The Goods and Services Tax Appellate Tribunal (GSTAT), State Bench at Lucknow, has held that eligibility to avail input tax credit (ITC) of Compensation Cess does not automatically confer a right to receive the accumulated credit as a cash refund. A taxpayer must independently establish that the claim satisfies the conditions prescribed under Section 54(3) of the Central Goods and Services Tax Act, 2017.
The Bench Santosh Kumar Srivastava (Judicial Member) and Arvind Kumar (Technical Member) allowed six departmental appeals concerning Compensation Cess paid on coal used in manufacturing leather products sold in the domestic market.
Buy Now: 160+ GST E-Magazine September 2026
The dispute arose from refund applications filed by M/s Pacific Leather Pvt. Ltd., Kanpur, concerning accumulated ITC of Compensation Cess paid on coal purchased for its manufacturing operations.
The manufacturer used coal as fuel to operate boilers and generate energy for producing leather products. While coal attracted Compensation Cess, the finished leather products were not subject to that levy. This resulted in the accumulation of unutilised cess credit.
The manufacturer sought refunds under the inverted tax structure category. The Deputy Commissioner, Commercial Tax, Sector-20, Kanpur, rejected the claims on the ground that the accumulated Compensation Cess credit was not refundable against the domestic outward supplies in question.
The Additional Commissioner, Grade-II (Appeal), Commercial Tax, Kanpur, subsequently allowed the manufacturer’s appeals through an order dated July 5, 2021. The first appellate authority relied on the eligibility of cess paid on coal as ITC and the absence of a restriction under Section 17(5) of the CGST Act.
The Department challenged that decision before the Tribunal under Section 112(3) of the CGST/UPGST Act, 2017. As the six appeals involved identical issues and factual circumstances, the Tribunal decided them through a common order.
The Department argued that the first appellate authority had treated the availability of ITC as sufficient justification for granting a refund without examining the independent requirements of Section 54(3).
It submitted that accumulated credit does not become refundable merely because it remains unutilised in the electronic credit ledger. The manufacturer was required to demonstrate that the accumulation qualified for refund under the specific statutory category invoked.
The Department also relied on the proviso to Section 11(2) of the Goods and Services Tax (Compensation to States) Act, 2017, which confines the utilisation of Compensation Cess credit to payment of Compensation Cess.
It further contended that the circulars relied upon by the manufacturer addressed refunds in the context of qualifying zero-rated supplies, whereas the disputed claims concerned domestic sales of leather products.
Opposing the appeals, the manufacturer submitted that Compensation Cess had been duly paid on coal used in the manufacturing process and that the corresponding credit was lawfully available.
It argued that the restriction under Section 11(2) concerned utilisation of cess credit against other tax liabilities and did not expressly prohibit refunds. According to the manufacturer, a restriction on utilisation should not be interpreted as a complete prohibition on refunding accumulated credit.
The manufacturer also relied on Section 54(3), read with the Compensation Cess Act, and maintained that administrative circulars could not override the parent statute. It cited judicial decisions concerning refunds of Compensation Cess paid on coal used in manufacturing exported goods.
The Tribunal held that Section 54(3) permits refunds of unutilised ITC only within the categories and conditions specified by the legislature.
Since the manufacturer had applied under the inverted tax structure category, it had to establish that the credit accumulated because the rate of tax on inputs was higher than the rate on output supplies within the meaning of Section 54(3)(ii). It also had to demonstrate that the statutory exclusion concerning nil-rated or fully exempt supplies did not apply.
The Bench observed that the levy of Compensation Cess on an input, coupled with the absence of that levy on the finished product, did not by itself establish an entitlement to refund under the inverted tax structure provisions.
The statutory test had to be applied with reference to the particular levy for which the refund was claimed. Where the outward supply did not attract Compensation Cess, the treatment of that supply for the purposes of the cess and the applicability of the statutory exclusion required examination.
The Tribunal distinguished between taking ITC, using it to discharge a liability, and obtaining a refund of unutilised credit.
Section 16 governs the conditions for taking credit, while Section 17(5) identifies categories of blocked credit. The fact that the credit was not blocked could support its admissibility, but did not independently establish that it was refundable.
The Bench found that the first appellate authority had placed undue reliance on Section 17(5) without adequately examining the conditions governing refunds.
Even assuming that the manufacturer was entitled to avail Compensation Cess credit on coal, it still had to establish a separate statutory entitlement to refund under Section 54(3).
The Tribunal accepted the manufacturer’s contention to the limited extent that the restriction on utilisation under Section 11(2) should not, by itself, be read as an absolute prohibition on every refund claim.
However, the absence of an express prohibition did not create an independent right to refund in circumstances not authorised by the statutory provisions.
The inability to use Compensation Cess credit against other tax liabilities could not, on its own, justify a cash refund. The claim still had to fall within a refund category permitted by Section 54(3), read with the provisions governing Compensation Cess.
The Tribunal examined Circular No. 45/19/2018-GST dated May 30, 2018, and Circular No. 125/44/2019-GST dated November 18, 2019.
It noted that the clarification concerning Compensation Cess paid on coal addressed qualifying zero-rated supplies, including aluminium products exported under a bond or Letter of Undertaking even though the finished products did not attract cess.
That clarification did not grant an unconditional refund entitlement for every domestic supply of a finished product that was not subject to Compensation Cess.
The disputed claims concerned domestic supplies of leather products, and the record did not establish that the amounts were attributable to qualifying zero-rated supplies.
While acknowledging that circulars cannot override the parent enactment, the Tribunal held that this principle did not itself establish the admissibility of the manufacturer’s refund claims.
The Tribunal also considered the manufacturer’s reliance on Patson Papers Private Limited v. Union of India, Atul Limited v. Union of India and Tata Steel Limited v. State of Jharkhand.
It distinguished those decisions because they concerned Compensation Cess credit associated with exported goods or qualifying zero-rated supplies.
According to the Tribunal, those rulings demonstrated that refunds of Compensation Cess credit may be available in appropriate circumstances. They did not dispense with the requirement to establish the conditions of Section 54(3) for the domestic supplies involved in the present dispute.
The Tribunal observed that the refund procedure and the formula under Rule 89(5) operate within the framework of Section 54(3).
A taxpayer must first establish substantive eligibility for refund. Only thereafter can the applicable computation and procedural requirements be considered.
The Bench also declined to assume that Notification No. 5/2017-Central Tax (Rate), dated June 28, 2017, restricted refunds for the manufacturer’s finished leather products. It found that the available material did not establish that the goods fell within a category covered by that notification during the relevant periods.
Nevertheless, the absence of a notification-based restriction did not independently establish a right to refund.
The Tribunal held that the first appellate authority had failed to establish an independent statutory basis for granting the disputed refunds.
It set aside the appellate order dated July 5, 2021, and restored the original orders rejecting the refund claims.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
