Refund of Compensation Cess ITC Cannot be Denied When Goods are Exported on Payment of IGST: Gujarat HC [Read Order]

In a recent ruling, the Gujarat High Court held that refund of unutilised compensation cess input tax credit ( ITC ) cannot be denied when goods are exported on payment of Integrated Goods andServices (IGST).

Patson Papers Private Limited, the petitioner, was engaged in the manufacture of dyes and chemicals and purchased coal for use in its production. On the purchase of coal, it paid GST compensation cess along with GST. The finished goods were exported on payment of IGST, for which a refund of IGST was granted by customs authorities.

The petitioner also claimed refund of unutilised compensation cess credit on coal, since no cess was payable on the exported goods and the input tax credit remained unutilised.

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Initially the refund was sanctioned, but later show cause notices were issued by the department relying on CBIC circulars of 2018 and 2019. The department argued that refund of compensation cess credit is available only when goods are exported without payment of tax under a bond or LUT, and not when exported on payment of IGST.

On that basis, fresh refund claims were rejected and recovery of earlier refunds was also sought. In one appeal, the refund was rejected and in another relating to the same petitioner, the appellate authority allowed the refund.

The petitioner’s counsel argued that Section 54(3) of the CGST Act read with Section 16 of the IGST Act and Section 11(2) of the Compensation Cess Act entitled the petitioner to refund of unutilised credit.

The counsel explained that the proviso to Section 11(2) restricted use of compensation cess credit only for payment of compensation cess, but since exported goods were not subject to cess at all, the credit remained unutilised and had to be refunded.

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The revenue counsel argued that once exports were made on payment of IGST, refund of cess credit could not be claimed separately. They submitted that cess credit cannot be used for payment of IGST and refund of such credit is confined only to cases of zero-rated supplies made without payment of tax under a bond or LUT.

The Division Bench comprising Justice BhargavD. Karia and Justice D.N. Ray observed that the petitioner had paid compensation cess on coal, but the finished goods were exported without any cess liability.

The court observed that in such circumstances, the cess credit remained unutilised and the statute clearly permitted refund of such unutilised credit. The court further pointed out that the department’s reliance on the circulars was misplaced, as statutory provisions had to prevail over executive instructions.

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The court held that the petitioner was entitled to refund of unutilised compensation cess credit and that the rejection of refund by the appellate authority was contrary to law. The impugned orders were quashed and the department was directed to process and sanction the refund claims. The petitions were allowed.

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