Atul Limited & Anr. Vs Union of India & Ors. (Gujarat High Court)

Refund of Compensation-Cess on coal used for manufacturing of goods, exported on payment of IGST but, no cess charged on exported goodsThe Gujarat High Court, in the case of Atul Limited & Anr. v. Union of India & Ors., has ruled that a company can claim a refund of unutilized compensation cess paid on coal, even when the final goods are exported with the payment of Integrated Goods and Services Tax (IGST). This decision clarifies the interpretation of GST laws and circulars regarding refunds for zero-rated supplies. The petitioner, Atul Limited, manufactures chemical products that are not subject to compensation cess but require coal for captive power generation, which is subject to the cess. The company’s refund application for the unutilized cess credit was denied by tax authorities, who cited circulars that they argued prohibited such refunds when exports were made with IGST payment. The company challenged this decision, leading to the High Court’s intervention.The court examined the relevant legal provisions, including Sections 54 of the CGST Act, 16 of the IGST Act, and 11 of the Cess Act. It was established that the petitioner’s finished goods were exempt from the compensation cess, and the cess was only levied on the coal used as an input. The court concluded that the tax authorities had misinterpreted Circulars No. 45/19/2018 and No. 125/44/2019, which address the inability to use cess credit to pay IGST, but do not prohibit a refund of cess when it remains unutilized. By referencing a similar case, Patson Papers Pvt. Ltd. v. Union of India, the court reaffirmed that the legislative intent of the GST framework allows for refunds in cases of zero-rated supplies.Based on its analysis, the Gujarat High Court held that the proviso to Section 11(2) of the Cess Act, which restricts the use of cess credit to the payment of cess only, was not applicable in this scenario since no cess was payable on the exported final goods. Therefore, the refund of the unutilized cess credit was permissible under the law. The court’s order quashed the rejection of the company’s refund claim and directed the tax authorities to process and sanction the refund. This ruling sets a precedent that aligns with the broader principle of ensuring tax neutrality for exporters by allowing them to recover the input tax credit on inputs used for zero-rated supplies.Facts:Atul Limited & Anr (“the Petitioner”) is a public limited company engaged in manufacture and sale of various chemical products, supplying them to Special Economic Zone (SEZ) units and for exports. The Petitioner is registered under the CGST and IGST Acts. To generate electricity needed for manufacturing, the Petitioner purchased coal and generated captive power, incurring compensation cess on such coal.Office of the Assistant Commissioner, Central Goods & Services Tax, Central Excise Division-VIII, Valsad (“the Respondent”) rejected the Petitioner’s refund application for compensation cess on the ground that such refund is not allowed, where exports are made with payment of IGST.The Petitioner contended that under Sections 9 and Section 11 of the Cess Act, and Sections 16 and Section 54 of the CGST and IGST Acts, refund of unutilised input tax credit of cess is permissible even when exports are made with IGST payment, as the cess was never payable on the final product.The Respondent contended that the refund of compensation cess was not admissible since the exports were made with payment of IGST, relying on Circulars No. 45/19/2018-GST dated May 30, 2018 and No. 125/44/2019-GST dated November 18, 2019.Aggrieved by the rejection order dated April 08, 2021 and the appellate order dated May 19, 2022, the Petitioner approached the Hon’ble Court by way of writ petitions under Article 226 of the Constitution, challenging the misapplication of the statutory provisions and circulars.Issue:Whether refund of unutilised compensation cess paid on inward coal supplies is permissible, where the final goods are exported on payment of IGST and are not liable to cess?Held:The Hon’ble Gujarat High Court in R/Special Civil Application No. 20038 of 2022 held as under:Our Comments:The Court has clarified that the statutory framework under Section 54(3) of the CGST Act, Section 16 of the IGST Act, and Section 11(2) of the Cess Act permits refund of unutilised input tax credit of compensation cess, even where exports are made with IGST payment, and cess is not payable on the outward supply. Para 42 of Circular No. 125/44/2019 and para 5 of Circular No. 45/19/2018 clarify that credit of compensation cess cannot be utilised for IGST payment, but do not prohibit refund where such credit remains unutilised due to exemption of output from cess.Relying on the precedent set by the court in Patson Papers Pvt. Ltd. v. Union of India[Special Civil Application No. 26250 of 2022], which is places on pari materia facts, the judgment affirms the broader legislative intent of permitting refunds in cases of zero-rated supplies and upholds the mutatis mutandis application of the GST refund framework under the Cess Act.Relevant Provisions:Section 54(3) – CGST Act, 201754. Refund of tax:“(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: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.”Section 16(3), IGST Act, 2017:“16. Zero rated 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..”Section 11(2) of the Goods & Service Tax (Compensation to States) Act, 2017“11. Other provisions relating to cess-(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 mutandıs, 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.”Circular No. 45/19/2018-GST dated May 30, 2018“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: 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…..”Circular No. 125/44/2019-GST dated November 18, 2019” 42. Guidelines for claims of refund of Compensation CessDoubts 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.…”