High Court Allows GST Refund for Unutilized ITC at Time of Closure of Business

Petitioners were engaged in the business of manufacturing security inks and solutions with GST registration.

The manufacturing units of the Petitioners were in full operation in the pre-GST regime.

The Petitioners in January 2019 decided to discontinue their operation in the State, pursuant to which the Petitioners sold all the machineries and manufacturing facilities from April 2019 to March 2020. At the time of the sale of assets, the Petitioners had appropriately reversed the ITC as per the applicable provisions under the GST law.

The Petitioners had an accumulated balance of ITC amounting to Rs. 4,37,61,402/- (Rupees four crores, thirty seven lakhs, sixty one thousand, four hundred and two) only, on account of the closure of its business and accordingly claimed a refund of such unutilized ITC balance

GST Department, rejected the refund application filed by the Petitioners, claiming unutilized Input Tax Credit (ITC), lying in Electronic Credit Ledger amounting to Rs. 4,37,61,402/- (Rupees four crores, thirty seven lakhs, sixty one thousand, four hundred and two) only, upon discontinuance of business.

The Appellate Authority, vide Order dated 22-03-2023, upheld the Order dated 08-02-2022, of the Assistant Commissioner.

Question with Court of Law

Whether the refund of ITC under Section 49(6) of the CGST Act is only limited to companies carved out under Section 54(3) of the CGST Act or does every registered company have a right to refund of ITC in case of discontinuance of business?

Argument of the Department:

1. GST Law do not provide for refund of unutilized ITC in case of discontinuation or closure of business

It was reasoned that on a combined reading of Sections 54(3) and 29 of the Central Goods and Services Tax Act, 2017 (hereinafter, the “CGST Act”), it is evident that the current regulations do not provide for refund of unutilized ITC in case of discontinuation or closure of business. That, it is evidently clear from the provisions mandated in Section 54(3) of the CGST Act which is restricted to circumstances under which the unutilized ITC is allowed for refund, discontinuation/closure is not one of them.

2. Section 29(5) of the CGST Act provides for reversal of ITC upon cancellation of registration but not a refund.

3. Effective alternative statutory remedy exists under Section 112 of the CGST Act which has not been exhausted by the Petitioners.

Argument of the Taxpayer:

1. Section 49(6) of the CGST Act provides for refund of the balance in Electronic Cash Ledger and Electronic Credit Ledger after payment of tax in accordance with the provisions of Section 54 of the CGST Act which lays down the procedure for refund.

The Appellate Authority has failed to discuss as to why the provisions of Section 49(6) is not applicable in the Petitioners case. To buttress the submissions, reliance was placed on Shabnam Petrofils Pvt. Ltd. vs. Union of India (2019 SCC OnLine Guj 6910), The Union of India vs. Slovak India Trading Company Private Limited (MANU/KA/0709/2006) and Eicher Motors Ltd. and Another vs. Union of India and Others ((1999) 2 SCC 361).

2. Proviso to Section 54(3) of the CGST Act is not applicable in respect of refund of unutilized balance of ITC under Section 49(6) of the CGST Act.

Section 54(3) of the CGST Act is the exception carved out in the provision, which requires that a registered company may claim refund of unutilized ITC at the end of any tax period, provided that, no refund of unutilized ITC shall be allowed except as provided in Section 54(3)(i) and (ii) of the CGST Act. It is contended that the said exemption cannot take away the vested right of ITC accrued to the Petitioners and refund thereof under Section 49(6) of the CGST Act.

What did the High Court say?

Court can entertain a Writ Petition where an alternative remedy is available

High Court quoted the decision of the Supreme Court, where the court observed that there is no rule of law that the High Court should not entertain a Writ Petition where an alternative remedy is available to a party. It is always a matter of discretion with the Court, and if the discretion has been exercised by the High Court not unreasonably or perversely, it is the settled practice of the Supreme Court not to interfere with the exercise of discretion by the High Court. The High Court in the said matter had entertained the Writ Petition and decided the question of law arising in it which the Supreme Court opined was correct. [State of U.P. and Others vs. M/s. Indian Hume Pipe Co. Ltd; (1977) 2 SCC 724]

High Court allows refund:

As per the court is no express prohibition in Section 49(6) read with Section 54 and 54(3) of the CGST Act, for claiming a refund of ITC on closure of unit. Although Section 54(3) of the CGST Act deals only with two circumstances where refunds can be made, however the statute also does not provide for retention of tax without the authority of law. Consequently, the court was of the view that the Petitioners are entitled to the refund of unutilized ITC claimed by them.