SEZ Units Can Claim ISD Credit Refunds: Visakhapatnam Bench of the Goods and Services Tax Appellate Tribunal (GSTAT) has ruled that the unit in a Special Economic Zone (SEZ) can claim the refund of eligible but unutilized ITC supplied by the Input Service Distributor (ISD) and which pertains to its own zero-rated export.
In the case of Maithan Alloys Limited v. Deputy Commissioner, the Tribunal considered if an SEZ unit can claim the refund of accumulated ITC supplied by an ISD or whether the refund has to be claimed only by the original supplier. This case is connected to the allegations that suppliers have received a refund for the above credits.
According to the Tribunal, a mere reason like the unit being SEZ cannot form the basis to reject the refund claim and the interpretation of refund rules on direct supply to SEZ should not bar such claims. An allegation of supplier refund needs documentary proof and also an opportunity for the taxpayer to answer.
Background of the Maithan Alloys Case
Maithan Alloys Limited had an SEZ unit involved in both export of goods without payment of integrated GST. The company has availed ITC during the respective periods through an Input Service Distributor. The credit was not used in the electronic credit ledger of the company. Maithan Alloys then made refund claims under the relevant provisions of the CGST Act, 2017, IGST Act, 2017 and the CGST Rules for the months of April, May and June 2022.
The claims were denied by the adjudicating authority, which argued that a refund under the supplies aspect should only be allowed to the supplier and could not be pursued by the SEZ unit. This rejection was upheld by the First Appellate Authority.
Appellate Authority further noted that the suppliers claimed and received refunds in their departmental back office records. The GSTAT Visakhapatnam Bench challenged the findings by Maithan Alloys. The Tribunal considered what kind of credit constitutes, the difference between exports and direct supplies to the units within the SEZ and whether the earlier alleged refunds had been established on any evidence.
Key Legal Issue: Can an SEZ Unit Claim a Refund of ISD Credit?
The primary question was about an SEZ unit being able to claim a refund of unutilised ITC distributed via an ISD where the credit was due to the zero-rated exports of the SEZ unit itself. The Revenue used the refund mechanism as provided in Rule 89(1) of the CGST Rules. The proviso specifies that applications for refunds shall be made by the suppliers with respect to supplies made to an SEZ unit or SEZ developer, subject to certain conditions.
The company contended that its claim was different. It’s not asking for a refund just because it’s been given a direct supply to an SEZ unit. Rather, it was looking for the refund of the credit validly distributed by an ISD, which was maintained in their credit ledger electronically and available for their exports without the payment of the integrated tax.
In such a case, the company argued, the supplier-specific provision would create a gap in the right to receive a refund, even if the original supplier had no right to a refund of the credit that was already paid out by the ISD system. This distinction was recognised by the Tribunal.
Difference Between Exports and Supplies to SEZ Units
In this regard, the Tribunal observed that the IGST Act was already recognising exports and supplies to SEZ units/developers as separate types of zero-rated supplies under Section 16 thereof. While both are included in the zero-rating concept, the legal effect of the transactions and the availability of refunds should be distinguished.
In this context, it was a claim made by Maithan Alloys for unutilised ITC on its own electronic credit ledger and for its own exports without paying integrated tax. Was not seeking to substitute an original supplier in claiming a refund for a direct supply to an SEZ unit.
The Tribunal concluded that the proviso in Rule 89(1), which is confined to the suppliers, could not be read as precluding the SEZ unit’s own claim for a separate refund for exports. The provisions had to be read in a harmonious manner to avoid the creation of a procedural restriction which would be a violation of a substantive right to a refund without a clear lawful basis.
Relevant GST Provisions Explained
Section 16 of the IGST Act
Section 16 of the Integrated Goods and Services Tax Act, 2017, deals with zero-rated supplies. These encompass supplies or services provided to SEZ units or developers (where appropriate) and exports of goods or services.
Eligible registered persons who were making supplies at zero rate without payment of integrated tax under a bond or Letter of Undertaking for the above period were eligible to get refunds of unutilised ITC subject to the given conditions and processes.
Section 54 of CGST Act
Under GST, Refunds are available under Section 54 of the CGST Act. Eligibility for a refund is subject to the relevant conditions of law, supporting documents, and verification of the amount claimed.
Rule 89 of the CGST Rules
The procedure for filing refund applications and certain requirements for various types of refund claims are included in Rule 89. The Tribunal explained that it was not the same supplier-specific procedure in relation to direct supplies made to an SEZ as it would be in relation to a claim arising from ITC supplied through an ISD and credited to the unit’s own zero rated exports.
It found that the first restriction was not unreasonable in itself, but the second restriction could not be ruled out on the basis of only the supplier-specific restriction and was therefore not covered by that restriction.
Why the Tribunal Rejected the Allegation of Double Refund
An additional issue in the case was that suppliers had already applied and been granted refunds for the credits. This is based on the department’s back office records from the First Appellate Authority. But the allegation did not get put to the taxpayer at the appellate level, and evidence was not provided to support it.
The contention had not been raised before the First Appellate Authority and on record no evidence is available that the suppliers received the refunds claimed by them, the Department said during the hearing of the Tribunal.
The Tribunal determined that it must include relevant evidence in an adverse determination in assailing a taxpayer’s refund claim. A mere mention of internal records is insufficient to prove that the refund was approved and that it matched the exact credit amount claimed by the appellant.
The Department would have to determine the appropriate suppliers, the invoices, the credits and refund sanctions, and make a link between the previous refund and the claimed refund by the SEZ unit.
The Tribunal also laid emphasis on the principles of natural justice. Where an authority proposes to refuse a claim, due to adverse material, the taxpayer should be given a reasonable opportunity to view and respond to the material. This is not to allow a taxpayer to receive a double benefit; i.e., a taxpayer cannot receive a double benefit. Instead, it calls for the Department to provide a factual basis for excluding any portion on that basis.
Judicial Precedents Considered
The Tribunal referred to previous judgments concerning the refund of ISD allocated credit in relation to SEZ units, such as:
- Britannia Industries Ltd. vs. Union of India, a judgment of the Gujarat High Court.
- SE Forge Limited vs. Union of India, a judgment of the Gujarat High Court.
- Wipro Ltd. vs. Assistant Commissioner and other matters, a judgment of the Madras High Court dated 11 August 2026.
These judgments recognised the difference between direct supply to the SEZ units and allocation of input tax credit via ISD. These judgments were considered by the Tribunal while analysing the rights of Maithan Alloys in filing refund applications.