Gujarat HC: EOUs' Zero-Rated Supplies Not 'Deemed Exports' - 2025-11-27

Gujarat High Court Quashes Refund Recovery, Rules Zero-Rated Supplies by EOUs Cannot Be Reclassified as 'Deemed Exports'

Ahmedabad, Gujarat – In a significant judgment providing relief to exporters, the Gujarat High Court has ruled that zero-rated supplies made by 100% Export Oriented Units (EOUs) cannot be retrospectively reclassified as "deemed exports" to deny them refunds of unutilised Input Tax Credit (ITC). The Court, in the case of Shah Paper Plast Industries Limited & Anr. vs. Union of India & Ors. , quashed show-cause notices and recovery orders issued by tax authorities, holding that the Central Board of Indirect Taxes and Customs (CBIC) Circular No. 172/04/2022-GST was misapplied.

The decision firmly establishes that EOUs exporting goods without payment of tax are entitled to ITC refunds under Section 54(3) of the Central Goods and Services Tax (CGST) Act, 2017. The Court rejected the tax department's attempt to use Section 73 of the Act to claw back previously sanctioned refunds based on a reinterpretation prompted by the circular. While settling the primary issue for the petitioners, the High Court deliberately left open the broader questions of law concerning the revenue's suo motu powers to review sanctioned refunds and the precise scope of recovery mechanisms under Section 73.

Background of the Dispute: A Refund Granted, Then Revoked

The petitioners, Shah Paper Plast Industries Limited, are 100% EOUs engaged in manufacturing and exporting products like tissue paper and disposable plastics. They operate under a standard export model: they procure raw materials from domestic registered suppliers, paying the applicable GST, and then export the finished goods without payment of tax under a Letter of Undertaking (LUT). This process leads to an accumulation of unutilised ITC, for which they are statutorily entitled to claim a refund under Section 54(3) of the CGST Act.

The dispute arose after the petitioners had successfully claimed and received a provisional refund. The claim was supported by an undertaking confirming that their suppliers had not availed benefits under the "deemed export" notification (No. 48/2017).

However, the situation changed following the issuance of CBIC Circular No. 172/04/2022-GST on July 6, 2022. This circular clarified that tax paid on supplies treated as deemed exports should not be included in the 'Net ITC' calculation for refund purposes under Rule 89(4) and (5) of the CGST Rules. Armed with this circular, the tax authorities re-evaluated the petitioners' case. They alleged that the supplies received by the EOU were, in fact, "deemed exports," and consequently, the ITC claimed was ineligible for a refund.

This led to a Show Cause Notice (SCN) being issued on July 20, 2022, under Section 73 of the CGST Act, seeking to recover the sanctioned refund of Rs. 28,40,959. By an order dated August 18, 2022, the refund was withdrawn, and similar actions were initiated for earlier periods, which were upheld at the appellate level, compelling the petitioners to approach the High Court.

Core Arguments Before the Court

Petitioners' Stance: Represented by Advocate Uchit N. Sheth, the petitioners argued that they were direct exporters making "zero-rated supplies." Their transaction did not fit the criteria for "deemed exports" as defined in the relevant notifications. They contended that simply because their suppliers could have treated the supply as a deemed export (but did not) does not bar the petitioners from their statutory right to a refund on their actual exports under Section 54(3).

Crucially, they challenged the invocation of Section 73 for recovery. They argued that once a refund order is passed and not challenged through the prescribed appellate process, it attains finality. A higher authority cannot use the general recovery provisions of Section 73 to suo motu review and effectively overturn a final refund order.

Respondents' Counter-Arguments: The revenue, represented by Ms. Hetvi H. Sancheti, insisted that the supplies to a 100% EOU are inherently "deemed exports." Therefore, the petitioners should have claimed their refund under the specific provision of Rule 89(4A) of the CGST Rules, which pertains to deemed export cases. They relied heavily on the 2022 CBIC circular to argue that the ITC was ineligible.

Regarding the procedural aspect, the respondents submitted that Sections 73 and 74 are potent tools available to the department to recover any erroneously granted refund, irrespective of whether an appeal was filed against the original refund order. They cited Supreme Court precedents from the erstwhile Central Excise regime, such as in Grasim Industries and Asian Paints , to argue that recovery provisions operate independently of the appellate process.

High Court's Findings and Rationale

The Gujarat High Court sided decisively with the petitioners on the core issue of classification. The bench observed that the petitioners' actions were squarely aligned with the provisions for zero-rated supplies, not deemed exports.

The court highlighted several key factual distinctions: 1. Direct Export: The petitioners themselves were exporting the finished goods under an LUT. 2. No Deemed Export Procedure Followed: The petitioners did not follow the procedure specified for deemed exports, such as endorsing supplier invoices, as required by Circular No. 14/14/2017. 3. Refund Claimant: The refund was claimed by the exporter (the petitioner), not the supplier of raw materials. In a typical deemed export scenario, the supplier often has the option to claim the refund.

Based on these facts, the Court delivered a clear pronouncement:

"Therefore, in facts of the case, zero rated supplies made by the petitioners is not coming in the purview of the deemed exports because the petitioners have exported the goods and therefore, entitled to refund of the unutilised input tax credit as per the provisions of section 54(3) of the GST Act read with Rule 89(4) of the GST Rules.”

The Court clarified that both Circular No. 172/04/2022-GST and Rule 89(4A) were inapplicable to the petitioners' case. It explained that the circular would only become relevant if the suppliers had claimed the refund by treating their supplies to the EOU as deemed exports. Since that did not happen, the attempt by the appellate authority to apply Rule 89(4A) and deny the refund was contrary to the law.

Consequently, the High Court quashed the SCN, the recovery order, and related appellate orders. It directed the respondents to restore the wrongfully recovered refund to the petitioners within twelve weeks.

Broader Questions of Law Left Unanswered

While providing complete relief to the petitioners, the High Court consciously refrained from ruling on the larger legal question regarding the powers of recovery under Section 73. The judgment meticulously records the arguments from both sides, noting the various judicial precedents cited. The core of this unresolved debate is whether an "erroneous refund" can be recovered under Section 73/74 even if the original refund sanctioning order was never appealed by the department. This question remains open for future litigation, leaving a critical area of GST procedural law unsettled.

Implications of the Judgment

This ruling is a vital clarification for the export community, particularly EOUs, reaffirming their right to claim ITC refunds on zero-rated supplies. It serves as a check on the tax authorities' practice of using circulars to retrospectively alter the nature of transactions and initiate recovery proceedings.

The judgment underscores a fundamental principle: the tax treatment of a transaction is determined by the actions and documentation of the parties involved, not by a hypothetical alternative procedure they could have followed. For legal practitioners, the case reinforces the distinction between zero-rated supplies and deemed exports and provides strong precedent against the misapplication of Rule 89(4A) and the related CBIC circular. The deliberate decision to leave the question of Section 73's scope open ensures that this crucial procedural issue will continue to be a focal point in GST litigation.