Gujarat High Court
M/S. Sopariwala Export Pvt. Ltd vs Joint Commissioner, Cgst And Central ... on 9 May, 2025
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
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Reserved On : 19/12/2024
Pronounced On : 09/05/2025
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 6701 of 2023
With
R/SPECIAL CIVIL APPLICATION NO. 7073 of 2023
With
R/SPECIAL CIVIL APPLICATION NO. 15708 of 2024
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
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Approved for Reporting Yes No
✓
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M/S. SOPARIWALA EXPORT PVT. LTD.
Versus
JOINT COMMISSIONER, CGST AND CENTRAL EXCISE & ORS.
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Appearance:
MR V SRIDHARAN, SENIOR ADVOCATE WITH MR ANAND
NAINAWATI(5970) for the Petitioner(s) No. 1(SCA NO.6701/2023 & SCA
NO.7073/2023)
MR PARESH M DAVE for the Petitioner(s) No. 1(SCA NO.15708/2024)
MR UTKARSH SHARMA, for the Respondent(s) No. 4
MR CB GUPTA(1685) for the Respondent(s) No. 1,2,3,5
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
CAV JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
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1. Heard learned Senior Advocate Mr.
V.Sridharan with learned advocate Mr.
Anand Nainawati with learned advocate
Mr. Paresh M. Dave for the petitioner,
learned advocate Mr. C.B. Gupta for
respondent nos. 1,2,3 and 5 and learned
advocate Mr. Utkarsh Sharma for
respondent no.4.
2. By these petitions under Article
227 of the Constitution of India, the
petitioners have prayed for quashing
and setting aside the order-in-original
for levy of goods and service tax in
form of compensation Cess at the rate
of 160% on branded tobacco products
i.e. scented/flavoured chewing tobacco
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manufactured by the petitioners for
export through merchant exporters which
are subject to GST at 0.1% as per
Notifications No.40/2017 and 41/2017
dated 23/10/2017.
3. As the issue arising in these
petitions are common, same were heard
analogously and are being disposed off
by this common judgment.
4. For the sake of convenience Special
Civil Application No.6701 of 2023 is
treated as a lead matter.
5. Factual matrix of Special Civil
Application No. 6701 of 2023 can be
summarised as under:
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FACTS
6. The petitioner is engaged in the
business of manufacture of branded
tobacco products falling under HSN
24039910 on which GST is payable at the
rate of 28% and Compensation Cess is
payable at the rate of 160%.
7. The goods manufactured by the
petitioners are exported directly or
through merchant exporters.
8. The procedure followed by the
petitioners during different taxation
regime is as under:
A) As per pre-GST Regime
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9. Prior to the introduction of GST,
the main indirect taxes applicable were
Central Excise Duty, Value Added Tax
("VAT") / Central Sales Tax. ("CST").
B) As per Central Excise
10. As per Section 3 of the Central
Excise Act, 1994, excise duty was
leviable on manufacture of all
excisable goods in India. However, Rule
19 of the Central Excise Rules, 2002
provided for export of manufactured
goods without payment of duty.
11. In exercise of powers under Rule
19(3) of the Central Excise Rules,
2002, Notification No. 42/2001-CE (NT)
dated 26.6.2001 was issued prescribing
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conditions, safeguard and procedure for
removal of goods for export without
payment of duty. Explanation III of the
aforesaid notification read as under:
"Explanation-III. For the purposes
of this notification "duty" means,
the duties of excise collected
under the following enactments,
namely:-
(a) the Central Excise Act, 1944 (1
of 1944);
(b) the Additional Duties of Excise
(Goods of Special Importance) Act,
1957 (58 of 1957);
(c) the Additional Duties of Excise
(Textiles and Textile Articles)
Act, 1978 (40 of 1978);
(d) the National Calamity
Contingent duty leviable under
section 136 of the Finance Act,
2001 (14 of 2001), as amended by
Section 169 of the Finance Act,
2003 (32 of 2003) which was amended
by Section 3 of the Finance Act,
2004 (13 of 2004);
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(e) any special excise duty
collected under a Finance Act.
(f) The additional duties of excise
as levied under section 157 of the
Finance Act, 2003 (32 of 2003);
(g) the Education cess on excisable
goods as levied and collected under
section 91 read with section 93 of
the Finance (No.2) Act, 2004 (23 of
2004).
(h) the additional duty of excise
leviable under clause 85 of the
Finance Bill, 2005, the clause
which has, by virtue of the
declaration made in the said
Finance Bill under the Provisional
Collection of Taxes Act, 1931 (16
of 1931), the force of law,
(i) Secondary and Higher Education
Cess on excisable goods leviable
under clause (126) read with clause
(128) of the Finance Bill, 2007,
which has, by virtue of the
declaration made in the said
Finance Bill under the Provisional
Collection of Taxes Act, 1931 (16
of 1931), the force of law.
(j) Infrastructure Cess leviable
under sub-clause (1) of clause 159
of the Finance Bill, 2016, which
clause has, by virtue of the
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declaration made in the said
Finance Bill under the Provisional
Collection of Taxes Act, 1931 (16
of 1931), the force of law."
12. According to the procedure
prescribed under the aforesaid
Notification, a merchant-exporter shall
furnish a bond to the Assistant/Deputy
Commissioner of Central Excise Duty.
After furnishing the bond, a merchant-
exporter shall obtain certificates in
CT-1.
13. The petitioner removed the goods
from its factory under the cover of
Excise Invoice to be supplied to the
merchant exporter for export. As per
the Notification in case of self-
sealing, the owner, working partner,
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Managing Director etc. of the assessee
is required to certify the copies of
ARE-1 that goods for export have been
sealed in his presence and send the
original and duplicate copies along
with goods at the place of export and
sent the triplicate and quadruplicate
copies of the application to the
Superintendent or Inspector of Central
Excise having jurisdiction over the
factory of the petitioner.
14. Thereafter Commissioner of Customs
shall certify that the goods are
exported and return the original copy
of ARE-1 to the exporter and the
duplicate copy to the officer specified
in the application, with whom the
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exporter has furnished bond or a letter
of undertaking.
15. The petitioner followed the above
procedure and exported the goods
through merchant exporter without
payment of excise duty including
National Calamity Contingency Duty
(NCCD).
C) As per Central Sales Tax/Value Added
Tax
16. Section 5(3) of the Central Sales
Tax Act, 1965 states that the last sale
or purchase of any goods preceding the
sale or purchase occasioning the export
of those goods out of the territory of
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India shall also be deemed to be in the
course of such export, if such last
sale or purchase took place after, and
was for the purpose of complying with,
the agreement or order for or in
relation to such export. This is
generally referred to as penultimate
sale. No VAT/CST is leviable on such
sales.
17. The sales made by the Petitioner to
merchant exporters were covered under
Section 5(3) of the Central Sales Tax
Act, 1965 and were treated as in the
course of export. VAT/CST was also not
leviable on production of Form-H in
accordance with Rule 12 of the Central
Sales Tax Rules, 1956.
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18. Further the transactions were also
disclosed in VAT returns filed by the
petitioner.
D) As per GST Regime
19. Prior to issuance of Notification
exempting tax on supplies to merchant
exporter in excess of 0.1% with effect
from 23.10.2017, no tax was payable on
goods procured by the merchant
exporter. Therefore, discontinuing the
facility to merchant exporters to
procure export goods free of taxes was
leading to working capital blockage.
20. The GST Council in its 22nd Meeting
held on 06.10.2017 deliberated on this
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issue. The Council observed that the
merchant exporter procures the supplies
on payment of tax which is ultimately
refunded. However, this entire exercise
leads to working capital blockage for
merchant exporters. In the present
case, the Petitioner and most of its
group entities also acts as merchant
exporters.
21. During the discussion, it was being
proposed that the supplies made to
merchant exporter may be exempted,
however that would have led to blocking
of credit and cascading effect.
22. Thus, it was ultimately decided
that the rate of tax on supplies to
merchant exporter will be restricted to
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0.1% only. Keeping in mind the
background, the mischief sought to be
remedied and the discussion on the
proposal for alleviating the hardship
faced by the merchant exporter,
Notification No. 40/2017 - Central Tax
(Rate), Notification No. 40/2017 -
State Tax (Rate) and Notification No.
41/2017 Integrated Tax (Rate) all dated
23.10.2017 were issued on the
recommendation of the Council.
23. After issuance of Notification
No.40/2017-Central Tax (Rate) dated
23.10.2017, the tax payable on supplies
to merchant exporter is exempted in
excess of 0.1%. The said notification
prescribes detailed conditions and
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procedures to be followed for making
supplies to merchant exporter in order
to claim exemption. The petitioners
have complied with all the conditions
which are summarised as under:
a) The registered manufacturer supplier
shall supply the goods to the merchant
exporter on a tax invoice.
b) The registered recipient shall
export the said goods within a period
of ninety days from the date of issue
of a tax invoice by the registered
manufacturer supplier.
c) The merchant exporter shall indicate
the GSTIN number and tax invoice number
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issued by the registered manufacturer
supplier in the shipping bill.
d) The merchant exporter shall be
registered with an Export Promotion
Council or a Commodity Board recognised
by the Department of Commerce
e) The merchant exporter shall place a
purchase order on the registered
manufacturer supplier for procuring the
goods at concessional rate. A copy of
the same shall also be provided to the
jurisdictional tax officer of the
manufacturer supplier
f) The merchant exporter shall move the
said goods from the place of registered
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manufacturer supplier directly to the
port.
g) When goods have been exported, the
merchant exporter shall provide copy of
shipping bill containing details of
GSTIN and tax invoice of the registered
manufacturer supplier along with proof
of export general manifest having been
filed to the manufacturer supplier as
well as jurisdictional tax officer of
such supplier.
24. As per the above procedure, goods
moved from the factory of the
petitioner directly to the port for
export and earmarked for export in
compliance with both the GST and excise
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formalities.
25. In view of above, the supplies made
by the petitioner to merchant exporter
are eligible for the benefit of the
aforesaid Notification. The petitioner
has also filed GST returns disclosing
the details of supplies made to
merchant exporter by levy of 0.1% GST
along with HSN wise details and
applicable rate of tax and amount of
tax.
26. The goods supplied by the
petitioner i.e. branded tobacco is
always leviable to excise duty and NCCD
even after introduction of GST and
such excise duty and NCCD is payable in
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addition to GST. The petitioner has
also complied with the conditions of
Notification No.42/2001-CE(NT) dated
26.06.2001 issued under Rule 19(3) of
Central Excise (No.2) Rules, 2011 for
export of goods without payment of
excise duty and NCCD.
27. The Merchant exporters have claimed
input tax credit of the tax charged at
0.1% by the petitioner and wherever the
merchant exporters could not utilise
the said amount, it has been claimed as
refund under section 54 of the GST Act.
All claims filed by the Merchant
Exporters have been sanctioned and no
dispute has been raised and
declarations have been obtained by the
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petitioners from the Merchant Exporters
to that effect.
28. The officers of DGGI, Surat Zonal
Unit initiated an investigation on
12.06.2021 against the petitioner in
respect of non payment of Compensation
Cess on supplies of tobacco made to the
merchant exporters.
29. During the investigation, it was
revealed that the petitioner has paid
the applicable 0.1% GST for the period
in dispute i.e. from 01.07.2017 to
31.05.2021. However, Compensation Cess
applicable on the taxable value of
supply was not paid by the petitioners.
Thereafter, summons were issued on the
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Director and other CFO of the
petitioner company and during the
course of recording of statements, it
was submitted that the issue raised for
non-payment of Compensation Cess on the
taxable value of supplies was an
industry wide issue and there is a bona
fide belief in the industry that no
Compensation Cess is leviable on
supplies to a merchant exporter.
30. The respondent authorities
thereafter issued intimation in Form
DRC-01A dated 21.07.2022 under section
74(5) of the GST Act.
31. The petitioner submitted reply
dated 29.07.2022 contending inter-alia
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that supplies made by the petitioner is
for export and the entire exercise is
revenue neutral and even if the
petitioner would have paid the
Compensation Cess, same would have been
availed as credit by the Merchant
Exporter and subsequently claimed as
refund.
32. Thereafter show cause notice dated
11.08.2022 was issued wherein it is
alleged as under:
"i) Notification No. 40/2017
Central Tax (Rate) and 41/2017 -
IGST (Rate) both dated 23.10.2017
only exempts CGST and IGST. No
exemption, or any concessional rate
as such has been provided in
respect of compensation cess.
ii) The law has been settled by the
Hon'ble Supreme Court in M/s.
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Unicorn Industries v. Union of
India, 2019 (370) E.L.T. 3 (S.C.),
wherein the Court held that
exemption to excise duty will not
apply to NCCD, education cess and
secondary and higher education
cess.
iii) The product of the Petitioner
is classifiable under HSN 24039910
and thus Compensation Cess at the
rate of 160% as prescribed in
Compensation Cess Notification in
respect of branded manufactured
tobacco is payable by the
Petitioner.
iv) The supplies made by the
Petitioner are not export supplies.
They have themselves shown their
supply as outward supply instead of
exports. Further, the Petitioner
has themselves paid tax @ 0.1% and
claimed the benefit of exemption
notification.
v) The Petitioner has suppressed
the fact of non-payment of
compensation cess as the Petitioner
has not intimated the fact to the
department and it came to the
knowledge of the department only at
the time of audit."
33. The petitioner by reply dated
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11.10.2022 in Form DRC-06 reiterated
the contentions along with the
requisite documents.
34. Thereafter personal hearing was
held on 23.12.2022 wherein also the
petitioner reiterated the submissions
made in reply to the show cause notice.
35. The respondent adjudicating
authority thereafter passed the
impugned order-in-original dated
13.01.2023 confirming the demand of
GST (Compensation Cess) of
Rs.18,63,12,078/- under section 74(1)
of the GST Act read with section 11 of
the Goods and Services (Compensation to
the States) Act,2017 (For short "the
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Compensation Cess Act") along with
appropriate rate of interest under
section 50(1) of the GST Act, 2017 read
with section 11 of the Compensation
Cess Act on the confirmed demand and
penalty of equal amount read with
section 122(2)(b) of the GST Act. The
findings in the impugned order are
summarised as under:
"i) Branded tobacco products
supplied by the Petitioner is
covered under Notification No.
01/2017 - Compensation Cess (rate)
dated 28.06.2017 and therefore,
compensation cess along with
applicable GST on intra state
supplied and inter-state supplied
of goods is required to be paid by
the Petitioner.
ii) Exemption has been provided
from GST on supply of goods vide
Notification No. 40/2017- Central
Tax (Rate) and 41/2017 IGST (Rate)
both dated 23.10.2017, but no
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exemption for compensation cess
has been provided. The supply at
concessional rate under the said
notifications are optional and not
mandatory in nature. If the
Petitioner has not opted for supply
at concessional rate, it will be
liable to pay GST and compensation
cess on that supply.
iii) The CBIC has clarified vide
Circular No. 1/1/2017-Compensation
Cess dated 26.07.2017 that
Compensation cess is payable even
on exported goods being inter-state
supply. However, it will be
refunded under Section 16 of the
IGST Act. Further, if the exports
are made under bond, no
compensation cess will be charged.
iv) The CBIC Board has clarified
vide circular 37/11/2018-GST dated
15.03.2018, clarified that the
benefit of Supplies at concessional
rate is optional and are subject to
certain conditions prescribed
therein.
v) The Petitioner has supplied
goods to the merchant exporter who
has exported then out of India.
Thus, the Petitioner is not
exporter of goods.
vi) On the ground of revenue
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neutrality, the impugned order
relies on Star Industries Ltd. v.
Commissioner of Customs (Import),
Raigad, 2015 (324) E.L.T. 656
(S.C.). Further, reliance is placed
on the decisions holding that
exemption notifications have to be
construed strictly.
vii) The Petitioner has failed to
declare correct details in returns
filed under the GST law and the
short-payment/non-payment was
detected only after investigation
was initiated."
36. It is the case of the petitioner
that Tobacco and Tobacco Product
Manufacturers Association (Tobacco
Product Trader Association) made a
representation dated 13.02.2023
regarding the clarification on
confusion with respect to levy and
collection of compensation Cess on
supplies made to Merchant Exporter
under Notification No.40/2017 and
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Notification No.41/2017 along with a
prayer for retrospective exemption
before GST Council and Chairman of
CBIC.
37. Being aggrieved, the petitioner has
preferred these petitions though
alternative remedy is available under
the provisions of GST Act to challenge
the impugned order-in-original before
the Commissioner (Appeals) on the
ground that the impugned order is
violative of Article 14 and Article
19(1)(g) of the Constitution of India.
38. Heard learned Senior Advocate Mr.
V.Sridharan with learned advocate Mr.
Anand Nainawati for the petitioner in
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Special Civil Application No.6701 of
2023 and Special Civil Application
No.7073 of 2023, learned advocate Mr.
Paresh M. Dave for the petitioner in
Special Civil Application NO.15708 of
2024.
Submissions of the petitioners
39. Learned Senior Advocate Mr. V.
Sridharan with learned advocate Mr.
Anand Nainawati for the petitioners in
Special Civil Application No.6701 of
2023 and Special Civil Application No.
7073 of 2023 submitted that as per the
recommendation of GST Council, the
petitioners are subject to payment of
0.1% GST on the goods manufactured by
the petitioners i.e. branded tobacco
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products falling under HSN 24039910 for
export instead of 28% rate of GST.
40. It was submitted that the
Compensation Cess is payable at the
rate of 160% on the branded tobacco
product which are sold in the domestic
market, however, Compensation Cess is
not leviable on the branded tobacco
products which are exported and
therefore, the petitioners are not
liable to pay the Compensation Cess on
the goods supplied to merchant
exporter.
41. It was submitted that the
Compensation Cess Act is to provide for
compensation to the States for loss of
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revenue arising on account of the
implementation of the goods and service
tax. It was pointed out that section 11
of the Compensation Cess Act provides
that the provisions of the GST Act and
IGST Act and the rules made thereunder
would apply mutatis mutandis in
relation to levy and collection of the
Cess leviable under section 8 of the
Compensation Cess Act. It was
therefore, submitted that as per the
provisions of section 2(5) of the IGST
Act which defines export of goods as
taking goods out of India to a place
outside India, would also be applicable
for the purpose of levy of Compensation
Cess. Therefore, sale made by the
merchant exporter to overseas customer
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is export of goods and therefore, is
zero rated supply under section 16 of
the IGST Act, not liable to GST and
Compensation Cess when supplied against
LUT.
42. It was submitted that however, it
is not necessary that in a particular
chain of transactions only one supply
can be an export of goods as in the
facts of the case, even supply by the
petitioner to merchant exporter would
also quality as export of goods as the
goods manufactured by the petitioners
are removed from factory of the
petitioners against the purchase order
of the merchant exporter for procuring
goods at concessional rate for the
purpose of export.
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43. It was submitted that the goods are
sealed and are cleared directly to the
port for export without being stored at
any intermediate place of merchant
exporter in accordance with the
procedure prescribed under Rule 19 of
the Central Excise Rules, 2002 as well
as Notification No.40/2017-Central/
State Tax and Notification No.41/2017-
Integrated Tax (Rate). It was therefore
submitted that diversion of the goods
is not possible as that will amount to
breach of conditions of Notification.
It was submitted that merchant
exporters consolidate the cargo and
ships the same for export thus
resulting into movement of goods from
the factory to the port and from the
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port to outside India which are so
integrally connected that they are part
and parcel of the same transactions
resulting into export of goods.
44. It was pointed out that the GSTIN
of the petitioners and the tax invoice
number is also mentioned in the
shipping bill filed by the merchant
exporter which is submitted along with
relevant documents before the
Jurisdictional Superintendent Excise of
the petitioners. In support of his
submission, reliance was placed on the
decision of Hon'ble Apex Court in case
of Amritsar Sugar Mills Co. Ltd. v.
Commissioner of Sales Tax, Uttar
Pradesh reported in AIR 1966 SC 1242
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wherein the Hon'ble Supreme Court was
considering the question as to whether
delivery of goods outside Uttar Pradesh
by the petitioner was entitled to
rebate under section 5 of the Uttar
Pradesh Sales Tax Act, 1948 or not. It
was submitted that section 5 of the
Uttar Pradesh Sales Tax Act provided
that when sales of certain goods was
made for delivery outside the State
subject to restrictions and conditions
as may be prescribed, a rebate of one-
half of the tax levied on sales of such
goods for delivery was allowed. It was
submitted that Hon'ble Apex Court by
interpreting the word "delivery" to
mean "constructive delivery" with an
intention to export an actual delivery
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to ensure that only real export sales
enjoy the rebate would be fulfilled and
therefore, the word "delivery"
occurring in the said section would
mean actual delivery and when the sales
were made by the assessee Mills,
therefore, is actual delivery outside
Uttar Pradesh through selling agents.
45. Learned Senior Advocate Mr.
Sridharan therefore submitted that
similar analogy would apply to the
petitioners who supplied the goods to
merchant exporters for the purpose of
actual export and therefore,
petitioners would also be entitled to
the same benefit as merchant exporter
would be entitled to under the
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provisions of GST Act, IGST Act or
Compensation Cess Act.
46. It was submitted that as per Rule
19 of the Central Excise Rules, 2002
along with the provisions of Central
Excise Act, 1944 also recognizes
supplies to merchant exporter as export
supplies.
47. Reference was made to Notification
No. 42/2001-CE(NT) dated 26.06.2001
which provides for the conditions,
safeguards and procedure for the
purpose of export. It was submitted
that the petitioners have followed the
prescribed procedure and removed the
goods for export under the cover of
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Form ARE-1.
48. It was further submitted that
Foreign Trade Policy also recognizes
the supplies made to merchant exporters
as an export supply by EOU as per para
6.10 of the Foreign Trade Policy 2015-
2020 subject to conditions mentioned in
para 6.19 of the Handbook of Procedure.
49. Learned Senior Advocate Mr.
Sridharan therefore, submitted that
considering such supply of goods by the
petitioners to merchant exporters for
actual export recommended that tax on
supplies to merchant exporters in
excess of 0.1% will be exempted as per
the provisions of section 11 of the
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CGST Act. It was submitted that
considering the recommendation of GST
Council, Government has issued
Exemption Notification No.40/2017 for
Central and State Tax (Rate) dated
23.10.2017 exempting payment of GST in
excess of 0.1% (0.1% in case of IGST
and 0.05% each in case of CGST and
SGST).
50. Learned Senior Advocate Mr.
Sridharan thereafter, referred to the
decision of Hon'ble Supreme Court in
case of Union of India v. Mohit
Minerals reported in 2022 (61) GSTL 257
(SC) wherein it is held that
recommendations of the GST Council are
binding on the Government while
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prescribing subordinate legislation.
51. Reliance was placed on the minutes
of 22nd Meeting of GST Council held on
06.10.2017 wherein it was suggested
that for the purpose of importing goods
without payment of tax by exporters
availing Advance Authorisation/Export
Promotion Capital Goods /100% Export
Oriented Units Scheme, exemption should
be granted from IGST and Cess under
section 6 of the IGST Act and in case
of domestic procurement, such supplies
should be deemed as exports and to
tackle the problem of fund blockage in
the hands of merchant exporter, it was
suggested that the supplies to such
persons shall be on payment of nominal
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0.1% GST.
52. It was submitted by learned Senior
Advocate Mr. Sridharan that
Compensation Cess levied under section
8 of the Compensation Cess Act is also
a tax on supplies as held by Hon'ble
Supreme Court in case of Union of India
v. Mohit Minerals reported in (2019) 2
Supreme Court Cases 599 while upholding
levy of Compensation Cess, sustained
the same under Article 246A of the
Constitution as a tax on supply of
goods or services.
53. It was submitted that the findings
arrived at by the respondent to the
effect that exemption notification
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issued by the Government in relation to
the GST Act applicable to the taxes
payable on supply of the goods in
question to merchant exporter in excess
of 0.1% will not apply to Compensation
Cess Act relying upon the decision of
Hon'ble Supreme Court in case of
Unicorn Industries v. Union of India
reported in 2019 (370) ELT 3 (SC)
wherein it was held that the exemption
granted to Central Excise duty will not
apply to NCCD and Cess is erroneous. It
was submitted that Compensation Cess is
at par with CGST, SGST and IGST and
therefore, stand taken by the
respondents that the recommendation of
GST Council cannot be applied to
compensation Cess would frustrate the
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entire purpose of the recommendation
and therefore, strict interpretation of
exemption notification issued by the
Government in relation to CGST and SGST
would equally apply to the Compensation
Cess and the respondents were not
justified in levy of Compensation Cess
at the rate of 160% which ultimately is
required to be refunded to the merchant
exporter as the goods supplied by the
petitioners to merchant exporter is
zero rated supply. It was therefore,
submitted that Notification No. 40/2017
and Notification No.41/2017 dated
23.10.2017 will also include exemption
from Compensation Cess in excess of
0.1%.
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54. It was submitted that without
prejudice to the above contentions, not
granting exemption from Compensation
Cess on supplies made to merchant
exporter will be violative of Article
14 of the Constitution of India as the
GST Council in its 22nd Meeting held on
06.10.2017 made recommendation to
resolve the issue of payment of GST
and Compensation Cess at the time of
procurement to the effect that supplies
of goods to merchant exporters
registered with Export Promotion
Council/Commodity Board shall be on
payment of tax at the rate of 0.1%
and to prevent misuse, adequate
safeguards shall be provided.
55. It was therefore submitted that
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rationale/objective of granting
exemption to basic GST levy applies
with equal force to the Compensation
Cess and it cannot be said that in
absence of any Notification in relation
to Compensation Cess, the petitioners
were liable to pay Compensation Cess at
the rate of 160% which ultimately is to
be refunded.
56. It was submitted that Compensation
Cess is also a tax on supply of goods
or services or both and only some of
the goods or services are specified for
the purpose of levy of Compensation
Cess which generally includes luxury or
sin goods or services. It was submitted
that there is nothing discriminatory in
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prescribing higher rate of tax in
respect of sin goods or services when
supplied domestically. However, in case
of export of such goods or services,
the policy of the Government is to
export goods and not taxes and the
Government does not discourage export
of so-called luxury or sin goods like
branded tobacco which is evident from
the fact refund is granted in case of
export of such goods.
57. It was submitted that in case of
supply of such goods to the merchant
exporter, the basic GST i.e.
CGST/SGST/IGST has been exempted which
clearly shows that the intention of the
Government is not to deny exemption to
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such goods on which Compensation Cess
is leviable. It was therefore,
submitted that to deny exemption to
Compensation Cess on supplies to
merchant exporter is therefore, clearly
discriminatory, arbitrary and violative
of Article 14 of the Constitution which
provides for equality before the law
and equal protection of law.
58. Reliance was placed on the decision
of Hon'ble Apex Court in case of
Budhan Chaudhry v. State of Bihar
reported in AIR 1955 SC 191 wherein it
is held that Article 14 forbids class
legislation but it does not forbid
reasonable classification for the
purposes of legislation. It was
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therefore submitted that in the facts
of the case, the object sought to be
achieved is to relieve merchant
exporters from the problem of working
capital blockage as the taxes paid at
input stage are ultimately refunded and
keeping this object in mind, the
classification sought to be made
between the basic GST and Compensation
Cess is not based on any intelligible
differentia and the only permissible
classification is between supplies
meant for exports including to merchant
exporters and other domestic supplies.
It was therefore, submitted that for
levy of Compensation Cess on such
supplies made to merchant exporters is
arbitrary, discriminatory and violative
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of Article 14 of the Constitution of
India.
59. It was further submitted that
entire exercise of payment of
Compensation Cess at the rate of 160%
on the supplies made to merchant
exporter is revenue neutral as even
nominal tax which is 0.1% to be paid by
the petitioners is also refunded to
merchant exporter, therefore, even
Compensation Cess levied at 160% by the
respondent authorities on the supplies
of merchant exporter is also to be
refunded resulting into revenue neutral
exercise.
60. Reliance was placed on Circular No.
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37/11/2018-GST dated 15.03.2018 in
which it is clarified that the benefit
of supplies at concessional rate is
subject to certain conditions and the
said benefit is optional and the
supplier who supplies goods at
concessional rate is also eligible for
refund on account of inverted tax
structure as per the provisions of sub-
section(3) of section 54 of the CGST
Act. It was therefore, submitted that
if Compensation Cess was paid by the
petitioners, the same would also have
been refunded by the Government to the
merchant exporter as there is no
dispute regarding the fact that the
goods have actually been exported.
61. It was therefore, submitted that
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even if it is assumed that the
contention of the respondent authority
is correct then also the impugned
demand is not sustainable as the entire
tax is otherwise refundable and there
is no revenue implication and any other
interpretation would lead to exporting
taxes which is not the policy of the
Government.
62. In support of his submission,
reliance was placed on the following
decisions:
i) In case of CCE v. Coca-Cola India
Pvt. Ltd. reported in 2007 (213) ELT
490 (SC).
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ii) In case of Apar Industries Ltd. v.
B.S. Ganu reported in 2017 (354) ELT 74
(Bom).
iii) In case of Cipla India v. Union
of India reported in 1995 (80) ELT 17
(Bom.)
63. It was therefore, submitted that
reliance placed by the respondent
authorities on the decision in case of
Star Industries Ltd reported in 2015
(324) ELT 656 (SC) is not applicable to
the facts of the case.
64. It was submitted that section 15(1)
of the CGST Act provides that the value
of supply shall be the transaction
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value i.e. the price paid or payable
for the supply but the provision does
not apply to related parties and as per
section 15(4) where value is not
determinable as per section 15(1), the
value shall be determined in the manner
prescribed under the Rules. It was
pointed out that Rule 28 of the CGST
Rules provides the mechanism for
valuing supplies between related
parties and as per the said Rule,
supplies shall be valued at open market
value or the value of supply of goods
or services of like kind and quality
and if the value is also not
determinable then further rules are
provided. It was submitted however in
case where the recipient is eligible
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for full input tax credit, then the
value declared in the invoice shall be
deemed to be open market value.
65. It was therefore, submitted that in
facts of the case, merchant exporter is
entitled to full input tax credit and
further entitled to refund of entire
amount so claimed as credit and for the
purpose of the Compensation Cess Act,
the value declared in the invoice is
Nil and hence, the said value will be
accepted in accordance with the second
proviso to Rule 28 of the CGST Rules.
66. Reliance was also placed on
Circular No.199/11/2023-GST dated
17.07.2023 in which proviso to Rule 28
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is clarified. It was therefore,
submitted that no Compensation Cess
will be payable by the petitioners and
therefore, the impugned order is
required to be quashed and set aside.
67. Learned Senior Advocate Mr.
Sridharan also referred to sections 8
and 10(1) of the Compensation Cess Act
to submit that the Compensation Cess,
if any, collected from the petitioners
will be available as credit to the
merchant exporters and will be refunded
to them as the goods are exported and
such Compensation Cess would not be
credited to the Goods and Services Tax
Compensation Fund to be distributed to
the States as compensation for loss of
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revenue. It was therefore, submitted
that the amount which cannot be
distributed to the States in accordance
with the purpose of the Act, the same
cannot be levied itself at the
threshold stage under section 8(1) of
the Compensation Cess Act.
68. It was therefore, submitted that
inter-state and intra-state supplies
referred to in section 8 of the
Compensation Cess Act refers only to
the supplies within India and an export
supply is not within the contemplation
of charging section.
69. Learned Senior Advocate Mr.
Sridharan therefore submitted that the
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purpose of the Compensation Cess is to
compensate States for loss of revenue
and considering the fact that no tax
was levied on the supplies to merchant
exporter in earlier regime and
therefore, there is no purpose for
levying Compensation Cess on such
supplies in GST regime also. It was
therefore, submitted that Central
Excise duty and other ancillary duties
like NCCD and Cess were not leviable as
the supply was treated as export under
Rule 19 of the Central Excise Rules,
2002 as well as no VAT was leviable as
per provisions of section 5 of the
Central Sales Tax Act, 1956 on
production of Form-H.
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70. It was therefore submitted that no
Compensation Cess is leviable as no
compensation is required to be given in
respect of supplies made to merchant
exporters.
71. It was further submitted that
respondents could not have invoked the
provisions of section 74 of the CGST
Act for issuance of show cause notice
if there is no fraud, willful
misstatement or suppression of facts to
evade tax in facts of the present case
and no penalty is payable under section
74(1) read with section 122(2) of the
CGST Act.
72. It was further submitted that there
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is no intention on part of the
petitioners nor there is any
suppression as the petitioners have
declared HSN number of the goods
supplied in its monthly return along
with applicable rate of tax and tax
amount paid. The petitioners have also
declared Nil payment of Compensation
Cess. It was therefore, submitted that
none of the ingredients for invocation
of section 74 of the CGST Act is
present in facts of the case as the
transaction is entirely revenue neutral
and entire amount which is alleged to
be payable is eligible as credit to the
merchant exporter and subsequently,
refundable and therefore, there is no
intention to evade the payment of tax.
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73. It was submitted that burden of
proving that the assessee has
suppressed the facts with an intent to
evade payment of tax is on the revenue
as per the decision of Hon'ble Apex
Court in case of Continental Foundation
v. Commissioner of Central Excise
reported in 2007 (216) ELT 177 (SC)
wherein it is held that mere omission
to give correct information is not
suppression of facts within the meaning
of section 11A of the Central Excise
Act, 1944 unless it was deliberate to
stop payment of tax and the burden is
cast upon the Revenue to prove such
suppression to invoke extended period
of limitation.
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74. It was therefore, submitted that in
facts of the case no penalty is
leviable under section 74 and section
122(2)(b) of the CGST Act. It was
further submitted that no interest is
also recoverable from the petitioners
under section 50 of the CGST Act as
the demand is not sustainable.
75. Learned advocate Mr. Paresh M. Dave
appearing for the petitioner in Special
Civil Application No.15708 of 2024
adopted the submissions and contentions
made by learned Senior Advocate Mr.
Sridharan and further emphasised upon
the contention that supply made by the
petitioner of branded tobacco product
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to merchant exporter would be
equivalent to export of goods as per
the provisions of section 2(5) of the
IGST Act and therefore, same would be
zero rated supply. Reliance was placed
on decision in case of Lord Krishna
Sugar Mills v. Commissioner of Sales
Tax, UP Lucknow reported in (1966) 18
STC 498 (SC) wherein relying upon
decision in case of Amritsar Sugar
Mills Co. Ltd.(supra), it was held that
the appellant before the Court was
entitled to rebate under section 5 of
the Uttar Pradesh Sales Tax Act, 1948
in respect of transaction of sale of
goods to selling agents meant for
actual delivery outside Uttar Pradesh.
It was therefore submitted that
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applying the same, supply of goods by
the petitioners to merchant exported
would also have to be considered as
export of goods.
76. It was submitted that Circular
No.1/1/2017-Compensation Cess dated
26.07.2017 issued by the Central Board
of Excise & Customs, New Delhi provides
clarification regarding applicability
of section 16 of the IGST Act, 2017
relating to zero rated supply for the
purpose of Compensation Cess on exports
wherein it is clarified that provisions
of section 16 of the IGST Act will
apply mutatis mutandis for the purpose
of Compensation Cess also and no
Compensation Cess would be charged on
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the goods exported by an exporter under
bond and exporter would be eligible for
refund of input tax credit of
Compensation Cess relating to the goods
exported.
77. It was therefore, submitted that
if the petitioner exports the goods
without payment of IGST under LUT, no
Compensation Cess is payable, however,
if the petitioner exports the goods on
payment of IGST as per Notification
No.40/2017 and Notification No.41/2017,
the petitioner would be liable to pay
GST @ 0.1% on the goods supplied to the
merchant exporter for export but the
petitioner would be liable to pay
Compensation Cess at the rate of 160%
in absence of similar Notification
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being issued by Government for levy of
Compensation Cess which ultimately
would be refunded to the merchant
exporter as input tax credit relating
to the goods exported. It was therefore
submitted that levy of Compensation
Cess at the rate of 160% would result
into a revenue neutral exercise.
78. Reference was also made to Circular
No.37/11/2018-GST dated 15.03.2018
which provides that Notification
No.40/2017 and Notification No.41/2017
would be applicable to supplies to
merchant exporter also. It was
therefore, submitted that levy of
Compensation Cess at 160% on supply of
the goods for export to merchant
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exporter is contrary to the provisions
of GST Act, IGST Act and the
Compensation Cess Act and the
petitioner should not be saddled with
such huge liability resulting into
blockage of working capital as such
exercise would not result in payment of
any compensation to State which is the
object of the levy of Compensation
Cess.
Submissions of the respondents:
79. Learned advocate Mr. C.B. Gupta and
learned advocate Mr. Utkarsh Sharma
appearing for the respondents submitted
that there is no exemption notification
issued by the Central Government to for
exemption from levy of Compensation
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Cess on the inter-state supply and the
same rate would be applicable to the
goods which are sold by the petitioners
to the merchant exporter for exports.
80. It was submitted that the
petitioners have an alternative remedy
to challenge the order-in-original
passed by the respondent authorities by
filing an appeal before the appellate
authority as per the provisions of
section 107 of the GST Act and as such,
the petitions should not be entertained
while exercising the jurisdiction under
Article 227 of the Constitution of
India.
81. It was submitted that issuance of
notification of exemption from levy of
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GST is a policy decision and the
notification issued for the purpose of
exemption of the goods to be exported
by restricting the levy to 0.1% on
CGST, SGST and IGST cannot be applied
to Compensation Cess to be levied under
the Compensation Cess Act.
82. In support of the submissions,
reliance was placed on the following
averments made in the affidavit in
reply:
"13. In the present case, the peti-
tioner has supplied the goods to
merchant exporter and then merchant
exporter has exported the goods.
The petitioner has shown the supply
to the merchant exporter in the E-
way bills as outward supply and
also availed the benefit of exemp-
tion notification and removed the
goods after charging 0.1% GST and
thus they have themselves treated
the supply as not export of goods.
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Therefore, the petitioner was not
exporter in the present case. Since
the supplies made by the petitioner
was outward supply as mentioned in
E-way Bill, the petitioner was li-
able to pay applicable GST and com-
pensation cess on supply of goods
to merchant exporter as per the
provisions of CGST Act, 2017.
14. I submit that in view of the
aforesaid and in view of the provi-
sions referred hereinabove, regard-
less of whether the Petitioner ex-
ports his products directly or
through a merchant exporter, it
would be a case of inter-State /
intra-State transfer of goods and
hence section 8 of the GST (Compen-
sation to the States) Act,2017
would be attracted.
15. I state that the CBIC vide cir-
cular no. 37/11/2018-GST dated
15.03.2018 (Copy at Annexure-3
hereto) clarified that the benefit
of supplies at concessional rates
such as in the present case is sub-
ject to certain condition and the
said benefit is optional. The op-
tion may or may not be availed by
the supplier and or the recipient
and the goods may be procured at
the normal applicable tax rate. The
petitioner is not exporter. I state
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that even otherwise, as mentioned
in paragraph 24.4 of the impugned
order, the provisions of the Inte-
grated Goods and Service Tax Act
and rules thereunder apply mutatis
mutandis in relation to levy and
collection of cess under section 8
of GST(Compensation to the States)
Act,2017 and hence the exporter
would be eligible for refund of
compensation cess paid on goods ex-
ported by him or no compensation
cess would be charged on goods ex-
ported by an exporter under bond
and he would be eligible for refund
of input tax credit of compensation
cess relating to goods exported.
16. With reference to the prayer
for issuance of writ of mandamus or
any other appropriate writ extend-
ing exemption to compensation cess
on supplies made to merchant ex-
porters similar to exemptions under
the notifications dated 23.10.2017,
I submit that grant of the said
prayer by this Hon'ble Court would
tantamount to formation of a policy
decision. I submit that in matters
of formation of policies and more
particularly fiscal policy, this
Hon'ble Court would ordinarily re-
frain from exercising extraordinary
writ jurisdiction and intervening.
Hence, on this ground alone, the
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said prayer is liable to be re-
jected.
17. I submit that it is amply clear
that compensation cess is com-
pletely and independent and dis-
tinct from GST, it has been intro-
duced for a limited period for a
specific purpose and the supply ef-
fected by the Petitioner to mer-
chant exporter attracts levy of
compensation cess. I state that the
products of the Petitioner are cov-
ered under the notification being
Notification No.1/2017-Compensation
Cess (Rate) dated28.06.2017 and
hence compensation cess along with
applicable GST on intra and inter
state supply of goods is required
to be paid by the assessee along
with interest and penalty in terms
of the impugned order. "
83. It was submitted that as per
Notification No.1/2017 dated
28.06.2017, the rate of Compensation
Cess for chewing tobacco without lime
tube under Chapter Heading 2403 99 10
is 160% being sin goods and as such,
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Compensation Cess is to be levied at
the same rate as per section 8 of the
Compensation Cess Act.
84. Reliance was also placed on
Circular No.1/1/2017-Compensation Cess
dated 26.07.2017 wherein it is
clarified that the provisions of
section 16 of the IGST Act, 2017
relating to zero rated supply will
apply mutatis mutandis for the purpose
of Compensation Cess also.
85. It was therefore, submitted that
the petitioners have not made supply to
merchant exporters under LUT/bond but
has availed the benefit of Notification
No.40/2017 and Notification No.41/2017
which provides for supplies for export
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at a concessional rate of 0.1% subject
to certain conditions specified therein
and in absence of similar notification
for Compensation Cess, the petitioners
are liable to pay the Compensation Cess
at the normal rate of 160%.
86. It was submitted that clarification
issued by CBEC in Circular
No.37/11/2018-GST dated 15.03.2018
cannot be relied upon by the
petitioners for payment of Compensation
Cess at par with the Notifications no.
40/2017 and 41/2017 for exemption form
levy of GST in excess of 0.1%.
87. In support of the submission that
the Court shouls not interfere with the
fiscal policy where the Government acts
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in "public interest" and neither any
fraud or lack of bona fide is alleged
much less established and the
Government has to be left free to
determine the priorities in the matter
of utilisation of finances and to act
in the public interest while issuing or
modifying or withdrawing an exemption
Notification, reliance was placed on
the decision of Hon'ble Supreme Court
in case of Kasinka Trading v. Union of
India reported in 1994 (74) ELT 782
(SC).
88. It was therefore, submitted by the
learned advocates for the respondents
that the reasons are assigned by the
adjudicating authority to arrive at the
conclusion that the petitioners are
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liable to pay Compensation Cess on
exported goods zero rated supply being
inter-State supply as per section 7(5)
of the IGST Act which is 160% as per
Notification No.1/2017.
89. It was further submitted that the
adjudicating authority has rightly
for the extended period of limitation
as the petitioners have not paid
Compensation Cess on the goods supplied
to the merchant exporters and failed to
declare the correct information and
returns under the provisions of GST Act
which was detected only after
investigation was initiated by the
officers of the DGGI. It was therefore,
submitted that the petitioners have
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been rightly saddled with interest and
penalty in the impugned order-in-
original.
90. It was further submitted that as
per Notifications No.40/2017 and
Notification No.41/2017, no exemption
for Compensation Cess has been provided
and supply at the nominal rate under
the said notifications is not mandatory
and it is optional and the assesse will
be liable to pay GST and Compensation
Cess on supply at normal rate if such
option of supply at exemption/nominal
rate is not exercised.
91. It was therefore, submitted that
since exemption/nominal rate of GST and
IGST has been provided by the said
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notifications and no exemption has been
provided thereof on Compensation Cess,
the petitioners are liable to pay
Compensation Cess along with
exemption/nominal rate of CGST and
IGST.
92. It was therefore, submitted that no
interference may be made in the
impugned orders and the petitioners may
be relegated to avail the alternative
efficacious remedy by preferring an
appeal to challenge the impugned order-
in-original.
93. Learned Senior Advocate Mr.
Sridharan in rejoinder submitted that
alternative efficacious remedy is not
an absolute bar to entertain writ
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petition, more particularly, in case of
exorbitant and arbitrary demand raised
by the authorities. In the alternative,
it was submitted that if the writ
petitions are not entertained then
while exercising writ jurisdiction in
facts of the case, mandatory pre-
deposit may be waived. In support of
his submissions reliance is placed on
the following decisions:
1) Godrej Sara Lee Ltd. v. Excise and
Taxation Officer reported in 2023
(384) ELT 8 (SC).
2) Government of A.P. v. P. Laxmi Devi
reported in (2008) 4 SCC 720.
3) Sumati Nath Jain v. State of UP
reported in 2016 SCC OnLine All
2840.
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4) Ganesh Yadav v. Union of India
reported in 2015 (320) ELT 711
(All).
5) Pioneer Corporation v. Union of
India reported in 2016 (340) ELT 63
(Del.).
Discussions and Findings:
94. The short controversy which arises
for consideration of this Court in the
facts of the case is whether the
petitioners are liable to pay
Compensation Cess at the rate of 160%
on the supply of goods i.e. branded
tobacco products to the merchant
exporters for export or no Compensation
Cess is payable or at-least
nominal/concessional Compensation Cess
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at the rate of 0.1% is payable by
applying Notification No.40/2017 and
Notification No.41/2017 dated
23.10.2017?
95. To consider the issue arising in
these petitions, it would be germane to
refer to the relevant provisions of the
Act.
IGST Act
2(5) - "export of goods" with its
grammatical variations and cognate
expressions, means taking goods out
of India to a place outside India;
7. Inter-State supply
(1) Subject to the provisions of
section 10, supply of goods, where
the location of the supplier and
the place of supply are in-
(a) two different States;
(b) two different Union
territories; or
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(c) a State and a Union territory,
shall be treated as a supply of
goods in the course of inter-State
trade or commerce.
xxx
(5) Supply of goods or services or
both,-
(a) when the supplier is located
in India and the place of supply is
outside India;
(b) to or by a Special Economic
Zone developer or a Special
Economic Zone unit; or
(c) in the taxable territory, not
being an intra-State supply and not
covered elsewhere in this section,
shall be treated to be a supply of
goods or services or both in the
course of inter-State trade or
commerce.
16. Zero-rated supply
(1) "zero-rated supply" means any
of the following supplies of goods
or services or both namely:-
(a) export of goods or services or
both; or
(b) supply of goods or services or
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both [for authorised operations] to
a Special Economic Zone developer
or a Special Economic Zone unit.
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(3) A registered person making
zero-rated supply shall be eligible
to claim refund under either of the
following options, namely:-
(a) he may supply goods or services
or both under bond or Letter of
Undertaking, subject to such
conditions, safeguards and
procedure as may be prescribed,
without payment of integrated tax
and claim refund of unutilised
input tax credit; or
(b) he may supply goods or services
or both, subject to such
conditions, safeguards and
procedure as may be prescribed, on
payment of integrated tax and claim
refund of such tax paid on goods or
services or both supplied,
in accordance with the provisions
of section 54 of the Central Goods
and Services Tax Act or the rules
made thereunder."
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Goods and Service Tax
(Compensation To States) Act, 2017.
2. Definitions
(1) In this Act, unless the context
otherwise requires,-
xxx
(c) "cess" means the goods and
services tax compensation cess
levied under section 8;
(d) "compensation" means an amount,
in the form of goods and services
tax compensation, as determined
under section 7;
8. Levy and collection of cess
(1) There shall be levied a cess on
such intra-State supplies of goods
or services or both, as provided
for in section 9 of the Central
Goods and Services Tax Act, and
such inter-State supplies of goods
or services or both as provided for
in section 5 of the Integrated
Goods and Services Tax Act, and
collected in such manner as may be
prescribed, on the recommendations
of the Council, for the purposes of
providing compensation to the
States for loss of revenue arising
on account of implementation of the
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goods and services tax with effect
from the date from which the
provisions of the Central Goods and
Services Tax Act is brought into
force, for a period of five years
or for such period as may be
prescribed on the recommendations
of the Council:
PROVIDED that no such cess shall be
leviable on supplies made by a
taxable person who has decided to
opt for composition levy under
section 10 of the Central Goods and
Services Tax Act.
(2) The cess shall be levied on
such supplies of goods and services
as are specified in column (2) of
the Schedule, on the basis of
value, quantity or on such basis at
such rate not exceeding the rate
set forth in the corresponding
entry in column (4) of the
Schedule, as the Central Government
may, on the recommendations of the
Council, by notification in the
Official Gazette, specify:
PROVIDED that where the cess is
chargeable on any supply of goods
or services or both with reference
to their value, for each such
supply the value shall be
determined under section 15 of the
Central Goods and Services Tax Act
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for all intra-State and inter-State
supplies of goods or services or
both:
PROVIDED FURTHER that the cess on
goods imported into India shall be
levied and collected in accordance
with the provisions of section 3 of
the Customs Tariff Act, 1975 (51 of
1975), at the point when duties of
customs are levied on the said
goods under section 12 of the
Customs Act, 1962 (52 of 1962), on
a value determined under the
Customs Tariff Act, 1975 (51 of
1975).
11. Other provisions relating to
cess
(1) The provisions of the Central
Goods and Services Tax Act, and the
rules made thereunder, including
those relating to assessment, input
tax credit, non-levy, short-levy,
interest, appeals, offences and
penalties, shall, as far as may be,
mutatis mutandis, apply, in
relation to the levy and collection
of the cess leviable under section
8 on the intra-State supply of
goods and services, as they apply
in relation to the levy and
collection of central tax on such
intra-State supplies under the said
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Act or the rules made thereunder.
(2) The provisions of the
Integrated Goods and Services Tax
Act, and the rules made thereunder,
including those relating to
assessment, input tax credit, non-
levy, short-levy, interest,
appeals, offences and penalties,
shall, mutatis mutandis, apply in
relation to the levy and collection
of the cess leviable under section
8 on the inter-State supply of
goods and services, as they apply
in relation to the levy and
collection of integrated tax on
such inter-State supplies under the
said Act or the rules made
thereunder:
PROVIDED that the input tax credit
in respect of cess on supply of
goods and services leviable under
section 8, shall be utilised only
towards payment of said cess on
supply of goods and services
leviable under the said section.
GST ACT
54(3) - Subject to the provisions
of sub-section (10), a registered
person may claim refund of any
unutilised input tax credit at the
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end of any tax period:
PROVIDED that no refund of
unutilised input tax credit shall
be allowed in cases other than-
(i) zero-rated supplies made
without payment of tax;
(ii) where the credit has
accumulated on account of rate of
tax on inputs being higher than the
rate of tax on output supplies
(other than nil rated or fully
exempt supplies), except supplies
of goods or services or both as may
be notified by the Government on
the recommendations of the Council:
PROVIDED FURTHER that no refund of
unutilised input tax credit shall
be allowed in cases where the goods
exported out of India are subjected
to export duty:
PROVIDED ALSO that no refund of
input tax credit shall be allowed,
if the supplier of goods or
services or both avails of drawback
in respect of central tax or claims
refund of the integrated tax paid
on such supplies.
GST Rules
28. Value of supply of goods or
services or both between distinct
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or related . persons, other than
through an agent
The value of the supply of goods or
services or both between distinct
persons as specified in sub-
sections (4) and (5) of section 25
or where the supplier and recipient
are related, other than where the
supply is made through an agent,
shall-
(a) be the open market value of
such supply;
(b) if the open market value is not
available, be the value of supply
goods or services of like kind and
quality;
(c) if the value is not
determinable under clause (a) or
(b), be the value as determined by
the application of rule 30 or rule
31, in that order:
PROVIDED that where the goods are
intended for further supply as such
by the recipient, the value shall,
at the option of the supplier, be
an amount equivalent to ninety
percent of the price charged for
the supply of goods of like kind
and quality by the recipient to his
customer not being a related
person:
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PROVIDED FURTHER that where the
recipient is eligible for full
input tax credit, the value
declared in the invoice shall be
deemed to be the open market value
of the goods or services."
96. It would also be germane to refer
to various circulars/notifications at
this stage as under:
Circular No. 199/11/2023-GST dated
17.7.2023
S. Issues Clarification
No.
2. In respect of The value of supply
internally generated of services made by
services, there may a registered person
be cases where HO is to a distinct person
providing certain needs to be
services to the BOs determined as per
for which full input rule 28 of CGST
tax credit is Rules, read with
available to the sub-section (4) of
concerned BOs. section 15 of CGST
However, HO may not Act. As per clause
be issuing tax (a) of rule 28, the
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invoice to the value of supply of
concerned BOs with goods or services or
respect to such both between
services, or the HO distinct persons
may not be including shall be the open
the cost of a market value of such
particular component supply. The second
such as salary cost proviso to rule 28
of employees of CGST Rules
involved in provides that where
providing said the recipient is
services while eligible for full
issuing tax invoice input tax credit,
to BOs for the the value declared
services provided by in the invoice shall
HO to BOs. Whether be deemed to be the
the HO is open market value of
mandatorily required the goods or
to issue invoice to services.
BOs under section 31 Accordingly, in
of CGST Act for such respect of supply of
internally generated services by HO to
services, and/ or BOs, the value of
whether the cost of the said supply of
all components services declared in
including salary the invoice by HO
cost of HO employees shall be deemed to
involved in be open market value
providing the said of such services, if
services has to be the recipient BO is
included in the eligible for full
computation of value input tax credit.
of services provided
by HO to BOs when Accordingly, in
full input tax cases where full
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credit is available input tax credit is
to the concerned available to a BO,
BOs. the value declared
on the invoice by HO
to the said BO in
respect of a supply
of services shall be
deemed to be the
open market value of
such services,
irrespective of the
fact whether cost of
any particular
component of such
services, like
employee cost etc.,
has been included or
not in the value of
the services in the
invoice.
Further, in such
cases where full
input tax credit is
available to the
recipient, if HO has
not issued a tax
invoice to the BO in
respect of any
particular services
being rendered by HO
to the said BO, the
value of such
services may be
deemed to be
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declared as Nil by
HO to BO, and may be
deemed as open
market value in
terms of second
proviso to rule 28
of CGST Rules.
Circular No. 37/11/2018-GST dated
15.3.2018
13. Supplies to Merchant Exporters:
Notification No. 40/2017 Central
Tax (Rate), dated 23rd October 2017
and notification No. 41/2017
Integrated Tax (Rate) dated 23rd
October 2017 provide for supplies
for exports at a concessional rate
of 0.05% and 0.1% respectively,
subject to certain conditions
specified in the said
notifications.
13.1 It is clarified that the
benefit of supplies at concessional
rate is subject to certain
conditions and the said benefit is
optional. The option may or may not
be availed by the supplier and/or
the recipient and the goods may be
procured at the normal applicable
tax rate.
13.2 It is also clarified that the
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exporter will be eligible to take
credit of the tax @ 0.05% /0.1%
paid by him. The supplier who
supplies goods at the concessional
rate is also eligible for refund on
account of inverted tax structure
as per the provisions of clause
(ii) of the first proviso to sub-
section (3) of section 54 of the
CGST Act. It may also be noted that
the exporter of such goods can
export the goods only under
LUT/bond and cannot export on
payment of integrated tax. In this
connection, notification No.
3/2018-Central Tax, dated
23.01.2018 may be referred.
Circular No. 1/1/2017-Compensation
Cess dated 26.7.2018
8. In view of the above, it is
hereby clarified that provisions of
section 16 of the IGST Act, 2017,
relating to zero rated supply will
apply mutatis mutandis for the
purpose of Compensation Cess
(wherever applicable), that is to
say that:
a) Exporter will be eligible for
refund of Compensation Cess paid on
goods exported by him [on similar
lines as refund of IGST under
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section 16(3) (b) of the IGST,
2017]; or
b) No Compensation Cess will be
charged on goods exported by an
exporter under bond and he will be
eligible for refund of input tax
credit of Compensation Cess
relating to goods exported [on
similar lines as refund of input
taxes under section 16(3)_(a)_of
the IGST, 2017]."
97. There is no dispute between the
parties regarding the supply of goods
by the petitioners to merchant
exporters to be considered as "export
of goods" in the hands of the
petitioners and therefore, provision
of section 16 of the IGST Act would
also apply to the supplies made by the
petitioners to merchant exporters as
zero rated supply.
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98. Prior to GST regime under the
provisions of the Central Excise Act
and Rules as well as Sales Tax and VAT
provisions, there was no levy of tax at
any point of time on export of goods
and therefore, the goods were exported
at the value excluding tax to be levied
thereon. Therefore as per Rule 19 of
the Central Excise Rules, 2002, export
was to be made without payment of any
excise duty which reads as under:
"19. Export without payment of duty
- (1) Any excisable goods may be
exported without payment of duty
from a factory of the producer or
the manufacturer or the warehouse
or any other premises, as may be
approved by the Principal
Commissioner or Commissioner, as
the case may be.
(2) Any material may be removed
without payment of duty from a
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factory of the producer or the
manufacturer or the warehouse or
any other premises, for use in the
manufacture or processing of goods
which are exported, as may be
approved by the Principal
Commissioner or Commissioner, as
the case may be.
(3) The export under sub-rule (1)
or sub-rule (2) shall be subject to
such conditions, safeguards and
procedure as may be specified by
notification by the Board.
[Provided that nothing contained in
this rule shall apply to Motor
spirit, commonly known as petrol,
Highspeed diesel oil and Aviation
Turbine Fuel.]"
99. As per Notification No.42/2001
dated 26.06.2001, conditions and
procedure for export of excisable goods
are prescribed without payment of duty.
Similarly, after the GST Act coming
into force, the basic concept of export
of goods without payment of duty or tax
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is continued and as per Circular
No.37/11/2018-GST dated 15.03.2018
supply of goods to merchant exporters
is considered as an export of goods in
consonance with decision of Hon'ble
Apex Court in case of Amritsar Sugar
Mills Co. Ltd.(supra) and in case of
Lord Krishna Sugar Mills (supra),
wherein it is held that in a
transaction of taking goods out of
Utter Pradesh , in facts of the case
to a place out of India more than one
supply can qualify as export supply and
therefore, supply by the petitioners to
the merchant exporters would qualify as
export supply. Reliance is placed on
the following observations of the
Hon'ble Apex Court in case of Amritsar
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Sugar Mills Co. Ltd.(supra) :
"The first question which arises in
these appeals is whether the word
"delivery" in the expression "sales
of Such goods for delivery outside
Uttar Pradesh" occurring in section
5 of the Act means actual delivery
or constructive delivery. If it
means constructive delivery then
there is no doubt that on the facts
as stated by the Judge (Revisions)
the contract provided for
constructive delivery inside Uttar
Pradesh and the assessee-mills
would not be entitled to rebate
under section 5.
The Madras High Court had occasion
to consider a similar question in
India Coffee and Tea Distributing
Co. Ltd. v. The State of Madras
[1959] 10 S.T.C. 359. It held that
the word "delivery" in section 5 of
the Madras General Sales Tax Act,
1939, which exempts from taxation
sales of tea "if the sale is for
delivery outside the State and
delivery actually was made" did not
include anything which the law
deemed "delivery" but was
restricted to physical delivery of
the thing sold. In coming to this
conclusion, Subrahmanyam, J.,
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observed:
"In deciding whether the word
'delivery' in section 5(v)
includes delivery in law, we
have to have regard to the
objects of the Legislature in
enacting section 5(v). The
object obviously was the
promotion of the export of tea.
The Legislature intended that
where tea was exported from the
State for being delivered
outside the State, the sale
which resulted in such export
should be exempt from taxation.
That object would not be wholly
achieved if we hold that
delivery of documents of title
in the State of Madras would
make the sale liable to
taxation."
We agree with the view expressed by
the Madras High Court. It seems to
us that the object underlying
section 5 is to encourage export of
goods manufactured in Uttar Pradesh
and notified under section 5. The
course of trade adopted by the
Indian Sugar Syndicate Ltd. and the
assessee-mills shows that if the
word "delivery" is interpreted to
mean "constructive delivery" very
few "export sales", if we may use
the expression, would enjoy rebate
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under section 5. As long as the
contract evinces an intention to
export and actual delivery is given
to effectuate that intention the
object of the Legislature to ensure
that only real "export sales" enjoy
the rebate would be fulfilled. It
seems to us that in the context of
section 5 the word "delivery"
occurring in section 5 means
"actual delivery".
100. It is also required to be noted
that even if the petitioners are
saddled with payment of Compensation
Cess at the rate of 160%, merchant
exporters shall get refund of the same
as per the provisions of section 16 of
the IGST Act read with section 54(3) of
the GST Act and therefore, such payment
of Compensation Cess would be revenue
neutral and in such circumstances, levy
of Compensation Cess at the rate of
160% on supply of goods to merchant
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exporters by the petitioners would not
be sustainable as held in case of Coca-
Cola India Pvt. Ltd.(supra).
101. GST Council in its 22nd Meeting held
on 06.10.2017 while considering Agenda
Item 5 of Report and Recommendations of
the Committee on Exports regarding
working capital blockage for
manufacturer exports including EOUs due
to requirement of upfront payment of
GST on inputs/capital goods and for
merchant exporters due to requirement
of upfront payment of GST on finished
goods discussed the issue as under:
"12.17. The Hon'ble Minister from
Jammu & Kashmir reiterated that if
exemption mechanism was to be kept
for exports till March 2018, then
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exemption scheme for Special
Category States should also be
continued till March 2018. The
Hon'ble Chairperson stated that
exporters formed a different
category and for them too,
exemption would be phased out. The
Senior Joint Commissioner
(Commercial Taxes), West Bengal
reiterated that supplies to
merchant exporters should not be
subject to a tax of 1%. The Hon'ble
Minister from Karnataka raised a
question whether the proposed
exemption scheme would also apply
to export of services. DGFT
clarified that the present scheme
of advance authorisation, EPCG,
etc. applied only to goods. The
Secretary suggested that no new
dispensation should be created
under the GST. The Council agreed
to this suggestion. The Secretary
suggested that supplies to merchant
exporters could be exempt if the
goods were moved immediately to the
port of shipment or to an export
warehouse. The Senior Joint
Commissioner (Commercial Taxes),
West Bengal stated that in the
earlier scheme of Form H under VAT,
no tax was paid when goods were
sold to merchant exporter but full
tax became payable if goods were
not eventually exported. He stated
that a similar procedure should be
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continued and there should be no
mandatory requirement of directly
sending the goods to warehouses for
export. The Secretary stated that
input tax credit would not be
available if full exemption was
given for supply to merchant
exporter. He suggested that a tax
of 0.1% could be levied on supplies
to merchant exporters. The Hon'ble
Deputy Chief Minister of Delhi
supported the proposal to keep the
rate of tax on supplies to merchant
exporters at the rate of 0.1%. The
Council agreed to this proposal.
The Council also agreed to the
other recommendations of the
Committee on Exports."
102. Thereafter in para no.13 GST
Council approved the exemption from
IGST, Cess etc. as under:
"13. For agenda item 5, the Council
approved the following:
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(v) Supplies of goods to merchant
exporters registered with Export
Promotion Council/Commodity Boards
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shall be on payment of tax at the
rate of 0.1% and to prevent misuse,
adequate safeguards shall be
provided."
103. Government of India issued
Notification No.40/2017 dated
23.10.2017 while exercising powers
conferred by sub-section(1) of section
11 of the CGST Act on recommendation of
the GST Council to exempt intra-State
supply of taxable goods by a registered
supplier to a registered recipient for
export, from so much of the central tax
leviable thereon under section 9 of the
GST Act, as in excess of the amount
calculated at the rate of 0.05 per
cent, so far as levy of CGST is
concerned and similar notification is
issued by the State Government
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resulting into payment of maximum tax
at the rate of 0.01%. Similar
Notification is also issued being
Notification No.41/2017 while
exercising powers under section 6 of
the IGST Act to grant exemption on IGST
leviable upon export in excess of
amount calculated at the rate of 0.1%
meaning thereby that maximum 0.1% IGST
is payable.
104. However, no notification is issued
by the Central Government or State
Government under the Compensation Cess
Act and therefore, the petitioners are
made liable to pay Compensation Cess at
normal rate i.e. 160% on the supply of
goods to merchant exporters for
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export.
105. It is true that in absence of any
notification, the respondent
authorities were justified in passing
the impugned order for levy of
Compensation Cess at the normal rate of
160% on the supply made by the
petitioners to merchant exporters.
However, considering the provisions of
section 11 of the Compensation Cess
Act, which provides for applicability
of provisions of CGST and IGST Act,
mutatis mutandis for levy of Cess as
per section 8 of Compensation Cess Act,
notification issued under the
provisions of GST and IGST Act are
required to be applied for levy of Cess
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also for the following reasons:
1) The petitioner is saddled with levy
of Compensation Cess at the rate of
160% considering the same as inter-
State supply under the IGST Act
though supplies made by the
petitioners to merchant exporters
is "export of goods" as per section
2(5) of the IGST Act read with
clarification issued by
Notification No. 13/2018.
Therefore, supplies made by the
petitioners to merchant exporter is
zero rated supply.
2) If the petitioners are made liable
to pay Compensation Cess at the
normal rate of 160%, the same
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analogy should apply with regard to
working capital blockage in the
hands of the manufactures who are
supplying goods for export to
merchant exporters for which GST
Council has recommended for
exemption from levy of GST and IGST
and reduced the rate upto 0.1% only
for the purpose of notifying the
transaction so as to bring the
transaction within the purview of
provisions of the GST Act.
Accordingly, the Government has
issued notification as stated here-
in-above. As the Compensation Cess
Act is a satellite Act adopting the
provisions of GST and IGST Act,
Government ought to have issued
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notification under the Compensation
Cess Act also at par with
Notification No.40/2017 and
Notification No. 41/2017.
106. In view of above, when there is no
revenue loss, there is no purpose of
levy of Compensation Cess at the normal
rate of 160% as the same is required to
be refunded to the merchant exporter on
export of goods as per provisions of
section 54(3) of the GST Act read with
section 16 of the IGST Act.
107. Though the respondent authorities
have considered that exporters will be
eligible for refund of Compensation
Cess paid on goods exported by him on
similar line as refund of IGST under
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section 16(3)(b) of the IGST Act, 2017
or no Compensation Cess will be charged
on goods exported by an exporter under
LUT/bond and he will be eligible for
refund of input tax credit of
Compensation Cess relating to good
exported meaning thereby that it is a
revenue neutral exercise by levy of
Compensation Cess at 160% and
thereafter refund the same either on
payment basis or as refund of input
tax.
108. There is a fallacy in reasoning of
the adjudicating authority that as
option is given to assessee either to
avail benefits of Exemption
Notification No.40/2017 and
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Notification No.41/2017 or to pay tax
at normal rate, the petitioners are
liable to pay Compensation Cess at
normal rate only in absence of any such
notification or option being given by
the Government.
109. The contention raised on behalf of
the respondents that it is a policy
decision of the Government seems to be
out of place as provisions of
Compensation Cess Act are to be applied
mutatis mutandis to that of GST Act and
IGST Act and in that view of the
matter, there cannot be any discrepancy
of levy of GST, IGST and Compensation
Cess. The Government is therefore,
required to issue similar notification
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for granting exemption under the
Compensation Cess Act also or extend
the benefits of Exemption Notification
No.40/2017 and Notification No.41/2017
for levy of Compensation Cess also on
supply of goods by the petitioners to
the merchant exporters on fulfillment
of various conditions as prescribed
therein.
110. With regard to the objection raised
on behalf of the respondents that there
is an alternative efficacious remedy,
the appellate authority would not be
able to decide the issue of grant of
exemption from Compensation Cess in
absence of any similr notification
issued by the Government for exemption
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of Compensation Cess or by extending
the benefit of Notification No.40/2017
and Notification No.41/2017.
111. It is not in dispute that the goods
manufactured by the petitioners are
removed from the factory of the
petitioners against the purchase orders
of the merchant exporters for procuring
the goods at concessional rate for the
purpose of export. Goods are sealed and
are cleared directly to the port for
export without being stored at any
intermediate place of merchant exporter
in accordance with the procedure
prescribed under Rule 19 of the Central
Excise Rules, 2002 as well as
Notification No.40/2017 and
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Notification No.41/2017. The merchant
exporters thereafter consolidate the
cargo and ships the same for export.
Therefore, the movement of goods from
the factory of the petitioners to the
port for export and from the port to
outside India are integrally connected
and therefore they are part and parcel
of the same transaction. The GSTIN of
the assessee and the tax invoice number
is also mentioned in the shipping bill
by the merchant exporter. In such
circumstances, as per provisions of
section 2(5) of the IGST Act, supply of
goods by the petitioners to merchant
exporters is to be considered as export
of goods and therefore, the same would
be zero rated supply as per section 16
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of the IGST Act.
112. It is pertinent to note that
Compensation Cess Act is brought on
statute to provide compensation to the
States for loss of revenue arising on
account of implementation of good and
services tax in pursuance of the
provisions of the Constitution (One
Hundred and First Amendment) Act, 2016
and as per section 5 of the
Compensation Cess Act, various Acts
are subsumed into Goods and Services
Tax Act. Therefore, Compensation Cess
as per the provisions of section 7 is
payable to the States during the
transition period as per the method
prescribed in the said section,
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considering the projected revenue for
any year calculated as per provisions
of section 6 of the Compensation Cess
Act. Therefore, Compensation Cess is
collected to be distributed amongst
States to compensate loss of revenue.
Life of Compensation Cess Act was
initially for five years which is now
extended for five years from 2017 which
is now further extended. Therefore, the
levy of Compensation Cess is required
to be considered at par with levy of
GST and IGST.
113. At the same time, the contention
raised on behalf of the petitioners for
violation of Articles 14 and 19(1)(g)
of the Constitution that petitioners
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cannot be treated differently from
similarly placed manufactures, cannot
be accepted in absence of notification
of exemption from payment of
Compensation Cess issued by the
Government. It is also true that no
notification under Compensation Cess
can be issued in absence of any
recommendation from GST Council.
114. Therefore, in facts of the case, as
the petitioners have a valid case for
exemption from payment of Compensation
Cess, GST Council is required to
consider recommending exemption from
levy of Compensation Cess in line with
exemption approved for levy of GST and
IGST for supply of export or supply to
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merchant exporters by the manufactures.
The Hon'ble Apex Court in case of Union
of India v. Vkc Footsteps India Private
Limited reported in (2022) 2 SCC 603
has held as under so as to urge the GST
Council to reconsider the formula and
take a policy decision regarding the
same for removing anomaly in Rule 89 of
the GST Rules :
"142. The above judicial precedents
indicate that in the field of
taxation, this Court has only
intervened to read down or interpret a
formula if the formula leads to absurd
results or is unworkable. In the
present case however, the formula is
not ambiguous in nature or unworkable,
nor is it opposed to the intent of the
legislature in granting limited refund
on accumulation of unutilised ITC. It
is merely the case that the practical
effect of the formula might result in
certain inequities. The reading down
of the formula as proposed by Mr
Natarjan and Mr. Sridharan by
prescribing an order of utilisation
would take this Court down the path of
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recrafting the formula and walk into
the shoes of the executive or the
legislature, which is impermissible.
Accordingly, we shall refrain from
replacing the wisdom of the
legislature or its delegate with our
own in such a case. However, given the
anomalies pointed out by the
assessees, we strongly urge the GST
Council to reconsider the formula and
take a policy decision regarding the
same."
115. In view of above, when there is no
recommendation by GST Council to grant
exemption from payment of Compensation
Cess at par with GST and IGST on supply
of goods for export or supply to
merchant exporter, we also strongly
urge the GST Council to consider the
issue of granting exemption from levy
of Compensation Cess at par with GST
and IGST as recommended by it in 22nd
Meeting so as to see that there is no
working capital blockage for
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manufacturer or exporters including
EOUs due to requirement of upfront
payment of Compensation Cess at normal
rate on supply of goods by the
petitioners to merchant exporters for
export which ultimately is required to
be refunded considering the fact that
no tax is leviable on the export of
goods.
116. In view of foregoing discussion and
reasons, the impugned action of levy of
Compensation Cess at the rate of 160%
on the supply of goods i.e. branded
tobacco products by the petitioners to
merchant exporters for export is
required to be kept in abeyance and the
matter is referred to GST Council to
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decide the issue as to whether
exemption is required to be granted on
levy of Compensation Cess on supply of
goods to merchant exporters for export
at par with exemption granted for levy
of GST and IGST in excess of 0.1% so as
to enable the petitioners to avail
input tax credit or refund as the case
may be as per the provisions of section
16(3) of the IGST Act read with section
54(3) of the GST Act.
117. Till the GST Council considers the
issue in accordance with law for
recommendation of the exemption from
levy of Compensation Cess, the
respondents shall not initiate further
proceedings by issuing show cause
notice or by passing any adjudication
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order in respect of levy of
Compensation Cess at normal rate on the
goods supplied to the merchant exporter
for export if the petitioners fulfill
the conditions as prescribed under
Exemption Notification No.40/2017 and
Exemption Notification No.41/2017 and
also file an undertaking before the
respondent authorities to deposit the
Compensation Cess if GST Council
recommends otherwise.
118. With the aforesaid observations and
findings, the petitions are disposed
of. The operation and implementation of
impugned orders are hereby kept in
abeyance till the GST Council
reconsider on the issue of recommending
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exemption from payment of Compensation
Cess on the products supplied by the
petitioners to merchant exporters for
export at par with recommendation
issued for exemption from levy of GST
and IGST in excess of 0.1% in its 22nd
Meeting which has resulted into
issuance of Notification No.40/2017
and Notification No.41/2017 dated
23.10.2017.
119. We hope that GST Council shall
consider the issue of such
recommendation of granting exemption
from payment of Compensation Cess at
par with GST and IGST at the earliest
so as to resolve such anomaly.
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120. Rule is made absolute to the
aforesaid extent. No order as to costs.
(BHARGAV D. KARIA, J)
(D.N.RAY,J)
RAGHUNATH R NAIR
