Gujarat High Court allows refund of unutilised GST ITC backed by transitional CENVAT credit

1. Background and common issue before the Court

The Gujarat High Court, in Ford India Pvt. Ltd. Vs Union of India & Ors. (Gujarat High Court), decided two connected writ petitions involving an identical legal question:

Whether an assessee can claim refund of unutilised input tax credit (ITC) under Section 54 of the Central Goods and Services Tax Act, 2017 (CGST Act) for the initial GST months (July–September 2017) by taking into account transitional CENVAT credit carried forward through Form GST TRAN-1, even where such transitional credit was actually reflected in the Electronic Credit Ledger only later.

Both petitions were heard together and disposed of by a common judgment and order.

2. Business operations and pre-GST credit position

2.1 Nature of business and exports

The petitioner, Ford India Pvt. Ltd., was engaged in:

  • Manufacture and supply of:
    • passenger cars
    • parts and components
    • engines

The assessee was also exporting goods without payment of IGST under a Letter of Undertaking (LUT) in terms of Section 16 of the Integrated Goods and Services Tax Act, 2017 (IGST Act), thereby treating such exports as zero-rated supplies.

2.2 Registration and CENVAT credit under the earlier regime

Before the introduction of GST:

  • The petitioner was registered under the Central Excise Act, 1944.
  • It discharged central excise duty on removal of finished goods from its factory.
  • For inputs and input services used in manufacture, it availed CENVAT Credit in accordance with the Central Value Added Tax Credit Rules, 2004.

2.3 Transition to GST and carry-forward of CENVAT credit

Upon the enactment of the Central Goods and Services Tax Act, 2017 with effect from 01.07.2017, transitional provisions enabled carry-forward of eligible CENVAT credit.

  • The petitioner was entitled to carry forward CENVAT Credit of Rs.1,63,15,92,468/- into the GST regime.
  • This carry-forward was to be effected under Section 140 of the CGST Act read with Rule 117 of the Central Goods and Services Tax Rules, 2017 (CGST Rules), by filing Form GST TRAN-1.

The Form GST TRAN-1 filed by the petitioner was processed on 28.08.2017.

3. ITC availment, utilisation and refund claims for July–September 2017

3.1 ITC position and utilisation during July–September 2017

Between July 2017 and September 2017, the petitioner:

  • Supplied passenger cars, parts, components and engines to domestic and overseas customers;
  • Received various inputs and input services and availed ITC thereon;
  • Filed returns in Form GSTR-3B for the relevant tax periods;
  • Utilised ITC to discharge GST liability and accumulated credit linked to zero-rated exports made without payment of IGST.

The orders on record show that the original adjudicating authority worked with the following framework:

  • Considered the transitional CENVAT credit carried forward via Form GST TRAN-1 as forming part of the available credit;
  • Computed opening balances, credit availed, tax liability, utilisation through Electronic Credit Ledger, and closing balances for each of the three months;
  • Sanctioned refund of accumulated ITC accordingly.

3.2 Export without payment of IGST and resulting accumulation

Since exports were made without payment of IGST under LUT, the ITC pertaining to inputs and input services used for such zero-rated supplies remained unutilised, resulting in accumulation of ITC in the Electronic Credit Ledger.

Consequently, the petitioner lodged refund claims of accumulated ITC under:

  • Section 54 of the CGST Act, read with
  • Section 16 of the IGST Act

for each of the periods:

  • July 2017
  • August 2017
  • September 2017

The refund claims were as follows:

  • July 2017: Total claimed Rs.3,02,74,762/-
  • August 2017: Total claimed Rs.37,60,51,377/-
  • September 2017: Total claimed Rs.1,36,95,69,274/-

3.3 Sanction of refund by Assistant Commissioner

The Assistant Commissioner, CGST (respondent No.6) sanctioned refunds through separate orders in Form GST RFD-06, inclusive of provisional refunds earlier granted:

  • Order No. 007/Final/2018-19 dated 03.05.2018 for July 2017:

    • Refund of Rs.2,80,70,787/- (IGST, CGST, SGST)

  • Order No. 0008/Final/2018-19 dated 16.05.2018 for August 2017:

    • Refund of Rs.37,49,36,213/-

  • Order No. 0015/Final/2018-19 dated 16.05.2018 for September 2017:

    • Refund of Rs.99,95,50,821/-

Payment advice was issued and the amounts were disbursed to the petitioner.

4. Audit objection, review and appellate reversal

4.1 Audit queries on transitional credit utilisation

Subsequent to the sanction of refunds:

  • Audit Headquarters raised queries via letters dated 09.07.2018 and 23.07.2018.
  • The objection was that the assessee was allegedly not entitled to claim refund for the months in question by utilising transitional credit as on 01.07.2017, on the premise that such credit was not “available” at the time of filing refund for July and August 2017 because it was reflected later after processing of Form GST TRAN‑1.

4.2 Review order and departmental appeals

Pursuant to the audit objection:

  • The Commissioner, CGST & Central Excise (respondent No.4) passed a review order directing filing of appeals against the refund sanction orders.
  • The Assistant Commissioner (respondent No.6) accordingly preferred appeals before the Commissioner (Appeals) (respondent No.5).

The department’s case in appeal was that: