Facts of the Case: Aurobindo Pharma Limited, a pharmaceutical manufacturer engaged in supplies to SEZ units and exports, is registered under the GST Act, 2017. In its manufacturing process, the petitioner purchases coal as fuel for generating steam, on which compensation cess is levied under the Goods and Services Tax (Compensation to States) Act, 2017. Since the petitioner's finished products (bulk drugs/formulations) are non-taxable under the Cess Act (not being specified in its Schedule), though taxable and exported on payment of IGST under the CGST/IGST Act, the petitioner claimed refund of accumulated, unutilised input tax credit of cess of Rs.7,46,644 for the tax period March 2020 (ARN dated 28.2.2022). The claim was rejected vide Order No. ZD3605250092900 dated 7.5.2025, relying on Circular No.45/19/2018-GST dated 30.5.2018, which the department read as barring refund of cess where zero-rated supply is made on payment of integrated tax.

Issues Involved:

  1. Whether an exporter can claim refund of unutilised input tax credit of compensation cess paid on inputs (coal) where the exported final product is itself non-taxable under the Compensation Cess Act, notwithstanding that IGST was paid on the export.

Petitioner's Arguments:

  • Compensation cess paid on coal qualifies as eligible "input tax" under the Cess Act, and the refund mechanism under Section 54(3) of the CGST Act applies mutatis mutandis to cess by virtue of Section 9 of the Cess Act.
  • Since the finished, exported product is a non-taxable supply under the Cess Act, no cess was payable on the export, and Circular No.45/19/2018-GST's restriction applies only where cess itself is payable on the outward taxable supply — not to this fact pattern.
  • Relied on the Gujarat High Court's rulings in Atul Limited v. Union of India and Patson Papers Private Limited v. Union of India, noting the Revenue's Special Leave Petition against Patson Papers had been dismissed by the Supreme Court.

Respondent's Arguments:

  • Relied on Circular No.45/19/2018-GST, contending that a supplier cannot claim refund of compensation cess for zero-rated supplies made on payment of integrated tax, and that refund is not automatic but subject to conditions under Section 16(3)(a)/(b) of the IGST Act.
  • However, on instructions, counsel for the State fairly submitted that the legal position had since been clarified by the Gujarat High Court in Atul Limited, and the Department was inclined to reconsider the matter in that light.

Court Order / Findings:

  • Since the Department itself conceded willingness to reconsider the claim following the ratio in Atul Limited and Patson Papers, the Court, without further dilating on the legal position, set aside the impugned Order-in-Original and the appellate order.
  • The matter was remanded to the original authority for a fresh decision, after affording an opportunity of hearing, within four months, following its own common order dated 10.12.2025 in the petitioner's connected batch, W.P.No.2391 of 2023 and batch.

Important Clarification:

  • Compensation cess paid on inputs (such as coal) used to manufacture goods exported as zero-rated supplies — where the exported goods are themselves non-taxable under the GST (Compensation to States) Act — is eligible to be refunded as unutilised input tax credit, even where IGST was paid on the export; Circular No.45/19/2018-GST's bar is confined to cases where the outward supply is itself subject to cess.

Sections Involved:

  • Sections 8, 9 and 11(2), Goods and Services Tax (Compensation to States) Act, 2017 — levy of cess, refund provisions, and mutatis mutandis application of IGST provisions to inter-State supplies.
  • Section 54(3), Central Goods and Services Tax Act, 2017 — refund of unutilised input tax credit.
  • Section 16, Integrated Goods and Services Tax Act, 2017 — zero-rated supply and refund eligibility.

Decision – In Favour of: Disposed of with directions, in substance favourable to the Assessee — the rejection order was set aside and the claim remanded for fresh decision applying the Assessee-favourable ratio in Atul Limited and Patson Papers.

Related Case Laws: Atul Limited v. Union of India (Gujarat High Court, 2025 (7) TMI 1768); Patson Papers Private Limited v. Union of India (Gujarat High Court, SLP dismissed by the Supreme Court); the petitioner's own connected batch, W.P.No.2391 of 2023 and batch (Telangana High Court, common order dated 10.12.2025).

Case Details: High Court for the State of Telangana at Hyderabad | WP No. 23857 of 2025 | Coram: Hon'ble the Chief Justice Aparesh Kumar Singh and Hon'ble Sri Justice G.M. Mohiuddin | Date of Order: 15.12.2025.

Link to Download the Order: View/Download the Order

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