Goods & Services Tax (GST) in IndiaSEZ Unit Entitled to Claim Refund of Unutilized ITC

The Gujarat High Court, in the case of M/s IPCA Laboratories Ltd. v. Commissioner, R/Special Civil Application No. 638 of 2021, decided on 18.02.2022, held that a Special Economic Zone (“SEZ”) Unit making Zero Rated Supplies is entitled to refund of unutilized Integrated Goods and Services Tax (“IGST”) credit lying in the Electronic Credit Ledger.

FACTS

IPCA Laboratories Ltd. (hereinafter referred to as “the Applicant”), a pharmaceutical company, had one of its manufacturing facilities situated in Kandla SEZ, Gandhidham and was authorized to operate as a SEZ. The Applicant was engaged in the export of goods under the Letter of Undertaking (“LUT”) from the SEZ Unit.

In the year 2017-18, the Applicant accumulated Input Tax Credit (“ITC”) of Rs. 21,66,887/-. The ITC accumulation was on account of Input Service Distributor (“ISD”) credit received amounting to Rs. 18,67,578/-, and ITC of Goods and Services Tax (“GST”) paid in case of inward supplies received for export of goods as charged by the supplier amounting to Rs. 2,99,289/-.

The Applicant, being a SEZ Unit, made Zero Rated Supplies under GST and could not utilize the ITC. Thus, the accumulated ITC remained unutilized in the Electronic Credit Ledger. The Applicant filed a refund application in Form GST RFD-01A for the refund of such accumulated ITC.

Thereafter, a Show Cause Notice in Form GST RFD-08 was issued to the Applicant on the following grounds:

1. The Applicant was a SEZ Unit making Zero Rated Supplies, and hence was not eligible for refund under Section 54 of the Central Goods and Services Tax Act, 2017 (“CGST Act”).
2. The Applicant’s refund could not be processed under any category of refund for manual refund processing.
3. For supplies received from outside SEZ, the Applicant was not required to pay any tax under forward charge or reverse charge mechanism; and for supplies within the SEZ, such supplies did not have any tax treatment and therefore, there was no question of tax payment.
4. The Central Board of Indirect Taxes and Customs (“CBIC”) did not issue any circular, notification or relevant guidelines for processing GST refund claim application of SEZ Units for tax paid on inward supplies, and in the absence of the same, the refund application could not be processed.

Subsequently, the Applicant’s refund claim of Rs. 21,66,867/- under Section 54 of the CGST Act was rejected by the Assistant Commissioner vide Order in Form GST RFD-06.

The Applicant preferred an appeal before the Joint Commissioner (Appeals), but the same was dismissed. Aggrieved by the rejection of the Applicant’s claim of refund, the Applicant filed the present writ application before the Gujarat High Court (“High Court”).

ISSUE BEFORE THE HIGH COURT

Whether the Applicant, being a SEZ Unit, is entitled to claim the refund of IGST credit lying unutilized in the Electronic Credit Ledger?

DECISION AND FINDINGS

The High Court held that the Applicant is entitled to claim refund of IGST lying in the Electronic Credit Ledger in the present set of facts, as there was no particular Supplier who could claim the refund under Section 54 of the CGST Act and Section 89 of the CGST Rules as the ITC was distributed by an ISD.

The High Court noted that the issue raised is no longer res integra, in view of the judgment in the case of M/s. Britannia Industries Limited vs. Union of India [Special Civil Application No.15473 of 2019] (“Britannia case”), wherein it was held that it is not possible for a specific supplier to file a refund application to claim the refund of ITC distributed by ISD and therefore, the claim of refund made by the SEZ unit of the Petitioner is required to be granted.

The decision in the Britannia case was based on M/s. Amit Cotton Industries vs. Principal Commissioner of Customs [Special Civil Application No.20126 of 2018], wherein it was held that:

“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.”

AMLEGALS REMARKS

The SEZ initiative was launched in India pursuant to the Special Economic Zones Act, 2005, with the view to create a competitive environment for the export of goods and services from India, thereby increasing foreign exchange inflow into India.

The GST regime grants certain advantages to SEZ Units in terms of their GST liability. Supplies made to SEZ Units are considered at par with export supplies, and thus, are exempted from the payment of IGST under Notification No. 64/2017-Customs dated 05.07.2017.

In the present case, the Applicant made Zero Rated Supplies and sought for the refund of its accumulated ITC under Section 54 of the CGST Act. The Applicant also sought for refund of ITC on tax paid on goods and services received by SEZ from various suppliers, although the majority of the accumulated ITC was on account of the ITC distributed by ISD.

The High Court allowed the refund of both such accumulated and un-utilised ITC in the absence of any provision in the CGST Act, or its Rules, for the suppliers of goods and services to file an application for the refund of ITC distributed by ISD.

Therefore, the High Court relied on the decision in the Britannia case and directed the GST authorities to process the claim of refund made by the Applicant for the unutilized IGST credit lying in Electronic Credit Ledger.

The present case, as well as the Britannia case, was originally argued by Mr. Anandaday Mishra, Founder & Managing Partner, AMLEGALS, who represented the Applicant in both the matters. This decision would be of significant assistance to various SEZ Units having unutilized ITC in their Electronic Credit Ledger, pending to be refunded under Section 54 of the CGST Act.

For any queries or feedback, please feel free to get in touch with chaitali.sadayet@amlegals.com or riddhi.dutta@amlegals.com.