The Hon’ble Bombay High Court in the case of Sukraft Recycling Private Limited v. Union of India & Ors. [Writ Petition No. 540 of 2024, order dated August 21, 2025] held that unutilized Input Tax Credit (ITC) of compensation cess paid on raw material (coal) used in the manufacture of Kraft Paper exported as a zero-rated supply is refundable.
Facts
Sukraft Recycling Private Limited (‘the Petitioner’) is a manufacturer of Kraft Paper, registered under GST, and uses coal as a raw material, on which compensation cess is paid.
Union of India & Ors. (‘the Respondent’), through GST authorities, rejected the Petitioner’s refund application for unutilized compensation cess credit on coal, even as refunds for IGST and CGST were allowed on exports.
The Petitioner contended that the refund of compensation cess should be allowed as Kraft Paper (the exported product) is zero-rated and not subject to compensation cess. They argued that the refund mechanism for compensation cess is distinct from that for IGST/CGST and should not be denied merely for not using the bond/Letter of Undertaking option under Section 16(3) of the IGST Act, especially since no compensation cess is payable on the exported product.
The Respondent contended that the Petitioner could not claim compensation cess refund, having chosen to export under payment of IGST (and hence using Section 16(3) IGST route). They insisted that the mechanism of refund provided for IGST/CGST should also apply to compensation cess, and that both must be claimed under the same option.
Aggrieved by this rejection, the Petitioner filed a writ petition seeking refund and a declaration of its eligibility for credit of compensation cess under the GST (Compensation to States) Act.
Issue:
Whether an exporter of goods (Kraft Paper in the instant case) can claim refund of unutilized input tax credit of compensation cess paid on inputs (coal in the instant case), when the exported final product is zero-rated and does not attract compensation cess, even if refund on IGST is claimed under clause (b) of Section 16(3) of the IGST Act.
Held:
The Hon’ble Bombay High Court in Writ Petition No. 540 of 2024 held as under:
- Observed that, the justification offered by the Revenue for denying refund of compensation cess credit is “completely lacking logic,” since the statutory scheme and definitions pertaining to compensation cess are distinct from those under the CGST/IGST Acts.
- Noted that, Section 16 of the IGST Act restricts refund mechanism to IGST and CGST, while Section 2(g), Section 9, Section 11 of the Compensation to States Act provides an independent procedure for refund of compensation cess, incorporating mutatis mutandis, the GST provisions only for procedural purposes.
- Noted that, the Circular dated May 30, 2018 which says, refund of unutilized ITC of compensation cess is permissible even if the final product is not leviable to compensation cess, and that the mechanism for such refund is distinct from that for CGST/IGST refunds.
- Held that while IGST/CGST refund must follow Section 16(3) mechanism, compensation cess refund stands on its own statutory scheme. The Petitioner is entitled to refund as the exported product is zero-rated and does not attract compensation cess, while the input of coal does.
- Noted that a claimant cannot be denied compensation cess refund merely for not filing a bond/Letter of Undertaking if export is already established, and procedural details cannot override clear statutory entitlement when the exported product is exempt from compensation cess, and directed the Revenue to grant the refund together with interest within four weeks.
Our Comments:
The Bombay High Court’s judgment follows the precedent the Gujarat High Court judgment in Patson Papers Pvt. Ltd. v. Union of India [(2025) 29 Centax 457 (Guj.)], that affirms the refundability of compensation cess ITC under the Compensation to States Act even when the export refund for IGST is claimed under Section 16(3)(b) of the IGST Act. The reasoning aligns with the statutory interpretation that the Compensation Cess Act operates alongside, but distinctly from, the CGST/IGST law, due to differences in the definition of ‘input tax credit’ and the compensation cess mechanism.
Relevant Provisions:
Section 2(62) and Section 2(63) of the CGST Act, 2017.
“‘input tax’ in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes-
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy;
(63) “input tax credit” means the credit of input tax;”
Section 2(g) of the Goods and Services Tax (Compensation to States) Act, 2017
“(g) “input tax” in relation to a taxable person, means,-
( i ) cess charged on any supply of goods or services or both made to him;
(ii) cess charged on import of goods and includes the cess payable on reverse charge basis;”
Section 9 of the Goods and Services Tax (Compensation to States) Act, 2017
9. Returns, payments and refunds-
(1) Every taxable person, making a taxable supply of goods or services or both, shall-
(a) pay the amount of cess as payable under this Act in such manner;
(b) furnish such returns in such forms, along with the returns to be filed under the Central Goods and Services Tax Act; and
(c) apply for refunds of such cess paid in such form, as may be prescribed.
(2) For all purposes of furnishing of returns and claiming refunds, except for the form to be filed, the provisions of the Central Goods and Services Tax Act and the rules made there under, shall, as far as may be, apply in relation to the levy and collection of the cess leviable under section 8 on all taxable supplies of goods or services or both, as they apply in relation to the levy and collection of central tax on such supplies under the said Act or the rules made thereunder.”
CBIC’s Circular No. 45/19/2018-GST dated May 30, 2018
“5.2 …. Moreover, as section 17(5) of the CGST Act does not restrict the availment of input tax credit of compensation cess on coal, it is clarified that a registered person making zero rated supply of aluminum products under bond or LUT may claim refund of unutilized credit including that of compensation cess paid on coal.
5.3 Such registered persons may also make zero-rated supply of aluminum products on payment of integrated tax but they cannot utilize the credit of the compensation cess paid on coal for payment of integrated tax in view of the proviso to section 11(2) of the Cess Act, which allows the utilization of the input tax credit of cess, only for the payment of cess on the outward supplies. Accordingly, they cannot claim refund of compensation cess in case of zero-rated supply on payment of integrated tax.”
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