Refund On Zero-Rated Supplies Cannot Be Denied Based On Deemed Export Circular: Gujarat High Court Sets Aside Recovery Orders

The Court ruled that Circular No. 172/04/2022-GST and Rule 89(4A) were inapplicable, quashed the withdrawal and recovery of refunds issued under Section 73, rejected the retrospective reclassification of zero-rated supplies as deemed exports, and directed restoration of refunds within 12 weeks while leaving broader questions of law on refund scrutiny and recovery open.

Supplies & Tax Treatment

Petitioners were engaged in manufacturing and exporting tissue paper, wrapping paper, and disposable plastic products. Petitioners purchased raw materials from registered suppliers under GST which was utilised for manufacture of the finished products for the purpose of export. The finished goods were exported without payment of tax, entitling them to claim refund of unutilised Input Tax Credit (ITC) under Section 54(3) of the CGST Act. As Petitioners had filed an undertaking to the effect that suppliers had not claimed refund under deemed export Notification No.48/2017 dated October 18, 2017 and Circular No.14/2017 dated November 06, 2017, a refund application was filed. The provisional refund was granted to Petitioner.

CBIC Circular and Refund Withdrawal

On July 06, 2022, CBIC issued Circular No. 172/04/2022-GST, stating that tax paid on deemed exports would not be treated as ITC for refund calculation under Rule 89(4) and (5) of the CGST Rules, 2017.

Based on this circular, it was alleged that the tax paid on deemed exports would not be considered as ITC. As such, a Show Cause Notice (SCN) dated July 20, 2022 under Section 73 of the CGST Act, 2017 was issued to the Petitioners by which Respondents withdrew the refund by order dated August 18, 2022 and sought to recover Rs. 28,40,959. The refunds for earlier periods (Dec 2021–Mar 2022) were also reviewed and challenged, leading to further appellate orders against the Petitioners.

Petitioners challenged the SCN on the ground that merely because suppliers sold the goods upon payment of GST instead of benefit of the deemed export Notification, it cannot be barred from claiming refund on the exports under Section 54(3) of the CGST Act. As for invoking Section 73 of the CGST Act, Petitioners submitted that in cases where order granting refund is not challenged by the

Assessing Authority, the higher authority cannot suo-motu review the order and withdraw the grant of refund. Contrarily, the Respondents submitted that Sections 73 and 74 of the CGST Act, 2017 were invokable to recover an erroneous refund granted under section 54 of the GST Act even in the absence of an appeal preferred against the refund order.

Findings

As opposed to the insistence by Respondent that refund should have been claimed under Rule 89(4A) (deemed export notification cases), the High Court explained that Petitioners were making zero-rated supplies without payment of taxes under Letter of Undertaking which led to accumulated ITC of the inputs, capital goods and services for which refund claim was filed. Thus, as neither the procedure for 'deemed exports' as specified in Circular No.14/14/2017 was followed by the Petitioners nor any invoices were endorsed by it as an EOU unit, the High Court observed that

“Therefore, in facts of the case, zero rated supplies made by the petitioners is not coming in the purview of the deemed exports because the petitioners have exported the goods and therefore, entitled to refund of the unutilised input tax credit as per the provisions of section 54(3) of the GST Act read with Rule 89(4) of the GST Rules.”

Following the recommendation of the 54^th GST Council Meeting, vide Notification No. 20/2024-Central Tax issued on October 8, 2024, Rule 89(4A) had been omitted by the CGST(Second Amendment) Rules, 2024 prospectively.

The High Court re-iterating that Petitioners were exporters of the finished goods who had claimed refund being 100% EOU of zero-rated supply without payment of tax, held that appellate authority withdrew the refund by applying Rule 89(4A) was contrary to Section 2(39) of the CGST Act, 2017which defines “deemed exports”. The High Court clarified that the Circular No. 172/04/2022-GST, particularly, para 2.2. which dealt with 'NET ITC' calculation would be inapplicable. Further, the High Court illustrated how Circular would become applicable had the suppliers of Petitioners claimed the refund as deemed exporters to state that Rule 89 (4A) would also be inapplicable.

As for recovery mechanism under Section 73 as well as on suo motu powers for reviewing the sanctioned refund orders, the High Court recorded submissions of the parties on refund being a statutory right and refund orders could be subjected to scrutiny. The High Court also noted judicial support drawn by the parties from the cases of Eicher Motors, Jayam & Co., VKC Footsteps, Patanjali Foods, Tripura Ispat, and others to argue on refund rights flow and Supreme Court decisions in case of Grasim Industries, Asian Paints and Premier Cotton Textiles (Madras HC) to argue that recovery provisions like Section 11A of Excise Act (akin to Section 73) allowed recovery of erroneous refunds independent of appellate process. However, the High Court kept the questions of law open.

Case Detail: Shah Paper Plast Industries Limited & Anr. vs. UOI & Ors.

Case No.: Special Civil Application No. 18892 of 2023

For Petitioner: Advocate Uchit N. Sheth

For Respondent: Ms. Hetvi H. Sancheti

Click Here To Read/Download Order 

Citation : 2025 LiveLaw (Guj) 197