Union of India & Ors. Vs Messrs Meghmani Organochem Limited & Anr. (Supreme Court of India)
The dispute concerns whether a Special Economic Zone (SEZ) unit is entitled to claim a refund of unutilised Input Tax Credit (ITC) under Rule 89 of the CGST Rules for exports made without payment of tax under a Letter of Undertaking (LUT). The Gujarat High Court allowed the refund and quashed the order of the Appellate Authority, and the Supreme Court later declined to interfere while leaving the legal question open.
Read HC Judgment: SEZ Unit Entitled to Refund of Accumulated ITC: Gujarat HC
The petitioner in the High Court operated an SEZ unit engaged in the manufacture of chemical products at Dahej SEZ. It was duly registered under the GST law and complied with statutory requirements such as maintaining electronic ledgers and filing monthly returns. As an SEZ unit, its outward supplies were made without payment of GST, causing accumulation of ITC from inputs and input services procured on payment of tax. The petitioner filed a refund claim of ₹65,05,135 for May 2021 to March 2022 under Rule 89(4), classifying it as refund of accumulated ITC on exports without payment of tax.
The Assistant Commissioner initially issued a notice proposing to reduce the refund amount on the ground that certain credits were inadmissible but, after considering the reply and granting a hearing, sanctioned the entire refund. The amount was credited to the petitioner.
Subsequently, the Commissioner directed filing of an appeal against the refund order, arguing that an SEZ unit, being a recipient of supplies, could not claim refund under Rule 89 and that only the supplier of goods or services to an SEZ could apply for such refund. Acting on this direction, an appeal was filed, which the petitioner opposed with detailed submissions.
The Appellate Authority accepted the department’s position and, by order dated 30 November 2023, set aside the refund sanction. The petitioner challenged this decision before the Gujarat High Court, seeking prohibition against further action and quashing of the appellate order.
Before the High Court, the petitioner relied heavily on the decision in Britannia Industries Limited v. Union of India (2020), in which the same High Court had held that an SEZ unit is entitled to claim refund of unutilised ITC under Rule 89 when goods are exported without tax payment under LUT. It was argued that although an SLP against Britannia Industries was pending before the Supreme Court, the absence of any stay meant the legal position continued to hold the field and was binding on lower authorities. The petitioner submitted that the Appellate Authority had erred in disregarding this precedent and that the department could not deny refund simply because the applicant was an SEZ unit.
The Revenue did not dispute that Britannia Industries covered the issue and that the SLP was pending without stay. The High Court examined the material and concluded that the controversy was no longer res integra in view of the binding coordinate bench ruling. The Court extracted relevant portions from Britannia Industries, where it was held that Rule 89 must be applied in a manner consistent with the role of Input Service Distributors (ISD). Since ISD credits are distributed across units, the supplier alone cannot claim refund for ITC pertaining to services allocated to the SEZ unit. Therefore, an SEZ unit receiving distributed ITC was entitled to lodge a refund application. The earlier ruling also referred to service-tax era provisions confirming the principle of pro-rata distribution of credit. Applying this reasoning, the High Court held that the Appellate Authority had incorrectly set aside the refund and that the ratio in Britannia Industries was directly applicable.
Since the facts of the present case were materially similar and the earlier decision remained operative, the High Court quashed the appellate order and restored the refund in favour of the petitioner.
In parallel, the Supreme Court considered the Revenue’s challenge against the High Court’s decision. The Government argued that Britannia Industries had been challenged but dismissed previously due to low tax effect and contended that only the supplier, not the SEZ unit, could claim refund of unutilised ITC under Rule 89. The Supreme Court, however, noted the circumstances of the case and the refund amount involved and declined to interfere with the High Court’s order. Crucially, it left the underlying question of law open for future consideration. The special leave petition was dismissed, and pending applications were disposed of.
Thus, the combined effect of both judgments is that the refund remains undisturbed in this particular case, while the broader legal issue—whether an SEZ unit independently qualifies to claim refund of accumulated ITC under Rule 89—remains unresolved at the Supreme Court level. The High Court’s interpretation prevails for now due to absence of any stay, but the Supreme Court has not made a conclusive determination on the legal principle.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
