The Gujarat High Court (Ahmedabad Bench) ruled that a 100% Export Oriented Unit (EOU) is entitled to a refund of accumulated input tax credit (ITC) on zero-rated exports. The ruling came after finding that the petitioners are not “deemed exporters” but are exporters of goods engaged in zero-rated supplies under Section 16(1) of the IGST Act, and all inward supplies received by the petitioners were taxable supplies on which the suppliers had charged GST and had not availed the benefit of any deemed-export notification.
The Court noted that the petitioners had exported goods without payment of IGST under a valid Letter of Undertaking, which resulted in the accumulation of input tax credit on inputs, capital goods and input services. Further, the suppliers of raw materials to the petitioners, who used those inputs for manufacturing the finished export products, did not treat or report their supplies as deemed exports. Instead, all such transactions were reflected as ordinary B2B supplies in the regular GST return structure.
The suppliers also did not comply with the procedural requirements under Circular No. 14/14/2017 dated November 06, 2017, which mandates specific documentation for deemed export treatment. Correspondingly, the petitioners did not endorse any invoices as an EOU, as required under the circular when claiming deemed export benefits. Thus, the Court found from the factual record that the petitioners received only normal taxable supplies, not deemed-export supplies.
Accordingly, the Court held that the zero-rated supplies made by the petitioners cannot be brought within the ambit of “deemed exports,” as the petitioners themselves exported the goods and all inward supplies were treated merely as regular taxable B2B supplies. Since neither the suppliers nor the petitioners followed the deemed-export procedural framework under the GST law, the transaction cannot be reclassified retrospectively as deemed exports.
Consequently, the petitioners’ exports duly qualify as zero-rated supplies under Section 16 of the IGST Act, entitling them to claim a refund of unutilised input tax credit under Section 54(3) of the GST Act read with Rule 89(4) of the GST Rules.
The Division Bench comprising Justice Bhargav D. Karia and Justice Pranav Trivedi referred to the Circular No. 172/04/2022-GST, to clarify that ITC taken by a recipient specifically for claiming refund of tax paid on deemed-export supplies is not to be treated as “input tax credit” under Chapter V of the GST Act. Accordingly, such ITC availed only for the purpose of seeking refund of tax paid on supplies treated as deemed exports cannot be included in “Net ITC” when computing refund of unutilised ITC either under Rule 89(4) (zero-rated supply refund) or Rule 89(5) (inverted duty structure).
In the present case, the Bench pointed out that even though the petitioners have not claimed any refund of input tax credit on deemed-export supplies, this fundamental fact appears to have been overlooked by the Tax authorities. Having already held on merits that the petitioners are fully entitled to the refund of accumulated ITC on zero-rated supplies under Rule 89(1)/89(4), the Bench concluded that subsequent questions, whether the respondents were justified in invoking review powers under Section 107(2) or issuing recovery notices under Sections 73/74, no longer survive for adjudication.
Briefly, the petitioners are 100% Export Oriented Units (EOUs) and had filed refund claims under Section 54 of the GST Act, read with Rule 89(4) of the GST Rules, relying on Notification No. 48/2017. Their suppliers had not availed input tax credit, and the competent authority initially sanctioned the refunds. Subsequently, however, the refund sanction orders were reviewed under Section 107(2) on the premise that, being EOUs, the petitioners ought to have filed refund applications either under the proviso to Rule 89(1) or Rule 89(4A), which specifically governs cases where the supplier has availed the benefit of Notification No. 48/2017.
Since these provisions stipulate that in such situations, the refund is restricted to input tax credit on other inputs or input services used for zero-rated supplies, and in the case of deemed exports, the refund claim may be filed by the recipient only if no ITC has been availed, the Review Authority therefore took the position that the petitioners’ refund claims, not having been filed under Rule 89(4A) or the proviso to Rule 89(1), were procedurally defective despite the initial sanction.
Appearances:
Advocate Uchint Sheth, for the Petitioner/ Taxpayer
Advocate Hetvi H Sancheti, for the Respondent/ Revenue
