SEZ unit entitled to refund of unutilized IGST ITC distributed by ISD.

SEZ unit entitled to refund of unutilized IGST ITC distributed by ISD.

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 input services where the IGST credit was distributed to it by an Input Service Distributor (ISD).
• Due to its zero-rated supplies, this ITC accumulated in the petitioner’s Electronic Credit Ledger.
• The petitioner filed refund claims for this unutilized credit for multiple quarters (April-December 2023).
• The refund claims were initially sanctioned by the adjudicating authority.
• However, the appellate authority later set aside these refund orders and proposed recovery, based on the argument that only the original supplier of services to an SEZ can claim a refund, not the SEZ unit itself.

Decision

• The Gujarat High Court quashed the appellate authority’s order.
• It held that the SEZ unit was rightfully entitled to the refund of the IGST credit accumulated in its Electronic Credit Ledger.
• The court relied on a binding precedent on the identical issue, which established that the department’s objection was untenable.
• The reasoning was that an ISD is merely an office of the supplier, not the supplier itself. The original third-party supplier cannot claim a refund of credit that has been distributed by the ISD to the SEZ.
• Therefore, the only entity that can claim the refund in this specific scenario is the SEZ unit that received the credit. The authorities were directed 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 (as neither the supplier nor the ISD could claim it), 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.