The Supreme Court has dismissed the tax department’s special leave petition challenging a Gujarat High Court judgment allowing refund of unutilised compensation cess credit on coal used in manufacturing goods supplied as zero-rated supplies, even where IGST was paid on those supplies.

The Bench of Justice Manoj Misra and Justice Vijay Bishnoi noted that the petition was filed 324 days beyond the prescribed time. It also recorded that another special leave petition against the same common judgment had already been dismissed on February 13, 2026.

Finding no cogent explanation for the delay, the Bench dismissed the petition on both grounds and disposed of the pending applications. The Supreme Court’s order is brief and does not separately elaborate on the statutory interpretation underlying the compensation cess refund dispute.

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The department’s petition arose from the Gujarat High Court’s common judgment.

Dispute Over Refund Of Cess Paid On Coal

The underlying controversy concerned whether an exporter could claim refund of accumulated compensation cess credit when the exported finished goods were not subject to compensation cess, but the exporter had paid IGST on the zero-rated supplies.

The Gujarat High Court decided the two petitions through a common judgment delivered by Justice Bhargav D. Karia and Justice Pranav Trivedi. It considered the facts of Atul Limited, the petitioner in Special Civil Application No. 20038 of 2022, as the lead matter.

The company manufactured and sold chemical products, including supplies to Special Economic Zone units and exports outside India. It purchased coal to generate electricity through its captive power plant for manufacturing operations. Suppliers charged compensation cess on the coal, resulting in the accumulation of cess input tax credit.

For financial year 2019–20, the company availed compensation cess credit of ₹13,46,38,852 on inward supplies of coal. It sought a refund of ₹3,39,02,063, representing the amount attributable to zero-rated supplies made with payment of IGST but without payment of compensation cess.

These figures relate to the lead petitioner’s facts recorded in the common High Court judgment.

Department Rejected Refund Because IGST Was Paid

The tax authority issued a show-cause notice dated February 25, 2021, proposing rejection of the refund. Its position was that refund of accumulated compensation cess credit was available only where zero-rated supplies were made without payment of IGST.

Since the company had made the supplies on payment of IGST, the authority treated the cess refund as inadmissible.

The refund application was rejected through an order in Form RFD-06 dated April 8, 2021. The company’s statutory appeal under Section 107(1) of the Central Goods and Services Tax Act, 2017, was subsequently rejected on May 19, 2022, prompting the writ proceedings.

The challenge also concerned paragraph 5 of Circular No. 45/19/2018-GST dated May 30, 2018, and paragraph 42 of Circular No. 125/44/2019-GST dated November 18, 2019, which were relied upon in denying the refund.

Taxpayer Relied On Statutory Credit And Refund Provisions

The taxpayer argued that Sections 9 and 11 of the Goods and Services Tax (Compensation to States) Act, 2017, apply the relevant GST provisions to compensation cess with the necessary adaptations.

It submitted that the provisions governing input tax credit and refund—including Section 16 of the CGST Act, Section 16 of the IGST Act, Section 54 of the CGST Act and Rule 89 of the CGST Rules—therefore supported its entitlement to refund of accumulated cess credit.

The coal was used in the course of manufacturing and selling the finished products. Consequently, the taxpayer maintained that its entitlement to credit of the cess paid on coal was undisputed.

It also relied on the Gujarat High Court’s earlier decision in Patson Papers Pvt. Ltd. v. Union of India, Special Civil Application No. 26250 of 2022. Counsel for the respondents acknowledged before the High Court that the issue stood covered by that decision.

Restriction On Using Cess Credit Does Not Defeat Refund Entitlement

Following Patson Papers, the High Court distinguished between the restriction on using compensation cess credit to pay IGST and the entitlement to refund of unutilised cess credit.

The proviso to Section 11(2) of the Compensation Cess Act permits cess credit to be utilised only towards payment of compensation cess. It therefore prevents a taxpayer from using that credit to discharge IGST liability.

However, the High Court applied the reasoning that this utilisation restriction did not defeat the refund claim in the circumstances before it. The finished goods supplied as zero-rated supplies were not subject to compensation cess, leaving the cess credit accumulated on coal unutilised.

Reading Section 54(3) of the CGST Act with Section 16(3) of the IGST Act and Section 11(2) of the Compensation Cess Act, the Court held that refund of the unutilised cess credit was available even though IGST had been paid on the exported goods.

The High Court concluded that the authorities had misinterpreted the circulars while rejecting the refund applications. It found that the earlier ruling applied squarely to the petitions before it.

The Gujarat High Court quashed the impugned orders and directed the authorities to process the refund applications and sanction the compensation cess amount claimed on unutilised credit.

The Supreme Court’s dismissal leaves that relief intact. The underlying High Court ruling addresses the specific situation in which compensation cess is paid on manufacturing inputs, the zero-rated finished goods do not attract cess, and the refund is denied because the taxpayer paid IGST on the outward supplies.

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