SEZ Units Can Claim Refund of Unutilised ISD-Distributed ITC on Their Own Exports: GSTAT Visakhapatnam

Introduction

Refund claims by SEZ units often run into a familiar objection: that under the second proviso to Rule 89(1) of the CGST Rules, only the supplier can apply for a refund on supplies made to an SEZ. The problem becomes sharper when the credit reaches the SEZ unit through an Input Service Distributor (ISD), because the original supplier has no realistic way to claim a refund of credit that has already been distributed. In Maithan Alloys Ltd. v. Deputy Commissioner (APL/1/VSK/2026, decided on 14-10-2026), reported as (2026) 47 Centax 289 (Tri. – GST – Vishak.), the Visakhapatnam Division Bench of the GSTAT considered whether an SEZ unit that exports goods without payment of integrated tax can claim a refund of unutilised ISD-distributed ITC for the periods April to June 2022.

The Tribunal ruled in the appellant’s favour on both the law and the procedure. It held that the supplier-specific proviso governs direct supplies to an SEZ and cannot be treated as an absolute bar against a refund of ISD credit used for the unit’s own zero-rated exports, relying on the Gujarat High Court’s decisions in Britannia Industries and SE Forge and the Madras High Court’s decision in Wipro. The Tribunal set aside the First Appellate Authority’s finding that the suppliers had already received refunds, since the finding rested on undisclosed “back-office records,” was never put to the appellant, and was admittedly unsupported by evidence on record.

Background of the Case

Maithan Alloys Ltd. (hereinafter referred to as “the appellant”), is a Special Economic Zone Unit (hereinafter “SEZ unit”). The appellant is engaged in the export of goods without the payment of IGST.

The appellant filed refund applications for the ITC received through its Input Service Distributor (ISD) as the same remained unutilized in the appellant’s electronic credit ledger. The refund applications of the appellant came to be rejected on conjoint reading of Section 54 of the CGST Act, Section 16 of the IGST Act and Rule 89 of the CGST Rules by the Adjudicating Authority, on grounds that the appellant being recipient of goods or services supplied to an SEZ unit, was not entitled to claim refund of the unutilized ITC.

That being aggrieved by the rejection order of the Adjudicating Authority, the appellant herein preferred an appeal before the First Appellate Authority, who in turn affirmed the rejection order and further observed that the departmental back-office records allegedly revealed that the suppliers had already claimed and received refunds in respect of the relevant supplies.

That being aggrieved by the order of the First Appellate Authority, the appellant herein preferred appeal before the GSTAT.

Contentions of the Parties

The Appellant argued that the refund is for unutilized Input Tax Credit validly distributed to the appellant through the Input Service Distributor mechanism, which remains unutilized against the appellant’s own zero-rated exports made without payment of integrated tax. The Appellant further submitted that the Section 16 of the IGST Act states exports as zero-rated supplies and Section 54 (3) red with Rule 89(4) provides the mechanism for the refund of unutilized ITC attributable to eligible zero-rated supplies made without payment of tax.

The Appellant further submits that the statutory scheme does not provide for the rejection of refund merely because the credit originated in tax paid on input services procured through the corporate structure and subsequently distributed to the SEZ Unit

The Appellant relied on the decisions of the Hon’ble Gujarat High Court in Britannia Industries Ltd. v. Union of India 2020 (42) G.S.T.L.3 (Guj.) interalia. With respect to the finding that the supplier of the appellant had already availed ITC, the appellant submitted that no such allegation was put to the appellant during the appellate proceedings and no supporting evidence was furnished. The Revenue Department argued that in respect of supplies to an SEZ unit, the refund application has to be filed by the supplier of goods or services. With regard to their contention that the suppliers had already availed ITC, the department said that they had no evidence on record establishing that the suppliers had actually received refunds as alleged in the Impugned Orders.

Questions of law under consideration:

Whether an SEZ unit making zero-rated exports of goods without payment of integrated tax is entitled to claim refund of unutilised ITC validly distributed to it through an Input Service Distributor (ISD), subject to the conditions prescribed under Section 54 of the CGST Act, 2017, read with Section 16 of the IGST Act, 2017 and Rule 89 of the CGST Rules, 2017?
Whether the second proviso to Rule 89(1) of the CGST Rules, which provides for filing of a refund application by the supplier in respect of supplies to an SEZ unit or SEZ developer, constitutes an absolute bar against a refund claim made by an SEZ unit in respect of ITC distributed through an ISD and attributable to its own zero-rated exports?
Whether the refund claim of the appellant can be rejected on the ground that the suppliers of the underlying goods or services are alone entitled to claim refund, notwithstanding that the relevant ITC has already been distributed through the ISD mechanism and the appellant has accumulated unutilised credit against its zero-rated exports?
Whether the finding of the First Appellate Authority that the suppliers had already claimed and received refund, allegedly on the basis of departmental back-office records, can be sustained when the allegation was not put to the appellant, the Department did not substantiate it with supporting evidence and the Revenue has subsequently acknowledged that no evidence of such refund is available on record?
Whether the impugned orders rejecting the refund claims are sustainable in law and, if not, what consequential relief should be granted to the appellant?

The Tribunal’s Reasoning

The Tribunal began with Section 16(1) of the IGST Act, which treats exports and supplies to an SEZ unit or developer as separate categories of zero-rated supply. It observed that the appellant was not stepping into the shoes of a supplier to claim a refund on a direct supply to an SEZ. Its claim was for unutilised ITC, distributed to it through an ISD, that was attributable to its own exports made without payment of integrated tax. The Tribunal called this distinction material and said it could not be disregarded while applying Rule 89(1).

Section 54(3) of the CGST Act allows refund of unutilised ITC on zero-rated supplies made without payment of tax, and Rule 89(4) prescribes the formula for computing it. The Tribunal held that the mere fact that a claimant is an SEZ unit is not, by itself, a disqualification from claiming refund of ITC relatable to its own exports.

The Revenue relied on the proviso requiring the supplier to file the refund application for supplies to an SEZ unit or developer. The Tribunal held that the proviso cannot be read in isolation. It governs refund claims arising from direct supplies to an SEZ, and it cannot be stretched into an absolute bar on every claim made by an SEZ unit. Reading it that way would ignore the difference between the original supply and the later accumulation of validly distributed credit in the hands of the recipient. A procedural rule, the Tribunal said, must not be applied so as to defeat a substantive entitlement in a situation the restriction does not cover.

The Tribunal relied on three High Court decisions:

Britannia Industries Ltd. (Gujarat HC)
SE Forge Ltd. (Gujarat HC)
Wipro Ltd. (Madras HC)

The First Appellate Authority had added, on the basis of “back-office records,” that the suppliers had already received refunds. The Tribunal found this unsustainable for three reasons:

The allegation was never put to the appellant, and no supporting material was provided.
The Department’s own additional counter admitted that it had not been raised before the First Appellate Authority and that no evidence of such refunds was on record.
Even if a supplier had filed a refund application, that would not prove the refund was sanctioned or that it related to the same ITC. Proof would need to establish the supplier’s identity, the invoices, the credit involved, the refund sanctioned and the nexus between the two amounts.

The Tribunal drew a useful line here: the possibility of a double refund justifies verification, but only proof of a double refund can justify rejection.

The Tribunal held that an authority proposing to decide on a ground not put to the affected party must give notice and a real opportunity to respond. Relying on Saci Allied Products, Reckitt & Colman and S.N. Mukherjee, it held that the undisclosed finding violated audi alteram partem and vitiated the First Appellate Authority’s order.

The Decision

The GSTAT, Division Bench, Visakhapatnam, allowed the appeals.

Answered Questions 1 to 3 in the appellant’s favour, holding that an SEZ unit making zero-rated exports without payment of integrated tax can claim refund of unutilised ISD-distributed ITC, subject to verification, and that the second proviso to Rule 89(1) is not an absolute bar.
Answered Question 4 in the appellant’s favour, holding that the finding on prior supplier refunds could not stand.
Set aside the First Appellate Authority’s orders (dated 10-09-2025) and the original rejection orders.
Remitted the matters to the jurisdictional proper officer for the limited purpose of quantifying and sanctioning the admissible refund under Section 54 of the CGST Act, Section 16 of the IGST Act and the CGST Rules.
Directed that the legal question not be reopened, and that the claims not be rejected on the ground that an SEZ unit is categorically barred from claiming refund of ISD-distributed ITC.
Directed that any proposed exclusion for an alleged prior supplier refund be backed by documentary evidence showing correspondence with the credit claimed, and that the appellant be given a reasonable opportunity to respond first.
Asked that the exercise be completed preferably within three months of receipt of the order.

AMLEGALS REMARKS

This ruling matters for SEZ units that receive ITC through a corporate ISD, a common structure in group companies where input services are procured centrally. Refund applications in such cases have often been met with a mechanical reliance on the supplier-only proviso to Rule 89(1). The decision adds to the growing line of authority that the proviso is aimed at direct supplies to an SEZ and does not close the refund route for ISD-distributed credit used against the unit’s own exports.

We see three practical points for taxpayers:

The refund should be presented as a claim under Section 54(3) and Rule 89(4) for ITC attributable to the unit’s own zero-rated exports, not as a claim in place of the supplier on a direct supply. The Tribunal’s reasoning turned on this distinction.
The Tribunal made its relief subject to verification of the ISD distribution, the credit’s availability in the electronic credit ledger and the applicable refund formula. ISD invoices, Form GSTR-6 records and ledger reconciliations should be in order.
If the department alleges a double refund, it must produce the material and give an opportunity to respond. Replies to show cause notices and appeals should record a request for the underlying records and a hearing.

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