100% EOUs Entitled to Refund of Unutilised GST ITC on Zero-Rated Exports: Gujarat HC Holds CBIC Circular Inapplicable [Read Order]

The Gujarat High Court recently confirmed that 100% Export Oriented Units (EOUs) are entitled to refund of unutilised Input Tax Credit ( ITC ) accumulated on account of zero-rated exports made without payment of tax; the Court accordingly rejected the applicability of Circular No. 172/04/2022-GST dated 06.07.2022, issued by the Central Board of Indirect Taxes and Customs ( CBIC ).

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The petitioners, Shah Paperplast Industries and another were entities registered as 100% EOUs. The petitioners used to purchase raw materials from the registered suppliers under the GST Act which was utilised for manufacture of the finished products for the purpose of export.

Accordingly, the petitioners sought refund of accumulated ITC on inputs and input services used in the manufacture of exported goods and filed refund applications under Section 54(3) of the Central Goods and Services Tax Act, 2017 read with Rule 89(4) of the CGST Rules, 2017,

The petitioners filed an undertaking stating that they had not received supplies as 'deemed exports' under Notification No.48/2017 dated 18.10.2017 or Circular No.14/2017 dated 06.11.2017, and that their suppliers had not claimed refund of the tax.

The refund was originally sanctioned on 2nd July 2022, but later withdrawn by the Department, pursuant to the issuance of CBIC Circular No.172/04/2022-GST dated 6th July 2022 - the circular clarified that refund of unutilised ITC shall not be available in respect of deemed export supplies received by EOUs.

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The petitioner challenged the withdrawal orders contending that the goods exported were zero-rated supplies made without payment of tax and under a Letter of Undertaking, and hence the CBIC Circular was not applicable to their case.

They argued that their refund claims were within the ambit of Section 54(3) of the GST Act and that administrative circulars could not override statutory provisions.

The Revenue maintained that, in view of the clarification in paragraph 2.2 of the Circular, refund of ITC related to deemed-export supplies was inadmissible and that the Department had acted accordingly.

The Revenue subsequently issued show-cause notice and then passed the impugned order. The matter was elevated before the appellate authority who upheld the withdrawal of the refund already granted to the petitioners along with interest, leading to the present petition.

Uchit N. Sheth appeared for the petitioners while Hetvi H. Sancheti represented the respondents.

The Division Bench comprising Justice Bhargav D. Karia and Justice Niral R. Mehta examined Section 54(3) of the GST Act, which provides that a registered person may claim refund of any unutilised input-tax credit at the end of a tax period for zero-rated supplies made without payment of tax.

“Section 54. 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:

Provided 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.”

The Bench also referred to Rule 89(4) and noted that the refund formula under the Rules applies specifically to zero-rated exports and not to deemed-export transactions. Accordingly, the Court observed that the petitioners had not received any deemed-export supplies but had exported finished goods themselves under LUT.

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The Bench categorically stated that ‘Paragraph 2.2’ of the CBIC Circular No. 172/04/2022-GST would have no bearing on the petitioners’ case as they had sought refund of unutilised ITC on zero-rated exports and not on deemed-export supplies.

Accordingly, the Gujarat High Court noted that the Revenue had misapplied the Circular and proceeded to quash all the separate recovery and rejection orders, and restore the refund already sanctioned.

The High Court thus directed the respondents to pay the refund as per the claims of the petitioners within 12 weeks from the date of receipt of a copy of this judgment.

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