Introduction
Eporters who supply goods without payment of tax frequently find that the credit they have accumulated on inputs cannot be used against any output liability, and must instead be recovered through a refund claim. How the amount of that refund is computed is therefore a question of considerable commercial importance. In its recent order in Pramod Chandan Surin v. Shivam Iron & Steel Co. Ltd., Appeal No. APL/11/RNC/2026; Order Reference No. ZN600160926000017H a Division Bench of the GST Appellate Tribunal (‘GSTAT’) at Ranchi examined whether input tax credit reversed during the refund period, but relating to earlier periods, must be deducted from ‘Net ITC’ under the refund formula, and answered the question in the exporter’s favour.
Statutory Framework
Section 54(3) of the Central Goods and Services Tax Act, 2017 permits a registered person to claim a refund of unutilised input tax credit (‘ITC’) where the accumulation results from zero-rated supplies, which include exports made without payment of tax under a bond or Letter of Undertaking (‘LUT’).
Rule 89(4) of the CGST Rules, 2017 prescribes the formula for such a refund: the turnover of zero-rated supplies, multiplied by ‘Net ITC’ and divided by the adjusted total turnover. Rule 89(4)(B) defines ‘Net ITC’ as input tax credit availed on inputs and input services during the relevant period, and the ‘relevant period’ is the period for which the claim is filed.
Separately, paragraph 43(c) of CBIC Circular No. 125/44/2019-GST dated 18 November 2019 clarifies that ITC which has been reversed cannot be held to have been ‘availed’ in the relevant period, and that where a reversed amount is availed again in a later period, it may be considered for refund in that later period, subject to Section 16(4).
Factual Background
The respondent is a manufacturer and exporter of mild steel billets, whose principal raw materials, including coal, attract Compensation Cess, whereas the finished billets do not. This mismatch resulted in unutilised Cess credit accumulating in its electronic credit ledger. Having furnished an LUT, the respondent exported goods without payment of tax and, on 7 June 2024, filed a refund claim in Form GST RFD-01 for the Cess credit relating to exports made between July 2022 and March 2023. Following a show cause notice and the respondent’s reply, the adjudicating authority sanctioned a refund of Rs. 35,84,057 on 21 June 2024.
The Revenue reviewed the sanction order and appealed to the first appellate authority, which upheld the refund. It recorded that, of the Cess credit availed through GSTR-3B for the relevant period, small reversals of Rs. 8,52,706 had been made in July, September and October 2022, yielding Net ITC of Rs. 2,19,41,356 as reflected in the electronic credit ledger.
A separate, larger reversal of Rs. 2,00,00,000 made in the September 2022 return was found to relate to credit of earlier tax periods and to have no nexus with the refund period. The Revenue then approached the Tribunal under Section 112(3) of the CGST Act. As recorded in the Tribunal’s summary, the Revenue’s position was that only Rs. 4,19,127 was admissible, and that Rs. 31,64,930 had been refunded erroneously.
Contentions of the Revenue
The Revenue relied on paragraph 43(c) of the Circular to contend that any ITC reversed in GSTR-3B during the refund period must be deducted from Net ITC, irrespective of whether the reversal relates to credit availed in that period or an earlier one.
It further argued that the reversed amount had been accounted for as a cost in the respondent’s books, reducing its income tax liability, so that the same amount could not also be refunded in proportion to export turnover, and that the respondent had produced no documentary evidence showing that the Rs. 2,00,00,000 reversal related to earlier periods.
Contentions of the Respondent
The respondent submitted that Rule 89(4)(B) speaks only of ITC ‘availed’ during the relevant period and makes no reference to reversals, so that reversals pertaining to earlier periods cannot be imported into the computation of Net ITC.
It argued that a circular is an administrative interpretation which cannot enlarge or restrict the statutory formula, that the Revenue had not disputed that the reversal related to periods outside the refund window, and that the income tax treatment of a reversal is extraneous to the GST refund framework, in any event, only the portion of the reversal relating to domestic turnover had been treated as a cost.
Findings and Reasoning of the Tribunal
The Hon’ble Tribunal framed the question as whether the refund was rightly sanctioned under Section 54(3) and Rule 89(4), having regard to paragraph 43(c) of the Circular, where ITC had been reversed during the relevant period or in respect of earlier periods. The Hon’ble Tribunal held that the statutory test is not whether an amount is credited or debited in the electronic credit ledger during the period, but whether the ITC in question was actually availed during the relevant refund period. Where ITC is reversed and reported in GSTR-3B during the refund period, the authority must therefore ascertain whether the reversed credit was itself availed in that period.
On the record, the Hon’ble Tribunal found that the Rs. 2,00,00,000 reversal pertained to an earlier tax period, and represented unutilised credit remaining in the electronic credit ledger after the refund for the previous period had been sanctioned, which could be neither adjusted against output tax nor claimed as a refund.
It also noted that the Cess credit availed in the relevant period was itself only about Rs. 65 lakh, so that a reversal of Rs. 2 crore could not logically be attributed to it, and that the reversal was made only after the proportionate eligible ITC had already been refunded. The Revenue’s contention that the respondent had produced no evidence was rejected on the footing that the relevant returns and ledger records are available on the common GST portal, and had been examined by both the adjudicating and first appellate authorities.
Status of the Circular in Relation to Rule 89(4)
The Tribunal observed that departmental circulars bind the department but cannot bind courts or override a statute, referring to the Supreme Court’s decisions in Commissioner of Central Excise, Bolpur v. Ratan Melting and Wire Industries and J.K. Lakshmi Cement Ltd. v. Commercial Tax Officer, Pali, and to the principle that where a statute prescribes a manner of doing something, it must be done in that manner alone.
On this footing, it held that paragraph 43(c) cannot be read as requiring every reversal made during the refund period to be treated as a reduction of the ITC availed in that period, irrespective of the period to which the underlying credit relates, since that would add words to Rule 89(4). The expressions ‘availed’ and ‘reversed’ were held not to be interchangeable, and the Circular was to be applied consistently with the Rule, not as a substitute for it.
The Hon’ble Tribunal also tempered the reach of its conclusion, noting that where the entitlement to refund is not disputed, both authorities below have confirmed the claim, and the conditions of Section 54(3) and Rule 89(4) are met, a clarification in a circular would not prevail over the statutory prescription. The appeal was accordingly dismissed and the order of the first appellate authority upheld.
Significance for Exporters and Refund Claimants
The decision draws a clear line between a reversal that relates to credit availed in the refund period, which may properly reduce Net ITC, and a reversal of credit belonging to earlier periods, which does not. It also confirms that Rule 89(4) is to be applied as written, rather than as supplemented by a circular, and it underlines that GST portal records may themselves constitute the evidentiary basis for a refund claim. As an order of a Tribunal bench, resting on its particular facts, it is persuasive rather than a settled position, and the Revenue may yet test the reasoning further.
AMLEGALS Remarks
Exporters claiming refund of unutilised ITC would be well advised to maintain period-wise reconciliations of credit availed and credit reversed, so that any reversal reported in GSTR-3B during a refund period can be clearly linked to the period in which the underlying credit was availed. Where a reversal relates to earlier periods, a contemporaneous working, tied to the ledger and returns, should be kept ready to demonstrate that it has no nexus with the refund period.
Where a refund is questioned solely on the strength of a circular, it may be useful to test whether the circular’s reading is consistent with the language of Rule 89(4) itself, while recognising that this Tribunal’s reasoning rests on the facts before it, in particular the earlier-period character and timing of the reversal, and that reversals attributable to the refund period may be treated differently.
For any queries or feedback, feel free to connect with Dhwani.tandon@amlegals.com