Facts of the Case: In this case, the respondent assessee were engaged in the manufacture and export of goods. They used coal in the manufacturing process and paid GST Compensation Cess on its purchase. The finished goods were exported on payment of IGST under Section 16(3) of the IGST Act, 2017, making the supplies zero-rated. As no compensation cess was payable on such exports, the cess paid on coal remained unutilized.

While the initial refund of unutilized ITC of cess was sanctioned, departmental officers later issued show cause notices to reject such refund, citing Circular No. 45/19/2018-GST dated 30.05.2018 and Circular No. 125/44/2019-GST dated 18.11.2019, issued under Section 168 of the CGST Act. The department argued that refund of unutilized cess credit was not permissible where exports were made on payment of IGST.

Issue: Whether the petitioner-exporters are entitled to refund of unutilized Input Tax Credit of Compensation Cess paid on coal used in manufacturing exported goods, when exports are made on payment of IGST.

Gujarat High Court Rulings:

The Gujarat High Court held that the departmental authorities misinterpreted Circulars No.45/19/2018 and 125/44/2019 while denying refund of unutilized ITC of compensation cess. Under Section 54(3) of the CGST Act, a registered person may claim refund of unutilized ITC in respect of zero-rated supplies. Section 16(3) of the IGST Act and Section 11(2) of the Cess Act provide that provisions relating to input tax credit and refund shall apply mutatis mutandis to the levy and collection of compensation cess. The petitioners had paid IGST on exports and no compensation cess was payable on the exported goods. Hence, the credit of cess on coal remained unutilized. The proviso to Section 11(2), which restricts utilization of cess credit only for payment of cess, would not apply here as no cess liability arose on exports.

Accordingly, the Court held that the petitioners are entitled to refund of unutilized ITC of Compensation Cess paid on coal used for manufacturing exported goods. The Court quashed the contrary orders of the appellate authority and restored the refund orders already sanctioned in favour of the petitioners.

Therefore, refund of unutilized compensation cess on inputs used for export goods cannot be denied merely because exports are made on payment of IGST, when no cess is leviable on such exports. Circulars 45/19/2018 and 125/44/2019 must be read harmoniously with Section 54(3) of the CGST Act and Section 11(2) of the Cess Act.

Supreme Court’s Rulings:

The Supreme Court, while considering the Special Leave Petition (Civil) Diary No. 49578/2025, refused to interfere with the Gujarat High Court’s decision. The Supreme Court’s refusal to interfere effectively affirms the entitlement of exporters to claim refund of unutilized ITC of Compensation Cess on inputs used in goods exported on payment of IGST, where no cess is leviable on such exports. Circulars 45/19/2018-GST and 125/44/2019-GST cannot override statutory provisions of Section 54(3) of the CGST Act and Section 11(2) of the Cess Act.

The SLP was dismissed, thereby upholding the Gujarat High Court’s interpretation of refund entitlement.

This ruling settles an important interpretational issue — exporters can claim refund of unutilized Compensation Cess even when exports are made on payment of IGST, as the cess component cannot be utilized and thus qualifies as unutilized ITC. The judgment harmonizes the intent of zero-rated supply provisions under the IGST Act with refund provisions under the CGST and Cess Acts.

Case Name: Union Of India & Ors. Versus Patson Papers Private Limited. dated 27.10.2025

To assesse the Gujarat High Court ruling passed in 2025 Taxo.online 806 Supreme Court ordered this judgement 2025 Taxo.online 2716