Denial of Cess Refund Contrary to Patson Papers Precedent: Gujarat HC Quashes Refund Rejections [Read Order]

compensation cess credit arising from coal used for captive power generation. The Court held that the authorities had misinterpreted GST circulars while denying the benefit, directing the department to process and sanction the The Gujarat High Court quashed a series of orders rejecting refund claims of accumulated refund across all relevant tax periods as a result.

The petitioner company, Atul Limited, had approached the Court after its refund applications filed under Section 11 of the Cess Act, 2017 read with Section 16(3) of the IGST Act, 2017 as well as Section 54(3) of the GST Act along with Rule 89(4) of the CGST Rules, 2017 in FORM RFD 01 were turned down.

The petitioner had availed compensation cess credit on coal purchased for generating electricity used in the manufacture of chemical products supplied to SEZ units and for exports. Despite the fact that the credit was uncontested, the department denied the claims on the grounds that cess refunds could only be granted in cases where zero-rated products were purchased without paying IGST.

Representing the company, counsel Abhay Desai contended that since Section 11 of the Cess Act applies the provisions of the GST and IGST Acts mutatis mutandis, the cess credit was a component of a qualifying input tax credit under the GST system.

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It was argued that the failure to reimburse the unused cess was against the statutory framework and that the coal used in the manufacturing process was directly tied to zero-rated suppliers. Additionally, the petitioner made extensive use of the Court's prior decisions in Patson Papers Pvt. Ltd. and a July 2025 ruling regarding Atul Limited, which both found that the return of unused cess credit could not be refused simply because exports were made after IGST was paid.

On the other hand, counsel for the department, Hetvi Sancheti, conceded that the issue was no longer open in light of the binding precedents and urged for the suitable orders to be passed.

The Bench comprising Justice Bhargav D. Karia and Justice Pranav Trivedi observed that the authorities’ stance, particularly their reliance on Circular No. 45/19/2018 and Circular No. 125/44/2019, was erroneous. The Court noted that both circulars had been misinterpreted because they did not forbid the repayment of unused cess credit in situations where exports were made after IGST was paid.

Rather than superseding the statutory right to a refund of accrued credit under Section 54(3) of the CGST Act read with Section 16(3) of the IGST Act, the circulars clarified eligibility where finished items were not subject to cess.

Reiterating its findings from the Patson Papers, the Court came to the conclusion that cess paid on coal used in the production of exported commodities is refundable as long as the outward supply is zero-rated and there is no leviable cess at the time of export. The accumulated cess credit remained unused and refundable because the petitioner had paid IGST on export and cess was never needed on the completed goods.

The Bench underscored that although the zero-rated supply structure precluded the use of cess credit for outbound tax payment, the proviso to Section 11(2) of the Cess Act did not prohibit such a refund.

Applying the settled position, the Court held that the facts were identical to those in Patson Papers and its earlier Atul Limited ruling. As a result, it overturned all rejection decisions and instructed the department to process and approve the compensatory cess refunds requested for each period.

The petitions were allowed with the direction that the respondent authorities grant the refund of unutilised cess credit and treat the issue as finally settled in line with the Court’s precedents. No order as to costs was passed.

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