The Goods and Services Tax Appellate Tribunal (GSTAT), State Bench at Rajkot, has held that a Special Economic Zone (SEZ) unit can claim refund of unutilised input tax credit distributed by an Input Service Distributor (ISD), rejecting the Revenue’s contention that only the supplier could seek such a refund.
The bench of Pramod Kumar Rai (Judicial Member) and Kishori Lal (Technical Member) followed Gujarat and Madras High Court decisions recognising refund entitlement in these circumstances. It also emphasised that a pending Supreme Court challenge does not, by itself, suspend the binding effect of a judgment.
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The dispute concerned the company’s SEZ unit at Jamnagar, Gujarat, engaged, among other activities, in exporting petroleum and petrochemical products.
The unit received input tax credit distributed by its ISD for common services and, in some instances, credit relating to tax paid by suppliers on inward supplies. It sought refund of credit remaining unutilised in its electronic credit ledger under the “any other” category, relying on the Gujarat High Court’s decision in IPCA Laboratories Ltd. v. Commissioner.
The representative claim discussed in the order related to May 2020. The tribunal reproduced a passage from the first appellate order recording a refund claim of ₹6,00,84,317. This figure concerns the claim discussed in that passage; the common order does not identify it as the aggregate amount involved in all eight appeals.
The refund authority rejected the claim, maintaining that Section 54(3) of the CGST Act permitted refunds of unutilised credit only in specified circumstances and that the company’s claim did not fulfil those conditions.
The first appellate authority ruled in the company’s favour. The Revenue challenged the appellate orders before GSTAT, which decided the eight appeals together because they involved an identical issue concerning the same assessee across different periods.
The Revenue relied on Section 54(3) of the CGST Act, Section 16 of the IGST Act and Rule 89 of the CGST Rules to argue that the SEZ unit, being the recipient of supplies, could not claim the disputed refund.
According to the department, the refund framework contemplated applications by suppliers making supplies to SEZ units or developers. It maintained that an ISD merely distributed credit relating to common services and that such distribution could not be equated with tax paid on supplies made directly to an SEZ unit.
The department also relied on CBIC circulars governing manual refund procedures and referred to Supreme Court challenges against the Gujarat High Court decisions supporting the company’s position.
The company argued that supplies to SEZ units for authorised operations qualified as zero-rated supplies and that taxes should not remain embedded in such operations.
It relied principally on Britannia Industries Ltd. v. Union of India and IPCA Laboratories Ltd. v. Commissioner. According to the company, these Gujarat High Court judgments recognised an SEZ unit’s entitlement to claim refund of ISD-distributed credit where the supplier could not seek that refund.
The company additionally contended that the disputed balance represented excess tax paid, the incidence of which it had borne. It sought to support refund entitlement under Section 54(1), read with Section 54(8)(e), of the CGST Act.
GSTAT separately examined whether the application concerned unutilised ITC or excess tax paid by suppliers.
Referring to the show-cause notice, the first appellate order and the underlying record, the tribunal found that the claim concerned unutilised input tax credit in the electronic credit ledger.
It noted that the appellate order expressly described the application as a claim under Section 54(3), involving ISD-distributed credit and, in some cases, tax paid on inward supplies by suppliers.
The tribunal found that the company’s additional attempt to characterise the claim as a refund of excess tax paid was unsupported by documentary evidence or law. It also observed that suppliers had voluntarily paid tax over a prolonged period and that payment by mistake, coercion or duress could not be presumed.
Consequently, the tribunal treated the dispute as one concerning refund of unutilised ITC. The company’s success rested on its entitlement to claim that refund as an SEZ recipient.
On the central issue, GSTAT followed the Gujarat High Court’s decisions in IPCA Laboratories and Britannia Industries.
It noted that IPCA Laboratories recognised entitlement to refund of IGST lying in an SEZ unit’s electronic credit ledger where credit had been distributed by an ISD and there was no specific supplier who could claim the refund under the statutory framework.
Similarly, Britannia Industries rejected the department’s objection that an SEZ unit could not apply for refund merely because it was not the supplier of goods or services. GSTAT relied on the High Court’s reasoning concerning credit distributed through the ISD mechanism.
The tribunal also considered the Madras High Court rulings in Platinum Holdings, Urjita Electronics and McKinsey Global Services India.
In discussing Platinum Holdings, it highlighted the High Court’s rejection of an interpretation that effectively inserted the word “only” into Rule 89 to restrict refund entitlement exclusively to suppliers.
GSTAT concluded that an SEZ unit could not be denied an ITC refund solely because it was not the supplier. It found the department’s objection to refund of ISD-distributed credit untenable in light of the High Court rulings.
The tribunal rejected the Revenue’s reliance on the pending Supreme Court challenge to Britannia Industries.
It recorded that the department had neither produced a stay order nor submitted that the judgment had been stayed. A judgment remains operative and binding until stayed by a higher court, the tribunal explained.
It further noted that the Revenue had not shown that the other High Court decisions relied upon by the company had been reversed or stayed.
Emphasising judicial discipline, the bench observed that the law declared by a High Court binds authorities and tribunals functioning within that State. Departmental disagreement with a precedent does not permit subordinate authorities to disregard it.
GSTAT also rejected reliance on Circular No. 17/17/2017-GST dated November 15, 2017, and Circular No. 24/24/2017-GST dated December 21, 2017.
The tribunal explained that these circulars prescribed manual filing and processing procedures because the refund module was unavailable on the common portal.
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