Denial by JC (ST) of refund claim by SEZ unit/developer stating ‘only supplier can claim refund of ITC/integrated tax on supply to SEZ unit/developer’
This is to apprise you of the recent judgement passed by Joint Commissioner (ST) & Appellate Authority (ST), Vijaywada in an appeal by M/s Vaachi International India Private Limited, order dated 10.02.2020
Said judgement is around SEZ unit/developer claiming input tax credit on supplies from DTA and then refund of such unutilised ITC on further zero-rated supplies
M/s Vaachi International India Private Limited (hereinafter as ‘Appellant’) is an SEZ unit in Vijaywada and has procured some supplies from vendors in DTA, who have supplied to Appellant as ‘zero rated supplies with payment of tax’ and has actually recovered the tax from them
Grounds of rejection by AA: Assessing Authority (hereinafter as ‘AA’) has rejected the claim of refund by Appellant after referring to section 54(3) of CGST Act, 2017, read with rule 89(1) and rule 89(2)(f) of CGST Rules, 2017
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 that any claim for refund relating to balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49 may be made through the return furnished for the relevant tax period in FORM GSTR-3 or FORM GSTR-4 or FORM GSTR-7 as the case may be:
Provided further that in respect of supplies to a Special Economic Zone unit or a Special Economic Zone developer, the application for refund shall be filed by the
(a) supplier of goods after such goods have been admitted in full in the Special Economic Zone for authorised operations, as endorsed by the specified officer of the Zone;
(b) supplier of services along with such evidence regarding receipt of services for authorised operations as endorsed by the specified officer of the Zone:
‘a declaration to the effect that tax has not been collected from the Special Economic Zone unit or the Special Economic Zone developer, in a case where the refund is on account of supply of goods or services or both made to a Special Economic Zone unit or a Special Economic Zone developer’
Held by AA: On comprehending the Rule 89(1), the second proviso unambiguously stipulates that in respect of supplies to SEZ units/developers, the refund “SHALL” be claimed by suppliers of goods to the SEZ unit or developer only. Further, Rule 89(2) (f) prescribes that SEZ unit/developers shall not avail input tax credit on the supplies received by them from non SEZ suppliers and refund would be claimed by supplier to SEZ unit/developer only.
Thus, a conjoint reading of all the above provisions undoubtedly point towards a conclusion that SEZ unit/ developers shall not claim any refund against the ITC involved in supplies received by them from non SEZ suppliers. The Act facilitates eligibility for refund claim to the suppliers who made supplies to SEZ unit/developers with payment of tax. The AA has rightly adhered to these provisions and rejected the refund claim in legitimate manner. In addition to this, it is to be observed that the appellant contentions of their eligibility regarding refund against the zero-rated supplies received by them, is found to be not tenable
Held by Joint Commissioner (ST) & Appellate Authority (ST): In view of the above emerged findings and discussed circumstances, it is to be held that the refund eligibility claim by the appellant is not in tune with the provisions of Act and the AA has precisely rejected such refund claim duly observing the provisions of the Act. So the rejection of refund by AA need not be interfered with and to be upheld as legitimate, and the appeal is dismissed by confirming the tax so levied by the assessing authority
As per Section 16 of Integrated Goods And Services Tax Act, 2017,
(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 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 under either of the following options, namely:-
(a) He may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilized input tax credit; or
(b) He may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.
(i) As already mentioned above, in the appurtant case, vendor has supplied to the appellant after opting for option 2 i.e. zero-rated supplies with payment of tax i.e. IGST and has actually recovered the portion of tax also.
(ii) Claim of input tax credit by SEZ unit/developer has not been challenged by the AA. Thus, SEZ can still continue with claiming of ITC, subject to the compliance with relevant provisions of GST law
(iii) Section 54(3) does not specifically restrict an SEZ unit/developer to claim refund of unutilised ITC in case of zero-rated supplies made without payment of tax. Thus, if an SEZ unit/developer is engaged in further outward zero-rated supply without payment of tax, they shall be eligible for claiming refund of unutilised tax.
(iv) Rule 89(1) and rule 89(2)(f) are required to be read in harmony, so that essence of both the provisions comes into play.
(v) First proviso to rule 89(1): In case of supply to an SEZ unit/ developer, refund shall be claimed by the vendor only.
(vi) Declaration to rule 89(2)(f): Tax has not been collected from the SEZ unit/developer.
(4) Thus, harmonising both the above provisions, we understand this to squarely cover only those cases where vendor supplies to SEZ units/developers with/without payment of tax and does not recover the tax portion and in turn opts to claim the refund of integrated tax/unutilised ITC respectively
(5) Furthermore, referring to above judgement as correct for once, vendor has charged tax from the recipient and thus they can’t provide the declaration as provided under rule 89(2)(f) since incidence of tax has been passed on to the recipient and can’t claim refund of unutilised ITC. Also, judgement provides that SEZ unit can’t claim refund in this case which seems unjust
Author’s Opinion: Subjected judgement by honorable Appellate Authority seems to have misinterpreted many facts as mentioned above and we understand that SEZ units/developers can continue with their current tax position to claim ITC and then refund of unutilised ITC on account of zero-rated supply of services and they hold a strong position in case of litigation at higher forums.
Our view can further be substantiated on referring to judgement by CESTAT in the case of M/s Lance Solar Pvt Limited Vs Commissioner, Central Tax, Central Excise Customs, (CG) Raipur wherein the appellate authority(AA) has denied the stand of exchequer to deny the refund of service tax on ground of time barred . AA confirmed that – the ab initio exemption provided under the SEZ provisions, has overriding effect on the service tax provision. Under such position of law, a notification under service tax cannot restrict or provide a time limit for grant of refund to the SEZ unit and developer. Accordingly, the appellant is entitled to consequential benefit, in accordance with law’. Same ways it should apply to GST law as well.