M/S. Atc Tires Private Limited vs Joint Commissioner Of Gst & on 8 March, 2022

1. Outcome

The Writ Petition was allowed. The High Court quashed the Order-in-Appeal No. 151/2021-JC(GSTA) dated 07.10.2021, which had denied the refund claim. Consequently, the Court directed the respondents to grant the petitioner the claimed refund of unutilized Input Tax Credit (ITC) amounting to ₹1,42,11,506 for the period from April 2019 to September 2019.

2. Core Issue

The central legal question was whether a Special Economic Zone (SEZ) unit is eligible to claim a refund of unutilized Input Tax Credit (ITC) on account of its zero-rated supplies (exports), when such ITC pertains to common input services procured by its Head Office and subsequently distributed to the SEZ unit through its registration as an Input Service Distributor (ISD).

3. Key Facts

• The petitioner, M/s. ATC Tires Private Limited, operates an SEZ unit in Tirunelveli, Tamil Nadu, which is engaged in the manufacture and export of tyres. These exports qualify as "zero-rated supplies" under the IGST Act.
• Certain common input services were procured by the petitioner's Head Office in Mumbai for the benefit of the Head Office, the SEZ unit, and another EOU unit in Gujarat.
• The Head Office, registered as an Input Service Distributor (ISD), distributed the proportionate ITC on these common services to the SEZ unit.
• The petitioner (SEZ unit) filed six refund applications under Section 54 of the CGST Act for the accumulated ITC distributed by the ISD for the period April 2019 to September 2019.
• The Assistant Commissioner rejected the refund claims, and this rejection was upheld by the Joint Commissioner (Appeals) on the grounds that for supplies to an SEZ, only the supplier of services can claim the refund, not the recipient SEZ unit.
• The petitioner challenged the appellate order before the High Court, as the GST Appellate Tribunal was not yet constituted.

4. Arguments

Petitioner's Arguments (M/s. ATC Tires Private Limited):

• Exports from an SEZ unit are zero-rated supplies under Section 16 of the IGST Act, which explicitly entitles them to a refund of unutilized ITC.
• The Head Office, being only an ISD and not a supplier of goods/services, could not have claimed the refund.
• The original third-party supplier of services to the Head Office also could not claim the refund as their supply was not made directly to an SEZ unit.
• Denying the refund to the SEZ unit would trap the tax credit, making it a cost, which defeats the legislative intent of making exports competitive and tax-free.
• The procedural requirement under the second proviso to Rule 89(1) of the CGST Rules (stating the supplier should file the claim) cannot override the substantive right to refund granted under Section 16 of the IGST Act and Section 54 of the CGST Act.

Respondents' Arguments (GST Department):

• The second proviso to Rule 89(1) of the CGST Rules explicitly states that in respect of supplies to an SEZ unit, the refund application shall be filed by the supplier of goods or services.
• The petitioner is a recipient of services (via ISD mechanism) and not the supplier, hence they are ineligible to file the refund claim.
• The refund granted for a prior period is irrelevant as that order is under appeal by the department, and the High Court judgment it relied upon (Britannia Industries) is under challenge before the Supreme Court.
• The petitioner's claim does not fall under the categories specified in the relevant CBIC circulars for refund processing.

5. Court’s Reasoning

• The Court held that exports by the petitioner from its SEZ unit are unequivocally "zero-rated supplies" under Section 16 of the IGST Act. This section grants a substantive right to claim a refund of unutilized ITC to make exports tax-neutral.
• The Court reasoned that the entire GST chain must be considered. The original supplier provided services to the Head Office, not the SEZ unit, and thus could not claim a refund. The Head Office, being an ISD, is merely a pass-through entity for credit and cannot claim a refund on its own account.
• If the petitioner (the actual exporter) is also denied the refund, the tax paid on input services becomes a dead cost. This would frustrate the primary objective of zero-rating, which is to relieve exports from the burden of domestic taxes.
• The Court interpreted the second proviso to Rule 89(1) as a procedural provision applicable to a standard transaction where a DTA supplier directly bills an SEZ unit. It cannot be used to extinguish the substantive right of an exporter (the SEZ unit) to claim a refund in a more complex but legitimate business arrangement involving an ISD.
• A procedural rule cannot be interpreted in a manner that defeats the purpose of the parent act. Citing the Supreme Court's decision in Unichem Laboratory, the Court emphasized that authorities must not deprive an assessee of a benefit available in law merely to augment revenue.
• Therefore, the Court concluded that the denial of the refund was based on a flawed and overly restrictive interpretation of the law. The petitioner, having made zero-rated supplies, is entitled to the refund of the unutilized ITC distributed by its ISD.

6. Statutory References

• Integrated Goods and Services Tax (IGST) Act, 2017:
  • Section 2(23): Definition of 'zero-rated supply'
  • Section 16: Provisions for 'Zero Rated Supply'
• Central Goods and Services Tax (CGST) Act, 2017:
  • Section 2(61): Definition of 'Input Service Distributor'
  • Section 54: Provisions for 'Refund of tax', particularly Section 54(3)
• Central Goods and Services Tax (CGST) Rules, 2017:
  • Rule 89: Application for refund, particularly the second proviso to Rule 89(1)
• Special Economic Zones (SEZ) Act, 2005 & Rules, 2006: Referenced in the impugned order.

7. Precedents Cited

• Britannia Industries Limited vs. Union of India [2020 (42) GSTL 3 (Guj.)]: Cited by the petitioner to support their stance, though the respondents noted it was under appeal in the Supreme Court.
• IPCA Laboratories Ltd. vs. Commissioner [2022-VIL-136-Guj]: Cited by the petitioner as following the Britannia view.
• Platinum Holdings Private Limited vs. Additional Commissioner of GST [2021 (10) TMI 630 (Madras HC)]: Cited by the petitioner on a related issue of refund to SEZs.
• Unichem Laboratory Vs Collector of Central Excise, Bombay [2002 (145) ELT 502 (SC)]: Relied upon by the High Court to hold that tax authorities should not unfairly deprive an assessee of a benefit available in law.
• M/s. Punjable Tractors Ltd. [2005 (181) ELT 380 (SC)]: Cited by the respondent appellate authority in the impugned order to emphasize adherence to the law.