ITC Cess Refund – HC Allows Refund on Coal Used for Export

Case Details: Patson Papers (P.) Ltd. vs. Union of India - [2025] 174 taxmann.com 6 (Gujarat)

Judiciary and Counsel Details

• Bhargav D. Karia & D.N. Ray, JJ.
• Hardik V Vora, for the Petitioner.
• Maunil G Yajnik, for the Respondent.

Facts of the Case

The petitioner, a GST-registered manufacturer, purchased coal on which Compensation Cess was paid. This coal was utilized in the manufacture of goods that were subsequently exported by the petitioner under a Letter of Undertaking (LUT) with payment of Integrated Goods and Services Tax (IGST). The petitioner received a refund of the IGST paid on such exported goods from the Customs Authorities under Section 54(3) read with Section 16(3) of the IGST Act, recognising the exports as zero-rated supplies.

Subsequently, the petitioner filed refund applications claiming Input Tax Credit (ITC) on the portion of unutilised Compensation Cess paid on the purchase of coal used in manufacture. However, the department issued show cause notices proposing to reject the refund claims, relying on Paragraph 42 of Circular No. 125/44/2019 dated 18-11-2019 read with Paragraph 5 of Circular No. 45/19/2018 dated 30-05-2018. These circulars stated that refund of unutilized ITC of cess is admissible only if exports are made without payment of tax, whereas in this case, the petitioner had exported goods on payment of IGST. The department thus contended that the refund of cess ITC was not permissible. The petitioner, then filed an appeal before Gujarat High Court.

High Court Held

The Hon’ble High Court held that the department had misinterpreted the relevant circulars while rejecting the petitioner’s refund applications. A conjoint reading of Section 54(3) of the CGST Act, Section 16(3) of the IGST Act, and Section 11(2) of the Goods and Services Tax (Compensation to State) Act, along with the aforementioned circular provisions, established that the petitioner was entitled to refund of the unutilized ITC of cess paid on coal used for manufacturing goods exported as zero-rated supplies. Although the petitioner paid IGST on export, no Compensation Cess was payable on the exported goods because they were exempt from cess levy.

Consequently, the proviso to Section 11(2) of the Cess Act, which disallows refund of cess ITC if IGST is paid, was not applicable. The petitioner, having paid IGST under Section 16(3) of the IGST Act on zero-rated supplies and being entitled to a refund of such IGST, was also entitled to refund of unutilized ITC of Compensation Cess paid on inputs used in manufacture. Accordingly, the Court directed the department to process the petitioner’s refund applications, affirming the entitlement to refund in favour of the petitioner.