Union of India Vs Patson Papers Private Limited (Supreme Court of India)
The dispute concerned the entitlement of exporters to claim a refund of unutilised Input Tax Credit (ITC) of Compensation Cess paid on inputs, where exports were made on payment of Integrated GST (IGST) and the final exported goods themselves were not subject to Compensation Cess.
Before the Gujarat High Court, multiple writ petitions challenged Circular No. 45/19/2018-GST dated 30 May 2018 and Circular No. 125/44/2019-GST dated 18 November 2019, issued under Section 168 of the Central Goods and Services Tax Act, 2017. These circulars were relied upon by tax authorities to deny or withdraw refunds of unutilised ITC of Compensation Cess when exports were made on payment of IGST.
The petitioners were manufacturers who purchased coal as an input for manufacturing goods meant for export. Coal attracted Compensation Cess, which was paid at the time of purchase and availed as ITC. The finished goods, however, were not leviable to Compensation Cess. The petitioners exported such goods on payment of IGST under Section 16 of the IGST Act, claimed refund of the IGST paid, and also sought refund of the unutilised ITC of Compensation Cess attributable to the exported goods.
Initially, refunds of Compensation Cess were sanctioned in some cases. Subsequently, show cause notices were issued proposing rejection or recovery of such refunds on the basis that refund of unutilised ITC of Compensation Cess was permissible only where exports were made without payment of tax (under bond or LUT), and not where IGST was paid on exports. Conflicting appellate orders further added to the dispute.
The petitioners contended that Section 54(3) of the CGST Act, read with Section 16 of the IGST Act and Section 11(2) of the GST (Compensation to States) Act, 2017, entitled them to refund of unutilised ITC of Compensation Cess. They argued that since Compensation Cess was not payable on the exported goods, the cess paid on inputs necessarily remained unutilised, and denial of refund would defeat the concept of zero-rated supply.
The respondents argued that Section 54(3) permits refund of unutilised ITC only in limited situations, namely zero-rated supplies made without payment of tax or inverted duty structure. Since the petitioners had opted to export on payment of IGST and had already obtained refund of IGST, refund of ITC of Compensation Cess was not admissible. Reliance was placed on the proviso to Section 11(2) of the Cess Act, which restricts utilisation of cess credit only towards payment of cess on outward supplies, and on the clarifications in the impugned circulars.
The Gujarat High Court examined the statutory provisions and the circulars in detail. It noted the undisputed facts that the petitioners had paid Compensation Cess on coal, availed ITC, used the coal in manufacture of exported goods, paid IGST on exports, and did not pay any Compensation Cess on exports because the final products were not leviable to cess.
On a conjoint reading of Section 54(3) of the CGST Act, Section 16 of the IGST Act, and Section 11(2) of the Cess Act, the Court held that the petitioners were entitled to refund of unutilised ITC of Compensation Cess. The Court observed that the circulars had been misinterpreted by the authorities. While the proviso to Section 11(2) restricts utilisation of cess credit for payment of other taxes, it does not bar refund of unutilised ITC where cess is not payable on outward supplies. Since Compensation Cess was not payable on the exported goods, the question of utilisation of cess credit did not arise, and the credit necessarily remained unutilised.
The Court concluded that denial of refund in such circumstances was contrary to the statutory scheme governing zero-rated supplies. Accordingly, the High Court allowed the petitions, directed sanction of refunds of Compensation Cess, and restored refund orders that had been set aside.
The Union of India challenged this decision before the Supreme Court. The Supreme Court condoned the delay but declined to exercise jurisdiction under Article 136 of the Constitution, noting the finding recorded by the High Court. The Special Leave Petition was dismissed, with the question of law, if any, left open.
Read High Court Judgment: Refund of Compensation Cess in case of exports on payment of IGST Permissible
