GST Act | Deemed Export Circular Cannot Override Section 54(3) Refund On Zero-Rated Supplies: Gujarat High Court Quashes Recovery Orders And Directs Restoration Of ITC Refunds
Safiya Malik
The High Court of Gujarat Division Bench of Justice Bhargav D. Karia and Justice Pranav Trivedi held that the petitioners, 100% export-oriented units exporting goods without payment of tax, are entitled to refund of unutilised input tax credit under Section 54(3) of the GST Act read with Rule 89(4), and that their exports do not fall within the category of deemed exports. The Bench further held that, in these matters, Circular No. 172/04/2022-GST and Rule 89(4A) are inapplicable, quashed withdrawal and recovery proceedings initiated under Section 73 which retrospectively sought to reclassify zero-rated supplies as deemed exports, directed the authorities to restore the refund amounts within twelve weeks, and left open broader questions on the scrutiny of refund claims and the use of recovery powers for consideration in an appropriate case.
The petitioners, Shah Paperplast Industries Ltd. and another, are 100% Export Oriented Units engaged in the manufacture and export of tissue paper, wrapping paper and disposable plastic products. They procured raw materials from registered suppliers on payment of GST and utilised them for manufacturing finished products exported without payment of tax under a Letter of Undertaking. The petitioners claimed refund of unutilised input tax credit under Section 54(3) of the CGST Act read with Rule 89(4) of the CGST Rules. An application for refund for April 2022 was filed on 11.06.2022 along with an undertaking that the petitioners had not procured goods without payment of tax under the deemed export notification and that suppliers had not availed refund. A provisional refund was sanctioned on 02.07.2022.
On 06.07.2022, Circular No.172/04/2022-GST was issued, clarifying that tax paid on deemed export supplies would not be considered as input tax credit for computing refund under Rule 89(4) or Rule 89(5). Based on this circular, a show cause notice dated 20.07.2022 was issued proposing withdrawal of the refund granted for April 2022. During pendency of the proceedings, the respondent authority passed an order dated 18.08.2022 withdrawing the refund.
Refunds granted for the period December 2021 to March 2022 were also reviewed through an order dated 29.12.2022 under Section 107(2), stating that the sanctioning of refund under Rule 89(4) was erroneous and that the proper provision was Rule 89(4A). Appeals were filed by the Revenue. By order dated 06.09.2023, the appellate authority allowed the appeals and ordered recovery of refund with interest. The petitioners challenged the circular, the review orders, the appellate orders, and the withdrawal of sanctioned refunds. Connected petitions involved similar issues for different refund periods, including one filed by Kumar World Trade Pvt. Ltd. concerning rejection of refund claims for August 2022 to March 2023.
The Court observed the factual and legal matrix in detail, stating: “The undisputed facts are that the petitioners are 100% Export Oriented Unit. The petitioners filed refund claim in view of Notification No.48/2017 under section 54 of the GST Act read with Rule 89(4) of the GST Rules.” It further recorded that “the supplier of the goods to the petitioners did not avail the input tax credit and refund was sanctioned by the authorised officer.”
On the character of the petitioners’ exports and supplies received, the Court stated: “It appears from the facts of the case that the petitioners are not the deemed exporters but are the exporter of the goods resulting into zero-rated supply as per section 16(1) of the IGST Act and all the inward supplies to the petitioners are made with payment of GST charged by the suppliers who have not taken benefit of any notification as deemed exporter.” It also recorded that “it is also not in dispute that the petitioners are exporting the goods at zero-rated supply without payment of taxes under Letter of Undertaking and the input tax credit of the inputs, capital goods and services got accumulated for which refund claim was filed.”
The Court noted that the suppliers had not treated their supplies as deemed exports, observing: “the suppliers of the raw materials to the petitioners who manufactured the finished products have not shown such supplies as deemed export but the supplies have been shown as regular B2B supplies i.e. in regular form only. The suppliers of the goods to the petitioners have never followed the procedure as per Circular No.14/14/2017 dated 6.11.2017 nor any invoices are endorsed as an EOU unit by the petitioners as per the procedure prescribed in the said circular.”
Referring to the impugned circular, the Court stated: “So far as para. 2.2 of the Circular No.172/04/2022-GST dated 06.07.2022 is concerned, it only clarifies that input tax credit of the tax paid on deemed export supplies allowed to the recipients for claiming refund of such tax paid, is not input tax credit in terms of provisions of Chapter-V of the GST Act and therefore, such input tax credit availed by the recipient of deemed export supply for claiming refund of tax paid on supplies regarded as deemed exports is not to be included in the Net ITC for computation of refund of unutilised ITC on account of zero-rated supplies under Rule 89(4) or on account of inverted rated structure under Rule 89(5) of the GST Rules.”
On applicability of this clarification, the Court recorded: “So far as the facts of the case are concerned, the petitioners have not claimed any refund of the input tax credit on the deemed export supply. It appears that the respondents have lost sight of the fact that the petitioners are the exporters of the finished goods and the refund claim is filed by the petitioners being 100% EOU of zero-rated supply without payment of tax. The petitioners are therefore, not governed by para no. 2.2 of the Circular dated 06.07.2022.”
The Court then added: “Had the suppliers of the raw materials to the petitioners claimed the refund being the deemed exporters regarding input tax credit paid on such deemed export supplies, then the clarificatory circular dated 06.07.2022 would have been applicable. When the petitioners are not the deemed export suppliers, Rule 89(4A) would also not be applicable to the petitioners…” and further held that “the reasonings assigned by the appellate authority for applicability of Rule 89(4A) of the GST Rules is also contrary to the provisions of the GST Act, more particularly, section 2(39) of the GST Act.”
The Court directed that “insofar as Special Civil Application No.17246 of 2022 is concerned, order dated 18.08.2022 withdrawing the refund granted under the GST Act is hereby quashed and set aside and notice dated 19.08.2022 proposing to partially reject the refund for the month of May, 2022 is also hereby quashed and set aside.”
“Insofar as Special Civil Application No.18892 of 2023 is concerned, order dated 06.09.2023 passed by the appellate authority for recovering refund granted to the petitioners for the period from December 2021 to March, 2022 is hereby quashed and set aside.”
“Insofar as Special Civil Application No.96 of 2025 is concerned, the show cause notice dated 18.08.2023 and order dated 27.12.2023 passed by the respondents for recovery of the refund granted to the petitioner for the period from June, 2018 to May, 2019 are hereby quashed and set aside.”
“Insofar as Special Civil Application No.17080 of 2023 is concerned, order dated 06.09.2022 rejecting the refund claim of the petitioner confirmed by the appellate order dated 31.07.2023 for the month of May, 2022 are hereby quashed and set aside.”
“Insofar as Special Civil Application No.8319 of 2025 order-in-original dated 17.05.2024 and order-in-appeal dated 26.02.2025 are hereby quashed and set aside. The prayer with regard to challenge to vires of para 2.2 of the Circular dated 06.07.2022 and applicability of such circular prospectively as well as the question relating to issuance of show cause notice under section 73/74 of the GST Act for exercise of powers of review under section 107(2) of the GST Act are not decided and kept open to be dealt with in an appropriate case.”
“The respondents shall pay the refund as per the claims made by the petitioners in accordance with law within 12 weeks from the date of receipt of a copy of this judgment.”
Advocates Representing the Parties
For the Petitioners: Uchit N. Sheth, Advocate
For the Respondents: Ms. Hetvi H. Sancheti, Advocate
Case Title: Shah Paperplast Industries Ltd. & Anr. v. Union of India & Ors.
Neutral Citation: 2025: GUJHC:65539-DB
Case Number: R/SCA/18892/2023 (with connected matters)
Bench: Justice Bhargav D. Karia and Justice Pranav Trivedi
