rated supply, the petitioner is entitled to the refund of Cess as the provisions of the Cess Act shall apply mutatis mutandis as the same would be applicable in case of the GST. Respondent no.3 also issued notices proposing to withdraw the refund of Cess already granted to the petitioner.

8. Being aggrieved, the petitioner has challenged such show cause notice proposing to recover the refund already sanctioned as well as rejecting the refund applications filed by the petitioners for refund of the Cess paid while purchasing the coal which was utilized for manufacture of the goods which are exported by the petitioner.

9. In Special Civil Application No.19279 of 2023, the respondent authorities preferred appeals challenging the order of sanction of refund passed by the adjudicating authority. The appellate authority allowed the appeal filed by the respondents and refund granted to the petitioner has been ordered to be withdrawn on the basis of the aforesaid circulars. It is also pertinent to note that in case of the petitioner of Special Civil Application No.26250 of 2022, the appellate authority has held that the refund of fund being utilized Input Tax Credit attributable to Cess is admissible even though the goods are exported on payment of IGST.

10. Therefore, there are two contradictory orders so far as the petitioner of Special Civil Application No.26250 of 2022 is concerned as in the petition, the petitioner has challenged the show cause notice as well as the order dated 13/10/2022 rejecting the refund application preferred by the petitioner. However, the appellate authority while hearing the appeal against the rejection order dated 14/06/2023 passed in case of the petitioner of Special Civil Application No.26250 of 2022, allowed the appeal by setting aside the order rejecting the refund application by order dated 30/08/2023.

11. Learned advocate for the respective parties submitted that on perusal of the provisions of Section 54(3) of the GST Act, the petitioners are entitled to refund of the payment of tax of unutilized Input Tax Credit if the goods are exported. It was submitted that the petitioners have already received refund of the IGST paid on the goods exported from the Custom Department and the refund claims made by the petitioners pertains to the refund of the Cess only. It was submitted that in view of the fact that the refund applications filed by the petitioners are based upon the interpretation of the provisions of the GST Act, the challenge to the aforesaid circulars is not pressed in these petitions in view of the subsequent appellate order passed by the appellate authority accepting the proposition of the petitioners that the petitioners are entitled to the refund of the Cess amount being the unutilized Input Tax Credit relatable to the zero rated supply. It was therefore submitted that the reliance placed by the respondents on aforesaid circulars are misplaced in the facts of the case as the Circular No.45/18 dated 30/05/2018 refers to the proviso to Section 11(2) of the Cess Act which allows the utilization of the Input Credit of Cess only for the payment of Cess on the outward supplies. It was submitted that however Section 11(2) is applicable only when the goods are not zero rated supply but in the facts of the case when the petitioners have exported the goods, provision of Section 54(3) would be applicable read with Section 16 of the IGST Act which define zero rates supply and accordingly, the petitioners would be entitled to claim the refund of compensation Cess as admittedly the petitioners have not paid any Cess along with IGST when the goods were exported.

12. It was further submitted that the petitioners are entitled to the refund of the Cess as per the provision of Section 9(2) of the Cess Act read with Section 11(2) of the GST (Compensation to States) Act, 2017 which provides that the provision of IGST Act and the Rules made thereunder including those relating to assessment Input Tax Credit etc. shall mutatis mutandis apply in relation to the levy and collection of the Cess leviable under Section 8 of the Act on the inter-state supply of goods and services. It was submitted that admittedly the goods of the petitioners are exported and therefore provision of Section 11(2) read with Section 16 of the IGST Act has to be applied as per the provision of Section 54(3) of the GST Act and as such, the petitioner would be entitled to refund of the Cess paid on purchase of the coal which was utilized for manufacture of the goods which are exported by the petitioner.

13. It was therefore submitted that the reliance placed by respondent on para-42 of the Circular No.125/44/2019 dated 18/11/2019, for denial of refund of amount of Cess paid by the petitioner for purchase of the coal utilized for manufacture of the goods which are exported is also misplaced as the clarifications issued therein reiterates the applicability of Section 11(2) of the Cess Act viz-a-viz the refund of unutilized ITC under Section 54(3) on payment of IGST and does not refer to the amount of Cess which was not paid by the petitioner while exporting the goods and therefore such amount of Cess has remained in form of unutilized Input Tax Credit. It was therefore submitted that the respondent authorities may be directed to issue the refund of the amount of Cess which has remained unutilized Input Tax Credit upon the products which was utilized for the manufacture of the goods which are exported.

14. Per contra, learned advocate Mr. Maulin Yajnik for the respondents submitted that admittedly the petitioners have paid the IGST on the goods exported which is duly refunded by the Custom Authorities as per the provision of Section 54(3) of the GST Act and therefore the respondent authorities have rightly relied upon para-42 of the Circular No.125/44/2019 dated 18/11/2019 by interpreting the same to the effect that a registered person can make zero rated supply on payment of integrated tax but cannot utilize the credit of the compensation Cess paid on coal for payment of integrated tax as input tax credit of Cess can be utilized only for the payment of Cess on the outward supplies. It was therefore submitted that in such cases of zero rated supply on payment of integrated tax as per para-42 of the Circular No.125/44/2019 dated 18/11/2019, refund of compensation Cess cannot be claimed because the said circular issued by the CBIC which is binding upon the respondent denies the refund of unutilized credit of compensation Cess in respect of consignment exported on payment of IGST.

15. In support of his submissions, reliance was placed on following averments made in the affidavit-in-reply filed by the respondent in Special Civil Application No.26250 of 2022.

“4.1. The contention of the Petitioner is not clear as what is relation of ‘exempt supply’ or ‘nil rated supply’ in this case. Moreover, they are factually wrong to mention that Kraft Paper is ‘exempt supply’ for levy of cess. In this. regard, it is submitted that the definition of exempt supply as per section 2(47) of the CGST Act, 2017 includes exemption from tax under section 11 of CGST Act, or under section 6 of the Integrated Goods and Services Tax Act but does not include exemption from cess. Thus, cess is not at par with the tax as far as exempt supply is concerned.

4.2. Provisions of sub-section (3) of section 16 of the IGST Act states that a registered person making zero rated supply shall be eligible to claim refund of unutilised input tax credit on supply of goods or services or both, without payment of integrated tax, under bond or Letter of Undertaking, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder, subject to such conditions, safeguards and procedure as may be prescribed; In this case, the Petitioner has opted to export Kraft Paper with payment of IGST and got the refund of IGST. As there is no cess levied on Kraft Paper, question of refund of cess does not arise. However, refund of unutilised ITC of cess is available when zero rated supplies are made without payment of IGST. It does not mean that refund of unutilised ITC of cess is available when zero rated supplies are made without payment cess. The Petitioner should appreciate that the refund has to be claimed as per statutory provisions laid out by the law and not by twisted interpretation of facts and law for undue benefits.

…..

4.4. Refund in GST is governed by section 54 of the CGST Act, 2017. Sub-section (3) is of section 54 is reproduced below:

(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than-

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council: Here, the words used are ‘zero rated supplies made without payment of tax’ and not ‘zero rated supplies’. Moreover, third proviso to sub-section (3) of section 54 categorically stipulates that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies. From plain reading of the above, it is clear that no refund of unutilised input tax credit shall be allowed in cases other than zero rated supplied made without payment of tax and inverted duty structure. The intention of law is to allow the refund of unutilised ITC in the said situations only and not in any other cases. The case of the Petitioner does not fall under any of these two criterions. Moreover, they are factually wrong to mention that Kraft Paper is exempt supply as definition of exempt supply as per section 2(47) of the CGST Act, 2017 includes exemption from tax under section 11 of CGST Act, or under section 6 of the Integrated Goods and Services Tax Act but does not include exemption from cess. Thus, Kraft Paper is not an exempt supply. The cess is not at par with the tax to determine whether a supply is taxable or not. Cess cannot be separately considered for criteria for exemption. Even definition of “taxable supply” given under section 2(108) of CGST Act makes it clear that taxable supply is a supply of goods which is leviable to tax under CGST Act, so it is apparent that the cess is not at par with the tax to determine taxability.”

16. It was submitted that as the petitioner has already claimed the refund of IGST paid on export of goods, the refund of ITC of Cess paid on inputs is available to the petitioner in case where there is only zero rated supply without payment of tax, but in the facts of the case when the petitioner has paid IGST, the petitioners are not entitled to refund of Input Tax Credit of Cess as the case of the petitioners does not fall under the criteria stipulated under Section 54(3) of the GST Act.

17. It was therefore submitted that the respondent authorities have rightly interpreted both the circulars being para-5 of Circular No.45/19/2018 dated 30/05/2018 and para-42 of Circular No.125/44/2019 dated 18/11/2019 by denying the refund claimed by the petitioner pertaining to the input tax credit of the Cess paid by the petitioner on purchase of coal utilized for the purpose of manufacture of the goods which are exported.

18. Having heard the learned advocates appearing for both the parties and considering the facts and material available on the record, following undisputed facts emerge.

(1) The petitioners have purchased the coal on payment of Cess and as such the petitioner is entitled to the Input Tax Credit on such Cess amount. The petitioner has utilized the coal purchased for manufacture of the goods which are exported.

(2) The petitioner paid the IGST at the time of export of the goods which was refunded by the Custom Authorities as per the provision of Section 54(3) read with Section 16 of the IGST Act being a zero rated supply.

(3) The petitioner therefore filed the refund claim application to claim the Input Tax Credit of the Cess amount which was paid by the petitioner while purchasing the coal and as such coal was utilized for manufacture of exported goods.

19. In view of the above, it would be germane to refer to the relevant provisions of the CGST Act and the IGST Act as well as the Cess Act.

19.1. Section 54(3) of the CGST Act reads as under: “Section 54 – Refund of tax-

(1) ….  

(2) .. 

(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

PROVIDED that no refund of unutilised input tax credit shall be allowed in cases other than-

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

PROVIDED also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.”

19.2. Section 16 of the IGST Act reads as under: “Section 16. Zero rated supply.-

(1) “zero rated supply” means any of the following supplies of goods or services or both, namely:-

(a) export of goods or services or both; or

(b) supply of goods or services or both [for authorised operations] to a Special Economic Zone developer or a Special Economic Zone unit.

(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.

[(3) A registered person making zero rated supply shall be eligible to claim refund of unutilised input tax credit on supply of goods or services or both, without payment of integrated tax, under bond or Letter of Undertaking, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder, subject to such conditions, safeguards and procedure as may be prescribed:

PROVIDED that the registered person making zero rated supply of goods shall, in case of non-realisation of sale proceeds, be liable to deposit the refund so received under this sub-section along with the applicable interest under section 50 of the Central Goods and Services Tax Act within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 (42 of 1999.) for receipt of foreign exchange remittances, in such manner as may be prescribed.

(4) The Government may, on the recommendation of the Council, and subject to such conditions, safeguards and procedures, by notification, specify-

(i) a class of persons who may make zero rated supply on payment of integrated tax and claim refund of the tax so paid [in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder];

(ii) a class of goods or services [or both, on zero rated supply of which, the supplier may pay integrated tax and claim the refund of tax so paid, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder].]

[(5) Notwithstanding anything contained in sub­sections (3) and (4), no refund of unutilised input tax credit on account of zero rated supply of goods or of integrated tax paid on account of zero rated supply of goods shall be allowed where such zero rated supply of goods are subjected to export duty.]

19.3. Section 11(2) of the Cess Act reads as under:

“Section 11 Other provisions relating to cess

(1) ………

(2) The provisions of the Integrated Goods and Services Tax Act, and the rules made thereunder, including those relating to assessment, input tax credit, non-levy, short-levy, interest, appeals, offences and penalties, shall, mutatis mutandis, apply in relation to the levy and collection of the cess leviable under section 8 on the inter-State supply of goods and services, as they apply in relation to the levy and collection of integrated tax on such inter-State supplies under the said Act or the rules made thereunder:

PROVIDED that the input tax credit in respect of cess on supply of goods and services leviable under section 8, shall be utilised only towards payment of said cess on supply of goods and services leviable under the said section.”

20. The relevant paragraphs of the circulars relied upon by the respondents also reads as under:

20.1. Para-5 of Circular No.45/19/2018 dated 30/05/2018 reads as under:

“5. Refund of unutilized input tax credit of compensation cess availed on inputs in cases where the final product is not subject to the levy of compensation cess:

5.1 Doubts have been raised whether an exporter is eligible to claim refund of unutilized input tax credit of compensation cess paid on inputs, where the final product is not leviable to compensation cess. For instance, cess is levied on coal, which is an input for the manufacture of aluminum products, whereas cess is not levied on aluminum products.

5.2 In this regard, section 16(2) of the Integrated Goods and Services Tax Act, 2017 (IGST Act for short) states that, subject to the provisions of section 17(5) of the CGST Act, credit of input tax may be availed for making zero rated supplies. Further, as per section 8 of the Goods and Services Tax (Compensation to States) Act, 2017, (hereafter referred to as the Cess Act), all goods and services specified in the Schedule to the Cess Act are leviable to cess under the Cess Act; and vide section 11 (2) of the Cess Act, section 16 of the IGST Act is mutatis mutandis made applicable to inter-State supplies of all such goods and services. Thus, it implies that all supplies of such goods and services are zero rated under the Cess Act. Moreover, as section 17(5) of the CGST Act does not restrict the availment of input tax credit of compensation cess on coal, it is clarified that a registered person making zero rated supply of aluminum products under bond or LUT may claim refund of unutilized credit including that of compensation cess paid on coal.

5.3 Such registered persons may also make zero-rated supply of aluminum products on payment of integrated tax but they cannot utilize the credit of the compensation cess paid on coal for payment of integrated tax in view of the proviso to section 11(2) of the Cess Act, which allows the utilization of the input tax credit of cess, only for the payment of cess on the outward supplies. Accordingly, they cannot claim refund of compensation cess in case of zero-rated supply on payment of integrated tax.”

20.2. Para-42 of Circular No.125/44/2019 dated 18/11/2019 reads as under:

“Guidelines for claims of refund of Compensation Cess

42. Doubts have been raised whether a registered person is eligible to claim refund of unutilized input tax credit of compensation cess paid on inputs, where the zero-rated final product is not leviable to compensation cess. For instance, cess is levied on coal, which is an input for the manufacture of aluminium products, whereas cess is not levied on aluminium products. In this context, attention is invited to section 16(2) of the Integrated Goods and Services Tax Act, 2017 (hereafter referred to as the “IGST Act”) which states that, subject to the provisions of section 17(5) of the CGST Act, credit of input tax may be availed for making zero rated supplies. Further, section 16 of the IGST Act has been mutatis mutandis made applicable to inter-State supplies under the Cess Act vide section 11 (2) of the Cess Act. Thus, it implies that input tax credit of Compensation Cess may be availed for making zero-rated supplies. Further, by virtue of section 54(3) of the CGST Act, the refund of such unutilized ITC shall be available. Accordingly, it is clarified that a registered person making zero rated supply of aluminium products under bond or LUT may claim refund of unutilized credit including that of compensation cess paid on coal. Such registered persons may also make zero-rated supply of aluminium products on payment of Integrated tax but they cannot utilize the credit of the compensation cess paid on coal for payment of Integrated tax in view of the proviso to section 11(2) of the Cess Act, which allows the utilization of the input tax credit of cess, only for the payment of cess on the outward supplies.”

21. On a conjoint reading of above provisions of the GST Act, IGST ACT and the GST (Compensation to State) Act, 2017 (for short ‘the Cess Act’) as well as para-5 of the Circular No.45/19/2018 and para-42 of Circular No.125/44/2019, the respondent authority appears to have misinterpreted the circulars while rejecting the refund claim applications filed by the petitioner for refund of input tax credit of cess paid by the petitioner for purchase of coal utilized for manufacture of the goods which are exported. As per the provision of Section 54(3) of the GST Act read with Section 16(3) of the IGST Act and Section 11(2) of the Cess Act, the petitioner can claim the refund of unutilized input tax credit for purchase of coal used for manufacture of goods exported being zero rated supply. The petitioner has paid 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 compensation cess. Therefore, while applying the above provisions, admittedly the compensation cess was not paid at the time of export of goods by the petitioner, the petitioner, therefore, is entitled to refund of input tax credit of the compensation cess paid on purchase of the coal utilized for the purpose of manufacture of the goods which are exported as zero rated supply on payment of IGST by the petitioner. Therefore, reliance placed by the respondent on para-42 of the Circular No.125/44/2019 dated 18/11/2019 is misplaced because the said circular was issued clarifying the eligibility to claim refund of unutilized input tax credit of compensation cess paid on input, where the zero rated final product is not leviable with compensation cess. However, the circular refers to the provision of Section 16(2) of the IGST Act that the registered person making zero rated supply of aluminum products under bond or LUT may claim refund of unutilized credit including that of compensation cess paid on coal. The circular further clarifies that when the registered person make a zero rated supply of product on payment of integrated tax, they cannot utilize the credit of the compensation cess paid on coal for payment of Integrated tax in view of the proviso to Section 11(2) of the Cess Act, as the said proviso allows the utilization of the input tax credit of cess, only for the payment of cess on the outward supplies. However, when the petitioner has paid the IGST under Section 16(3) of the IGST Act on the zero rated supply and refund is claimed by the payment of such IGST, the petitioner admittedly would not be able to utilize input tax credit of cess as cess is not payable on the zero rated supply. Therefore, proviso to Section 11(2) of the Act would not be applicable in the facts of the case and the petitioner would be entitled to refund of the unutilized input tax credit on cess paid on purchase of coal utilized for the purpose of manufacture of goods which are exported.

22. In view of the foregoing reasons, the petitions succeed and accordingly the same are allowed. The respondents are directed to process the refund applications of the petitioners to sanction the refund of the Cess amount claimed by the petitioners as unutilized Input Tax credit.

23. So far as the Special Civil Application No.19279 of 2023 is concerned, order dated 28/07/2023 passed by the Officer of the Commissioner (Appeals) is hereby quashed and set aide and order sanctioning the refund is restored.

24. Rule is made absolute to the aforesaid extent. No order as to cost.