SEZ is entitled for refund of ITC distributed by ISD¹

Facts of the case

The petitioner is a unit located in Special Economic Zone and is not able to utilize the credit of the Input tax credit of IGST from its ISD. Petitioner filed an application for refund in FORM RFD-01A but the same was rejected. It is to be noted that the stand of the department that the petitioner is not entitled to seek the refund of the ITC paid in connection with goods or services supplied to SEZ unit is not tenable.

Submission on behalf of the petitioner

It was submitted by the petitioner that Section 2(61) of the Central Goods and Service Tax Act, 2017 defines “input service distributer”means

“an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office”

It was therefore submitted that as the petitioner has received input tax credit from ISD, the petitioner is entitled to the refund being an SEZ unit.

It is to be noted that the procedure to distribute ITC by ISD was clarified through notification ¹ and SEZ Unit is not excluded in the said notificationfor distribution of ITC to all the units in the manner prescribed.

It was clarified that service tax attributable to the services used in more than one unit to be distributed pro-rata on the basis of the turnover during the relevant period of the concerned unit to the sum total of the turnover of all the units and similarly, in facts of the present case also, credit of service tax is distributed to all the units by the ISD and therefore, the claim of refund made by the SEZ unit of the petitioner is required to be granted.

Submission by the Respondent

It was submitted by the respondent thatthe Government has offered various incentives and facilities to the units in SEZs for attracting investments including foreign investments. The incentives include duty-free import/domestic procurement of goods for development, operation and maintenance of SEZ units, exemption from Central Sales Tax, and exemption from Service Tax and from State sales tax which has now been subsumed into GST and supplies to SEZs are zero-rated under IGST Act, 2017

It was also submitted that through a notification ¹Central Government exempts all the goods and/or services imported by the Unit or a developer in SEZ unit from the whole of the IGST for authorized operations.

Further, as per the provisions of Section 16 (3) of Integrated Goods and Services Tax Act, 2017 only the supplies of goods or services or both toSEZ Developer or SEZ units is eligible for claim of refund and there is no provision for granting of the refund to SEZ unitin the IGST Act, 2017. Therefore, the claim of the petitioner holds no merits.

As per Rule 89(1) of theCGST Rules, 2017 in case of supplies to a Special Economic Zone unit or a Special Economic Zone developer, the application for refund shall be filed by the supplier ofthegoods or services and not by the recipient/receiver of the goods or services. Thus, thepetitioner being the receiver is not eligible for a refund of ITC and Deputy Commissioner has rightly rejected the refund claim of the petitioner.

Judgment of High Court

It was held thatRule 89 of the CGST Rules provides for procedure for application for refund of tax, interest, penalty, fees andprescribes that in respect of supplies to a SEZ unit, the application for refund has to be filed by the supplier of goodsor services.

Therefore, the contention that as the petitioner is not the supplier of the goods and services, the petitioner would not be entitled to file application for refund is not tenable because in facts of the present case, input service distributor i.e. ISD as defined under section 2(61) of the CGST Act:-

“is an office of the supplier of goods and services which receives tax invoices issued under section 31 of the CGST Act towards the receipt of input services and issues a prescribed document for the purpose of distributing the credit of CGST, SGST Or IGST paid on such goods or services”

Therefore, in facts of the case, it is not possible for a supplier of goods and services to file a refund application to claim the refund of the input tax credit distributed by ISD. Therefore, the stance of the department that the petitioner is not entitled to seek the refund of the ITC paid in connection with goods or services supplied to SEZ unit is not tenable.

This aspect is further fortified by notification no. 28/2012 dated 20th June, 2012 which was in connection with service tax attributable to the services used in more than one unit to be distributed pro-rata on the basis of the turnover during the relevant period of the concerned unit to the sum total of the turnover of all the units and similarly, in facts of the present case also, credit of service tax is distributed to all the units by the ISD and therefore, the claim of refund made by the SEZ unit of the petitioner is required to be granted.

Further in view of the aforesaid decision in case of M/s. Amit Cotton Industries(supra), it was held that the petitioner is entitled to claim refund of the IGST lying in the Electronic Credit Ledger as there is no specific supplier who can claim the refund under the provisions of the CGST Act and the CGST Rules as input tax credit is distributed by the input service distributor. Accordingly on the basis of the above reasons, the petition was allowed.

The respondents are directed to process the claim of refund made by the petitioner for unutilized IGST credit lying in Electronic Credit Ledger under section 54 of the CGST Act, 2017.

Our opinion

We had come across such discrepancy in the law, while handling compliance of a SEZ unit. Accordingly, several representations were made to the GST policy wing to set right the said anomaly. Moreover, the said issue was undertaken by GST policy wing with the law committee, however, no such decision has yet been undertaken. On the said backdrop, such decision from the Hon’ble Gujarat High Court gives opportunity to SEZ developer and SEZ units to seek refund. It would be worthwhile to understand and monitor subsequent stands of the revenue, whether accepting the said position or challenging the same before the Apex Court. In our view, such strong stand can always be taken, if the stake involved are substantial.

¹M/s BRITANNIA INDUSTRIES LTDVs UNION OF INDIA 2020-TIOL-1495-HC-AHM-GST

²Notification no. 28/2012 dated 20th June 2012

³Notification no.15/2017-IGST Rates dated 30.06.2017