24.07.2025:Unutilized compensation cess eligible for refund under zero-rated supply provisions:The Gujarat High Court

The Gujarat High Court in the case of Atul Limited vs Union of India & Ors, vide order dated 24.07.2025 in R/Special Civil Application No. 13174 of 2022, held that refund of unutilized Compensation Cess credit cannot be denied merely because the exported goods were subject to IGST payment and not Compensation Cess. The Court ruled that where goods are exported under payment of IGST, and input services or inputs (like coal) used in manufacture suffer Compensation Cess which remains unutilized, such cess is eligible for refund under Section 54 of the CGST Act read with Rule 89 of CGST Rules.

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Facts of the Case:

The petitioner, Atul Limited, is a manufacturer and exporter of goods. In its manufacturing process, it uses coal as an input, on which Compensation Cess is levied. The final goods were exported under LUT or on payment of IGST, and no Compensation Cess was payable on the exported goods.

During the relevant period, Atul Limited accumulated unutilized input tax credit (ITC) of Compensation Cess paid on coal. Since there was no output liability of Compensation Cess, the ITC remained unutilized.

The petitioner filed refund applications under Section 54(3) of the CGST Act, read with Rule 89(4), seeking refund of the unutilized Compensation Cess on account of zero-rated exports. However, the refund claims were rejected by the GST Department citing CBIC Circulars dated 30.05.2018 and 18.11.2019, which were interpreted by the department to imply that no refund is allowed where the exported goods are not subject to Compensation Cess.

Aggrieved, Atul Limited approached the Gujarat High Court.

Issues:

  1. Whether unutilized ITC of Compensation Cess paid on inputs (coal) used in manufacture of exported goods (which are not subject to Compensation Cess) is eligible for refund.
  2. Whether the department’s reliance on CBIC Circulars dated 30.05.2018 and 18.11.2019 is valid in denying refund of Compensation Cess.
  3. Whether Section 54(3) of the CGST Act allows refund of unutilized Compensation Cess in cases of export of goods under IGST route.

Ruling:

The Gujarat High Court held that Atul Limited is entitled to refund of unutilized ITC of Compensation Cess. It stated that Section 54(3) of the CGST Act allows refund of any unutilized input tax credit, including Compensation Cess, where the output supply is zero-rated, such as exports.

The Court further held:

  • The Circulars dated 30.05.2018 and 18.11.2019 were misapplied by the department. These Circulars do not prohibit refund of Compensation Cess where accumulated due to zero-rated supplies.
  • The mere fact that exports were made with payment of IGST and not under LUT does not disqualify the petitioner from claiming the refund of unutilized cess credit.
  • The Court also relied on its earlier decision in Patson Papers Pvt Ltd, which had dealt with similar issues and allowed refund of accumulated Compensation Cess in similar circumstances.
  • It emphasized that Circulars cannot override statutory provisions and should be read harmoniously with the law.
  • The department’s reading of the Circular was contrary to the intent of GST law, which aims to zero-rate exports and refund all taxes suffered in the input chain.

Outcome:

The Gujarat High Court quashed the impugned orders denying refund and directed the authorities to process the refund claims filed by Atul Limited in respect of unutilized Compensation Cess.

Legal Takeaway:

The ruling reinforces the position that exporters are entitled to refund of unutilized Compensation Cess, even where such cess is not applicable on the exported goods, as long as the cess was legitimately paid on inputs used in the manufacture of exported products. It also underscores that statutory provisions prevail over circulars, especially when refund provisions under Section 54 are clearly worded.

To read the complete judgement Atul Limited vs Union of India & Ors,