Assessee entitled to claim GST Refund of zero-rated exports of unutilised ITC arising from Inverted Duty Structure.

The Hon’ble Madras High Court in the case of VSM Weavess India (P.) Ltd. v. Assistant Commissioner [Writ Petition No. 960, 964 and 968 of 2024 dated January 10, 2024]held that the refund claim for zero rated exports does not disentitle the Petitioner from claiming a refund for unutilized ITC. Further, if all the conditions are fulfilled as per Section 54 of the Central Goods and Service Tax Act, 2017 (“the CGST Act”) read with Rule 96 of the Central Goods and Service Tax Rules, 2017 (“the CGST Rules”) the GST refund claim cannot be rejected on the ground that debit entries were not made. Hence, the matter was remanded back.

Facts:

VSM Weavess India (P.) Ltd. (“the Petitioner”) were engaged in a textile manufacturing and used viscose yarn as a raw material for the manufacture of viscose fabrics. The tax paid on viscose yarn exceeded the tax payable on supplies. Therefore, this resulted in unutilized ITC as a result of the inverted duty structure (“IDS”) where the raw material was taxed at 12%, whereas the final product was taxed at 5%.

The Petitioner contended that export of sales is zero rated and hence are entitled to refund under the Integrated Goods and Services Tax (“IGST”).  Earlier, the Petitioner had applied for and had received refund under the IGST. Therefore, the Petitioner applied for refund with regard to unutilized ITC arising from the IDS. The application was rejected by the Assistant Commissioner (ST) (“the Respondent”) by issuing three separate deficiency memos (“Impugned Deficiency Memos”) based on the following reasons:

• refund claimed and received earlier pertained to zero-rated supplies,
• debit entries for claims were not made, and
• non-submission of supporting documents,

Hence, aggrieved by the Impugned Deficiency Memos, the present writ petition was filed by the Petitioner.

Issue:

Whether the Petitioner is entitled to Refund with regard to unutilized ITC arising from the IDS?

Held:

The Madras High Court in ­­­­­­­­ Writ Petition No. 960, 964 and 968 of 2024 held as under:

• Opined that, the refund claimed and received earlier pertained to zero rated supplies and not unutilized ITC. Under Section 54 of the CGST Act, refund may be claimed either for unutilized ITC on account of an IDS or in respect of zero-rated exports. Therefore, the refund claim for zero rated exports does not disentitle the Petitioner from claiming a refund for unutilized ITC. Hence, the first reason for rejection was untenable.
• Observed that, as long as such conditions are fulfilled under the Section 54 read with Rule 96 of the CGST Rules, a refund claim cannot be rejected on the ground that debit entries were not made.
• Held that, the last reason mentioned in the Impugned Deficiency Memos related to non-submission of supporting documents. It is possible that ITC may accumulate both in respect of input goods that are not affected by IDS and by the purchase of input goods that are so affected. Therefore, it is necessary for the Petitioner to submit all necessary documents to establish that its claim for refund is confined to input goods that are affected by an IDS. Hence, the deficiency memos were quashed, the matter was remanded for re-consideration.
• Directed that, the Petitioner may submit any further supporting documents in respect of its refund claim within two weeks from the date of receipt of a copy of this order. Upon receipt thereof, the Respondent was directed to take such documents into account, provide a reasonable opportunity to the Petitioner and dispose of the refund applications by a reasoned order in accordance with applicable law within four weeks therefrom.

Our Comment:

In this context, it has been clarified inter alia in para 44 of Circular No. 125/44/2019 – GST dated November 18, 2019that that the substantive benefits of zero rating may not be denied where it has been established that exports in terms of the relevant provisions have been made.  The relevant paragraph is reproduced below:

”Export of goods or services can be made without payment of Integrated tax under the provisions of rule 96A of the CGST Rules. Under the said provisions, an exporter is required to furnish a bond or Letter of Undertaking (LUT) to the jurisdictional Commissioner before effecting zero rated supplies. A detailed procedure for filing of LUT has been specified vide Circular No. 8/8/2017 –GST dated 4.10.2017. It has been brought to the notice of the Board that in some cases, such zero-rated supplies were made before filing the LUT and refund claims for unutilized input tax credit got filed. In this regard, it is emphasized that the substantive benefits of zero rating may not be denied where it has been established that exports in terms of the relevant provisions have been made. The delay in furnishing of LUT in such cases may be condoned and the facility for export under LUT may be allowed on ex post facto basis taking into account the facts and circumstances of each case.”

The above clarifications imply that as long as goods are actually exported or as the case may be, payment is realized in case of export of services, even if it is beyond the time frames as prescribed in sub-rule (1) of rule 96A, the benefit of zero-rated supplies cannot be denied to the concerned exporters. Accordingly, it is clarified that in such cases, on actual export of the goods or as the case may be, on realization of payment in case of export of services, the said exporters would be entitled to refund of unutilized input tax credit in terms of sub-section (3) of section 54 of the CGST Act, if otherwise admissible.