Shah Paperplast Industries Ltd vs Union Of India on 13 November, 2025

Judgment Summary: Shah Paperplast Industries Ltd vs Union Of India

1. Outcome

The petitions were allowed in favor of the Petitioner. The High Court quashed and set aside the orders that rejected the Petitioner's refund claims and the orders that sought to recover refunds already granted. The Court directed the respondents to pay the refund claims within 12 weeks.

2. Core Issue

The central legal issue was whether a 100% Export Oriented Unit (EOU), which is an actual exporter of goods (a zero-rated supply), can be denied a refund of unutilized Input Tax Credit (ITC) under Section 54(3) of the CGST Act, 2017, on the ground that its inward supplies are "deemed exports." The respondents contended that the Petitioner should have followed the specific refund procedure prescribed for deemed exports (under Rule 89(1) or 89(4A) of the CGST Rules, 2017) instead of the general procedure for zero-rated supplies (under Rule 89(4)).

3. Key Facts

• Petitioner's Business: The Petitioner, Shah Paperplast Industries Ltd., is a 100% EOU engaged in the manufacture and export of goods.
• Procurement & Export: They purchased raw materials from domestic registered suppliers on payment of GST. These materials were used to manufacture finished products, which were then exported without payment of tax under a Letter of Undertaking (LUT), qualifying as a "zero-rated supply."
• Refund Claim: Due to the exports being tax-free, ITC accumulated in the Petitioner's electronic credit ledger. They filed applications for a refund of this unutilized ITC under Section 54(3) of the CGST Act read with Rule 89(4).
• Department's Action: Initially, some refunds were sanctioned. However, following the issuance of Circular No. 172/04/2022-GST dated 06.07.2022, the department changed its stance.
• Denial/Recovery: The department argued that since supplies to a 100% EOU are considered "deemed exports," the Petitioner's refund claim was filed under the wrong provision. Consequently, new refund claims were rejected, and proceedings were initiated to review and recover the refunds already granted.
• Challenge: The Petitioner challenged the legality of Para 2.2 of the said Circular and the subsequent orders rejecting/recovering the refund.

4. Arguments

Petitioner's Arguments:

• The Petitioner is an actual exporter making zero-rated supplies, not a deemed exporter. Therefore, they are correctly entitled to a refund of unutilized ITC under Section 54(3) of the CGST Act.
• The suppliers of raw materials to the Petitioner did not treat the transactions as "deemed exports" and did not follow the procedure prescribed in Circular No. 14/14/2017-GST. The supplies were recorded as standard B2B transactions.
• Rule 89(4A) applies only when the supplier has availed the benefit of the deemed export notification, which was not the case here.
• Para 2.2 of the impugned Circular is being misinterpreted and applied incorrectly to their case. Furthermore, it cannot be applied retrospectively.
• The department's action of reviewing a sanctioned refund order and initiating recovery under Section 73 is procedurally flawed; the only remedy was to file an appeal.

Respondent's (Revenue's) Arguments:

• As per Notification No. 48/2017-Central Tax, any supply of goods to a 100% EOU is classified as a "deemed export."
• Therefore, the Petitioner was obligated to claim the refund under the specific provisions for deemed exports, i.e., the third proviso to Rule 89(1) or Rule 89(4A) of the CGST Rules.
• The refund claim filed under Rule 89(4) was erroneous, and the department was justified in rejecting it and recovering the wrongly sanctioned amounts.
• Circular No. 172/04/2022-GST is merely clarificatory in nature and explains the existing legal position, making it applicable to the Petitioner's case.
• The department has the power under Sections 73 and 74 of the CGST Act to recover erroneously granted refunds, independent of the appeal/review mechanism.

5. Court’s Reasoning

• Distinction between Actual and Deemed Exporter: The Court made a crucial distinction. The Petitioner is the actual exporter whose supplies leave the country, making them "zero-rated supplies" under Section 16(1) of the IGST Act. The "deemed export" status applies to the inward supply made to the EOU by its domestic supplier, not the outward supply made by the EOU.
• Conditions for Deemed Export Not Met: The Court noted that for a transaction to be treated as a deemed export for refund purposes, the prescribed procedures must be followed. In this case, the suppliers did not treat the supplies as deemed exports, nor was the procedure under Circular 14/14/2017-GST followed.
• Petitioner's Entitlement: As an actual exporter making zero-rated supplies, the Petitioner is legally entitled to claim a refund of unutilized ITC under the provisions of Section 54(3) of the CGST Act read with Rule 89(4). The department's insistence on using a different rule was incorrect.
• Inapplicability of the Circular: The Court reasoned that Para 2.2 of Circular No. 172/04/2022-GST applies to a different scenario: where the recipient of a deemed export supply claims a refund of the tax paid on that specific inward supply. It does not bar an actual exporter (like the Petitioner) from claiming a refund of its own accumulated ITC arising from its subsequent zero-rated outward supplies.
• Academic Questions: Since the Court decided the primary issue on merits in favor of the Petitioner, it did not delve into the secondary questions regarding the validity (vires) of the circular or the procedural propriety of initiating recovery under Section 73/107(2), leaving these issues open for a future appropriate case.

6. Statutory References

• Central Goods and Services Tax (CGST) Act, 2017:
  • Section 2(39) (Definition of "deemed exports")
  • Section 54 & 54(3) (Refund of tax and unutilized ITC)
  • Section 73 & 74 (Determination of tax not paid or erroneously refunded)
  • Section 107(2) (Power of Commissioner to direct appeal)
  • Section 147 (Power to notify deemed exports)
  • Section 168 (Power of the Board to issue instructions)
• Integrated Goods and Services Tax (IGST) Act, 2017:
  • Section 16(1) (Definition of "zero-rated supply")
• Central Goods and Services Tax (CGST) Rules, 2017:
  • Rule 89(1) (Application for refund)
  • Rule 89(4) (Formula for refund for zero-rated supplies)
  • Rule 89(4A) (Refund for supplies where supplier availed deemed export benefit)
  • Rule 89(5) (Formula for refund for inverted duty structure)
• Notifications & Circulars:
  • Notification No. 48/2017-Central Tax dated 18.10.2017
  • Circular No. 14/14/2017-GST dated 06.11.2017
  • Circular No. 172/04/2022-GST dated 06.07.2022

7. Precedents Cited

• Collector of Central Excise, Kanpur v. Clock (India) Pvt. Ltd. (2000) 6 SCC 650
• Priya Blue Industries Ltd. v. Commissioner of Customs (Preventive) (2005) 10 SCC 433
• ITC Limited v. Commissioner of Central Excise, Kolkata IV (2019) 17 SCC 46
• Union of India v. Vkc Footsteps India Private Limited (2022) 2 SCC 603
• Grasim Industries Limited v. Commissioner of Central Excise (2011) 14 SCC 685
• M/s. Premier Cotton Textiles v. Commissioner of Central Excise 2019 (368) E.L.T. 465 (Madras)
• Patanjali Foods Ltd. v. Union of India and others (Special Civil Application No.17298 of 2024)
• Asian paints (India) Ltd. v. Commissioner of Central Excise 2002 (142) E.L.T. 522 (SC)
• Eicher Motors Ltd. & another v. Union of India and others (1999) 2 SCC 361
• Jayam & Company v. Assistant Commissioner and another (2016) 15 SCC 125
• And various other judgments from High Courts.