Supreme Court upholds refund of unutilized Compensation Cess ITC despite export on payment of IGST
Issue
Whether an assessee is entitled to a refund of unutilized Input Tax Credit (ITC) of Compensation Cess paid on inputs (coal), when the final goods are exported on payment of IGST (which is subsequently refunded), and the Department denies the Cess refund based on Circulars restricting ITC refunds to exports made under Bond/LUT.
Facts
Input Tax: The assessee purchased coal, paying Compensation Cess on the purchase.
Manufacturing: The coal was used to manufacture goods.
Export Mode: The final manufactured goods were exported on payment of IGST (Integrated Tax). The assessee claimed and received a refund of this IGST from Customs.
Nature of Final Product: The goods manufactured and exported were exempt from the levy of Compensation Cess. Thus, no Cess was paid on the output.
The Dispute: The assessee filed a separate refund application for the unutilized ITC of Compensation Cess paid on the coal.
Department’s Rejection: The authorities proposed to reject the refund citing Para 42 of Circular No. 125/44/2019 and Para 5 of Circular No. 45/19/2018. These circulars suggest that a refund of unutilized ITC (Cess) is available only if exports are made under Bond/LUT (without payment of tax). Since the assessee paid IGST on export, the Department contended the Cess refund was inadmissible.
Decision
High Court’s Reasoning (Upheld by SC):
Misinterpretation of Circulars: The High Court held that the Revenue authorities misinterpreted the Circulars.
Nature of Cess Credit: Under Section 11(2) of the Cess Act, Cess ITC can only be utilized to pay output Cess. Since the final product was exempt from Cess, the assessee could not utilize the Cess ITC to pay the IGST on the export.
Zero-Rated Supply: Under Section 16(3) of the IGST Act and Section 54(3) of the CGST Act, exports are zero-rated supplies entitled to refunds.
Distinct Refund Rights: The payment of IGST on exports does not bar the refund of unutilized Cess ITC, because the Cess ITC was never utilized (nor could it be utilized) to pay that IGST. The restriction in the Circulars applies to general ITC (CGST/SGST/IGST) where the tax was paid on export, but it cannot block a refund of specific Cess credit that remains trapped due to exemption.
Ruling: The respondents were directed to process the refund applications.
Supreme Court’s Verdict:
The Supreme Court found no reason to interfere with the High Court’s detailed findings.
Held: The Special Leave Petition (SLP) filed by the Revenue was dismissed.
Key Takeaways
Exporters can claim “Double” Refunds: An exporter can claim a refund of the IGST paid on export goods AND a refund of unutilized Compensation Cess ITC, provided the final product is exempt from Cess and the Cess credit could not be utilized.
Circulars Subservient to Act: Administrative circulars cannot override the statutory right to refund granted under Section 54 of the CGST Act for zero-rated supplies.
Trapped Credit Relief: This judgment is crucial for industries (like Aluminum, Steel, Power) using coal where the input suffers Cess but the output is Cess-exempt. It confirms that “Export on Payment of IGST” is not a blanket bar for unutilized Cess ITC refunds.