An SEZ unit is entitled to claim a refund of unutilized IGST credit distributed by an Input Service Distributor.

Issue

Can a Special Economic Zone (SEZ) unit claim a refund of unutilized Input Tax Credit (ITC) of IGST that it received from its Input Service Distributor (ISD), or is the refund claim restricted only to the original supplier of the service?

Facts

The petitioner, an SEZ unit, received various input services on which IGST was paid. This credit was distributed to the SEZ unit by its Input Service Distributor (ISD), leading to an accumulation of unutilized ITC in its Electronic Credit Ledger.
The petitioner filed refund claims in Form RFD-01 for this unutilized credit, which were initially sanctioned by the tax authority.
However, the department’s appellate authority later set aside these refund orders, and recovery of the refunded amount was proposed.
The department’s main objection was that, as per the rules, only the supplier of goods or services to an SEZ unit can file for a refund, not the SEZ unit itself.
The petitioner filed a writ petition, challenging this decision.

Decision

The High Court quashed the appellate authority’s order and ruled decisively in favour of the assessee (the SEZ unit).
It held that the petitioner is entitled to the refund of the unutilized IGST ITC lying in its Electronic Credit Ledger.
The court’s decision was based on a binding precedent on the identical issue, which remained in force and had not been stayed.
It reasoned that the department’s objection was untenable because in an ISD mechanism, the ISD is an office of the supplier, and the original third-party supplier has no way to claim a refund of credit that has been distributed by the ISD.
Therefore, the only logical and legal entity that can claim the refund in this specific scenario is the SEZ unit that received the credit. The court directed the department to process the refund.

Key Takeaways

ISD Mechanism is an Exception: The general rule (that the supplier to an SEZ claims the refund) does not apply when the ITC is routed through an Input Service Distributor.
Recipient’s Right to Refund: In an ISD-to-SEZ transaction, the right to claim a refund of unutilized ITC shifts from the original supplier to the recipient of the credit (the SEZ unit).
Upholding Zero-Rating: This judgment prevents a situation where the tax credit would become a dead loss, thereby ensuring that the zero-rating principle for SEZs is upheld.
Binding Precedent: The court reiterated the importance of following established binding precedents on identical issues of law.

HIGH COURT OF GUJARAT

Ajanta Pharma Ltd.

Union of India

Bhargav D. Karia and Pranav Trivedi, JJ.

R/SPECIAL CIVIL APPLICATION NO. 6833 of 2025

OCTOBER 16, 2025

Anandodaya S. Mishra for the Petitioner. Ankit Shah for the Respondent.

JUDGMENT

1. Heard learned advocate Mr.Anandodaya Mishra for the petitioner and learned advocate Mr.Ankit Shah for the respondents.

2. Rule returnable forthwith. Learned advocate Mr.Ankit Shah for the respondent waives service of notice of rule for and on behalf of the respondents.

3. As the issue involved in this petition is in a narrow compass, with the consent of the learned advocates for the respective parties, the matter is taken up for final hearing.

4. The petition is preferred making prayer to quash and set aside the impugned order dated 18.02.2025 passed by the learned Additional Commissioner (Appeals), CGST, Vadodara under the provisions of Sec.107 of the Central Goods & Service Tax Act, 2017 (hereinafter referred to as ‘the Act’ for short) and further allow the refund application preferred by the petitioner under the provisions of Sec.54(3) of the Act and under Rule 89(4) of the CGST Rules, 2017 (hereinafter referred to as ‘the Rules’ for short).

5. The brief facts leading to filing of the present writ petition are as under:

5.1 The petitioner is a Special Economic Zone Unit (SEZ) engaged in the business of manufacturing and distributing medicines worldwide inter alia authorized to operate at Special Economic Zone at Dahej District. The petitioner is also registered under the provisions of the Act.

5.2 It is the case of the petitioner that it being the SEZ Unit, is the recipient of input services which are proportionately distributed by the Input Service Distributor (ISD) in accordance with the provisions of the Act. On the distribution of input services, the petitioner attracts Integrated Goods and Service Tax i.e. I.G.S.T. However, the petitioner is making zero rated supplies, and therefore, the petitioner is not able to utilize the credit that has been lying in the Electronic Credit Ledger. Therefore, when the petitioner is not in a position to utilize the Input Tax Credit, various refund applications dated 24.08.2023, 10.11.2023 and 31.01.2024 for quarters April 2023 to June 2023, July 2023 to September 2023 and October 2023 to December 2023 respectively, came to be preferred by the petitioner in Form GST RFD- 01 under the provisions of Sec.54 of the Act under the category of ‘Export of Goods / Services without payment of Tax’. The refund applications came to be preferred along with the requisite documents.

5.3 The applications preferred by the petitioner was allowed and the refund claim by the petitioner was sanctioned by the Assistant Commissioner, DivisionVII, CGST, Vadodara-II, vide sanction orders dated 05.10.2023, 11.12.2023 and 05.03.2024 for quarters April 2023 to June 2023, July 2023 to September 2023 and October 2023 to December 2023 respectively passed in Form GST RFD-06. The Adjudicating Authority also issued corrigendums dated 29.02.2024 and 19.04.2024 and modified the Refund Sanction Order dated 05.10.2023 and 05.032024 respectively in view of settled law by this Court in the case of Britannia Industries Limited v. Union of IndiaGSTL 3 (Gujarat)/2020 (42) GSTL.3 (Guj.)., and also in view of the fact that the SLP preferred against the decision of this Court had been withdrawn.

5.4 It is the case of the petitioner that the Commissioner, Central CGST, Vadodara, directed the Adjudicating Authority to file appeal before the Appellate Authority under Sec.107(2) of the Act. The appeals came to be preferred by the Adjudicating Authority before the Addl. Commissioner (Appeals), CGST, Vadodara, against sanction orders on the ground that refund sanction is invalid as per Sec.16(3) of the IGST Act, Sec.54(3) of the Act and Rule 89 of the CGST Rules. The petitioner filed detailed Written Submissions / Cross Objections before the Appellate Authority. The Appellate Authority allowed the appeal preferred by the Adjudicating Authority and set aside the refund order by way of impugned order dated 18.02.2025.

5.5 It is the case of the petitioner that subsequent to the setting aside of the refund order, a show-cause notice came to be issued to the petitioner on 12.03.2025 under Sec.73(1) of the Act, asking the petitioner as to why the refund sanction should not be demanded and recovered. The show-cause notice was issued under the guise that the respondent authority had filed review application before the Hon’ble Supreme Court against the disposal of the Special Leave Petition preferred against order of this Court in case of Britannia Industries Ltd (supra).

5.6 Being aggrieved and dissatisfied by the impugned order dated 18.02.2025, passed by the Appellate Authority, the petitioner has preferred the present writ petition.

6. Learned advocate Mr.Anandodaya Mishra appearing for the petitioner, submitted that this Court has pronounced various judgements interpreting the refund of Accumulated ITC under Sec.54(3) of the Act and the Appellate Authority being a statutory authority under the CGST Act, was duty bound to comply with the law laid down by this Court.

6.1 Mr.Mishra, learned advocate, relying on para 8 of the impugned order dated 18.02.2025, submitted that any deviation from the law laid down by this Hon’ble Court would amount to judicial indiscipline and would under mine the law. Relying on the decision in the case of Britannia Industries Ltd (supra), learned advocate Mr. Anandodaya Mishra for the petitioner submitted that the ratio as laid down in the decision is squarely applicable in the facts of the present case. It was submitted by Mr.Mishra that the decision in the case of Britannia Industries Ltd (supra), reads as under:

“21. In facts of the present case, instead of Rule 96 as was applicable in case of M/s. Amit Cotton Industries (supra), Rule 89 would be applicable which is pertaining to refund of the input tax credit. Rule 89 of the CGST Rules provides for procedure for application for refund of tax, interest, penalty, fees and prescribes that in respect of supplies to a SEZ unit, the application for refund has to be filed by the supplier of goods or services. The contention of the respondents that as the petitioner is not the supplier of the goods and services, the petitioner would not be entitled to file application for refund is not tenable because in facts of the present case, input service distributor Le. ISD as defined under section 2(61) of the CGST Act is an office of the supplier of goods and services which receives tax Invoices issued under section 31 of the CGST Act towards the receipt of input services and issues a prescribed document for the purpose of distributing the credit of CGST, SGST or IGST paid on such goods or services. Therefore, in facts of the case, it is not possible for a supplier of goods and services to file a refund application to claim the refund of the input tax credit distributed by ISD. Therefore, the stance of the department that the petitioner is not entitled to seek the refund of the ITC paid in connection with goods or services supplied to SEZ unit are not tenable.

22. This aspect is further fortified by notification n? 28/2012 dated 20th June, 2012 which was in connection with service tax attributable to the services used in more than one unit to be distributed pro-rata on the basis of the turnover during the relevant period of the concerned unit to the sum total of the turnover of all the units and similarly, in facts of the present case also, credit of service tax is distributed to all the units by the ISD and therefore, the claim of refund made by the SEZ unit of the petitioner is required to be granted.

23. We are of the opinion that in view of the aforesaid decision in case of M/s. Amit Cotton Industries (supra), the petitioner is entitled to claim refund of the IGST lying in the Electronic Credit Ledger as there is no specific supplier who can claim the refund under the provisions of the CGST Act and the CGST Rules as input tax credit is distributed by the input service distributor.”

6.2 Learned advocate Mr.Anandodaya Mishra relied upon the decision of this Court in the case ofIPCA Laboratories Ltd v. Commissioner GST 316/63 GSTL 187 (Gujarat)/Special Civil Application No. 638 of 2021, wherein it is held that the SEZ unit is eligible for refund of ITC of IGST lying in the Electronic Credit Ledger under Sec.54 of the Act.

7. In view of such submissions, learned advocate Mr.Anandodaya Mishra has submitted to allow the present petition and grant the refund to the writ petitioners.

8. Per Contra, learned advocate Mr.Ankit Shah for the respondents on the basis of the affidavit-in-reply has submitted that the judgement of this Court dated 11.03.2020 in the case of Britannia (supra), as quoted by the petitioner would not be applicable in the facts of the present case since the petitioner was situated in Special Economic Zone (SEZ) and had filed an application for refund in FORM GST RFD-01A with regard to the credit of Integrated Goods and Services Tax (IGST) distributed by Input Service Distributor (ISD) for the services pertaining to the SEZ unit, as in that case, the supplier was making supplies to the ISD of the company and thus was incapable of claiming refund due to supply not directly made to a SEZ unit. It was further submitted that it was not possible for a supplier of services to file a refund application to claim the refund of the Input Tax Credit (ITC) distributed by the ISD under Rule 89 of the CGST Rules, 2017.

8.1 With regard to the judgement in the case of IPCA Laboratories Ltd (supra) is concerned, it was contended that the same would not be applicable in the present case as in the case of IPCA Laboratories, there was no specific supplier who could have claimed the refund under Rule 89 of the CGST Rules.

8.2 It was further submitted that the judgement of this Court in the case of Amit Cotton Industries v. Principal Commissioner of Customs GST 33/29 GSTL 200 (Gujarat)/Special Civil Application No. 20126 of 2018 on 27th June, 2019, would not be applicable as, in the instant case, the CGST Rules 2017 do not provide for refund to SEZ Unit in respect of input tax credit distributed by Input Service Distributor to SEZ Unit.

8.3 It was also further submitted on collective reading of provisions of Sec.54(3) of the Central Goods & Service Tax Act, 2017, Section 16 of the IGST Rules, 2017, together with Rule 89(1) of the CGST Rules, 2017 that, it was clear that when a supply is made to the SEZ unit or SEZ Developer, it is the supplier and not the receiver viz., the petitioner in the instant case, who shall file the refund application. The reason for the same is that in case of supply to petitioner, the liability to pay tax on such supplies is on the supplier. The receiver, i.e. the petitioner is not at all liable to pay any kind of tax on such supplies received by them.

8.4 It was submitted by learned advocate Mr.Ankit Shah that the petitioner was not at all liable to pay any tax on the supplies received by the petitioner and therefore was not liable to claim refund as per the prevalent provisions.

8.5 Mr.Shah, learned advocate would further submit that neither any provision under the CGST Act 2017/IGST Act 2017 and rules thereunder or under any Notification nor any circular or guidelines have been issued by the Government/Central Board of Indirect Taxes and Customs prescribing to process and allow the refund of Input Tax Credit Refund filed by the units located in the Special Economic Zones, in respect of tax paid on inward supplies. Therefore, in absence of any mandate in the governing Act and Rules made thereunder, or Notification/Circular of the like, the petitioner should not have been granted refund and hence the petitioner’s contention before the appellate authority was rejected following the CGST/IGST laws and Rules applicable at the relevant time.

8.6 In wake of such submissions, learned advocate Mr.Ankit Shah has requested to reject the writ petition.

9. Having heard the learned advocates appearing for the respective parties and having perused the material on record, the issue is in a very narrow compass as to whether the writ petitioner being a SEZ Unit registered under the Special Economic Zone Act, would be eligible for grant of refund and entitled to the Input Tax Credit on the services received while making zero rated supply. The issue is squarely covered by the decision of this Court in the case of Britannia (supra) as it had been held that the input service distributor i.e. ISD as defined under Sec.2(61) of the CGST Act is an office of supplier of the goods and services which receives tax invoice issued under Sec.31 of the CGST Act towards the receipt of input services and issues a prescribed document for the purpose of distributing the credit of CGST/ IGST paid on such goods or services which is also squarely covered by the decision of this Court in the case of Britannia (supra). Relevant paragraphs 21 to 23 of the decision reads as under:

“21. In facts of the present case, instead of Rule 96 as was applicable in case of M/s.Amit Cotton Industries (supra), Rule 89 would be applicable which is pertaining to refund of the input tax credit. Rule 89 of the CGST Rules provides for procedure for application for refund of tax, interest, penalty,fees and prescribes that in respect of supplies to a SEZ unit, the application for refund has to be by the supplier of goods services. The contention of the respondents that as the petitioner is not the supplier of the goods and services, the petitioner would not be entitled to file application for refund is not tenable because in facts of the present case, input service distributor i.e. ISD as defined under Section2(61) of the CGST Act is an office of the supplier of goods and services which receives tax invoices issued under Section 31 of the CGST Act towards the receipt of input services and issues a prescribed document for the purpose of distributing the credit of CGST, SGST or IGST paid on such goods or services. Therefore, in facts of the case, it is not possible for a supplier of goods and services to file a refund application to claim the refund of the iinput tax credit distributed by ISD. Therefore, the stance of the department that the petitioner is not entitled to seek the refund of the ITC paid in connection with goods or services supplied to SEZ unit is not tenable.

22. This aspect is further fortified by Notification No.28/2012, dated 20th June 2012, which was in connection with service tax attributable to the services used in more than one unit to be distributed pro rata on the basis of the turnover during the relevant period of the concerned unit to the sum total of the turnover of all the units and similarly, in facts of the present case also, credit of service tax is distributed to all the units by the ISD and therefore, the claim of refund made by the SEZ unit of the petitioner is required to be granted.

9.1 The ratio covered by this Court is not disturbed till today. Further, there is no stay against the order passed by this Court in the case of Britannia (supra) and other allied matters. The ration laid down by this Court in the case of Britannia Industries Ltd (supra), squarely applies to facts of present case, and therefore, the petition succeeds and is accordingly allowed.

10. The impugned order dated 18.02.2025 passed by the learned Additional Commissioner (Appeals), CGST, Vadodara is hereby quashed and set aside. The respondents are directed to process the claim of refund made by the petitioner for unutilized IGST credit ledger in Electronic Credit Ledger under Sec.54 of the CGST Act,2017. Such exercise shall be completed within a period of three months from the date of receipt of writ of this order.

11. Rule is made absolute to the aforesaid extent. No order as to costs.