The taxpayers often hesitate to shut down the business operations since the input tax credit (‘ITC’) sitting in the credit ledger is often considered as a sunk cost. Instead, they tend to pursue alternative feasible legal solutions and processes, which could drag for months and may ultimately yield limited or no results.
The recent Sikkim High Court verdict in SICPA India Private Limited and Another v. Union of India and others [WP(C) No.54 of 2023] seems to have opened an avenue for such taxpayers by allowing refund of unutilized ITC in such cases. This Article emphasizes the impact of this ruling on business decisions of scaling down the business operations along with the soundness of the decision.
Brief overview of the judgement
The question of law before the High Court was whether the refund of ITC under Section 49(6) of the CGST Act is only limited to companies carved out under Section 54(3) of the CGST Act or the refund of ITC is a statutory right in case of discontinuance of business.
Section 49(6) of CGST Act provides for refund of balance in electronic cash ledger and credit ledger after clearing all the dues in accordance with the provisions of Section 54. On the other hand, the provisions relating to refund of unutilized ITC are encapsulated in Section 54(3) of CGST Act allowing refund of unutilized ITC in twin cases of exports and inverted duty structure.
The High Court after reflecting on the provisions and judgement of Karnataka High Court (upheld by Supreme Court as well[1]) rendered in pre-GST regime in Slovak India Trading Company Private Limited[2] allowed refund of unutilized ITC on account of closure of business by petitioner. The High Court’s decision was founded on two main reasons. It was noted that there is no express prohibition in Section 49(6) read with Section 54 and 54(3) of the CGST Act, for claiming a refund of ITC on closure of unit [similar to Rule 5 of the CENVAT Credit Rules, 2002 relied in case of Slovak (supra)]. The Court also held that though Section 54(3) of the CGST Act deals only with two circumstances where refunds can be made, the statute also does not provide for retention of tax without the authority of law.
Since the above decision is not detailed, it is important to delve into certain aspects which were not dealt with by the High Court before relying on this ruling and applying for a refund.
Decision of VKC Footsteps
Though the Sikkim High Court has relied on the decision of Slovak (supra) while allowing the refund, the High Court has not discussed the applicability of decision of the Hon’ble Supreme Court in case of VKC Footsteps India Private Limited[3]. The Apex Court in the said case while addressing the issue of availability of refund of input services under Section 54(3) of the CGST Act noted that the accumulated ITC may result due to variety of circumstances, some of which may, while others may not, lie within the volition of a registered person. Some of the reasons referred were the shutdown of business or industry, business loss, economic compulsion to sell at below value prices, stoppage of work etc. It was observed by the Apex Court that Parliament while enacting sub-Section (3) of Section 54 has stipulated the refunds in specific situations envisaged in clauses (i) and (ii) of the first proviso.
This may indicate that the refund provisions should be restricted to specific situations and should not be stretched.
Other decisions in pre-GST regime
Although Slovak has allowed refund of Cenvat credit on closure of factory, several other rulings such as Motonic India Automotive Pvt. Ltd.[4], Gauri Plasticulture Pvt. Ltd.[5] have distinguished it and denied the refunds on the ground that Sections 11B(2)(c) and (d) of the Central Excise Act, 1944 do not provide for such refunds, and that Rule 5 of the Cenvat Credit Rules permits refunds only in cases of export, and not on closure of manufacturing operations.
In case the refund is denied on the above ground, it may be argued that unlike pre-GST regime, since GST law has specifically carved out the enabling provision [Section 49(6)] for allowing refund in such cases, accordingly, refund should be admissible.
However, the point which warrants in-depth examination is whether Section 49(6) of CGST Act can be read in isolation when it allows refund in accordance with the provisions of Section 54 which, conversely, do not expressly address such situations.
Way forward
It is evident that despite its promising look, the decision deserves a careful caveat rather than blind adherence. The Single Judge bench decision is definitely a victory for taxpayers, but may foresee the challenges since there is a strong possibility of revenue challenging the decision before the Division Bench. It would be interesting to see if the ship will sail through in Division Bench amidst the above challenges.
If the matter is advanced to higher courts and is settled in favour of assessee, it would unlock new avenues for the taxpayers to reclaim their blocked working capital and will be nothing short of beacon of hope in a barren land.
The decision will also extend its reach to scenarios such as closure of operations in a registration since each registration is viewed as a separate person under the GST law. However, the taxpayers may misuse it as an opportunity to encash the ITC by closing down on its operations in existing registrations and re-opening another registration in the same state. It would also be intriguing to see if the outcome of the decision is annulled by any amendment in the statute or clarifications. Therefore, it would be prudent to wait for the forthcoming actions of the revenue and weigh the prons and cons before applying for refund, particularly, in cases wherein there are other legal permissible ways of utilizing the input tax credit. However, where there is nothing to lose and no other avenues are possible for utilization of ITC, the taxpayers may consider seizing this opportunity considering that refund has to be claimed within a prescribed time limit.
[The authors are Executive Partner, Partner and Principal Associate, respectively, in GST Advisory Team at Lakshmikumaran & Sridharan Attorneys]
[1] 2007 (1) TMI 556 - SC Order
[2] 2006 (7) TMI 9 - Karnataka HC
[3] 2021 (9) TMI 626
[4] [2025 (5) TMI 638]
[5] [2019 (6) TMI 820 - Bombay HC]
