Gujarat HC Allows Refund of Compensation Cess claimed on Unitilised ITC on Captive Power Inputs Used for SEZ/Export Supplies [Read Order]

The Gujarat High Court has allowed the refund of Compensation Cess on unutilized Input Tax Credit ( ITC ) under Goods and Services Tax ( GST ) arising from inward supplies used for generating captive power.

The petitioner, Atul Ltd., a manufacturer of chemical products, had established a captive power plant to generate electricity required for its manufacturing operations. Coal, which attracted Compensation Cess under the GST (Compensation to States) Act, 2017, was procured for this purpose.

The final products were either exported or supplied to SEZ units, both zero-rated under the IGST Act. However, as the finished goods did not attract Compensation Cess, the company could not utilize the ITC of such cess against output tax liability, leading to accumulation of unutilized ITC.

The refund application filed by the petitioner for the unutilized ITC of Compensation Cess on coal was rejected by the department, citing Para 5 of Circular No. 45/19/2018-GST dated 30.05.2018 and Para 42 of Circular No. 125/44/2019-GST dated 18.11.2019.

The department contended that refund of Compensation Cess is admissible only in cases where exports are made without payment of IGST. Since the petitioner had opted to export on payment of IGST (with refund of tax), it was held ineligible to claim refund of Cess on inputs.

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Challenging the rejection, the petitioner argued that Section 11 of the Compensation Cess Act explicitly applies the provisions of the GST and IGST Acts mutatis mutandis to the administration of Compensation Cess, including the refund mechanism.

It was further submitted that input tax credit of Compensation Cess, when unutilized in zero-rated supply scenarios, must be refunded as per Sections 16 and 54 of the IGST and CGST Acts, respectively.

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The Division Bench comprising Justice Bhargav D. Karia and Justice Pranav Trivedi accepted the petitioner’s submissions. The court, relying on the precedent in Patson Papers Pvt. Ltd. v. Union of India, clarified that exporters who pay Compensation Cess on inputs but not on outputs are eligible for refund of such unutilized ITC, regardless of whether the export is made under bond/LUT or on payment of IGST.

The bench also noted that the department had misinterpreted the cited circulars and wrongly applied the proviso to Section 11(2) of the Cess Act, which restricts the use but not the refund of Cess ITC when no Compensation Cess is levied on output.

Consequently, the Court quashed the orders rejecting the refund claim and directed the authorities to process and sanction the refund of ₹3.39 crores claimed by the petitioner.