ATC Tires Pvt. Ltd. vs. Joint Commissioner of GST & Central Excise – Refund of ITC in Supplies to SEZ Units (Madras HC, 2022)

ATC Tires Pvt. Ltd. vs. Joint Commissioner of GST & Central Excise: ATC Tires Pvt. Ltd. vs. Joint Commissioner of GST & Central Excise – Refund of ITC in Supplies to SEZ Units (Madras HC, 2022)

Background

The Goods and Services Tax (GST) regime grants special benefits to Special Economic Zones (SEZs) by treating supplies made to SEZ units or developers as zero-rated supplies under Section 16 of the IGST Act, 2017. This ensures that exports and SEZ transactions are not burdened with domestic tax, thereby enhancing competitiveness.

In this case, M/s ATC Tires Pvt. Ltd., a manufacturer, had its head office in Mumbai and an SEZ unit in Tamil Nadu. The head office received invoices from vendors for common input services (such as audit, consultancy, etc.) and distributed the proportionate Input Tax Credit (ITC) to the SEZ unit through the Input Service Distributor (ISD) mechanism.

The SEZ unit filed a refund claim under Section 16(3)(i) of the IGST Act, seeking refund of ITC on such input services. The Revenue authorities, however, rejected the claim, leading to litigation before the Madras High Court.

❓ Point of Dispute

The primary legal issue was:

👉 Who is entitled to claim refund of ITC in case of supplies to an SEZ unit – the supplier of services or the SEZ unit itself?

📑 Submissions by the Assessee

• Exports = Zero-rated supplies: Supplies made from the SEZ unit were “zero-rated supplies” under Section 2(23) and Section 16 of the IGST Act. Therefore, the SEZ unit was entitled to claim refund of ITC.
• ISD mechanism valid: The head office rightly distributed input service credits through ISD registration to the SEZ unit. Once credit was transferred to the SEZ unit, it became eligible for refund under Section 16(3)(i).
• Purpose of zero-rating: The legislative intent behind zero-rated supplies is to ensure that exports remain tax-free. Denying refund would defeat this intent.

📑 Submissions by the Revenue

• The Department argued that:
  • For services supplied directly to the SEZ unit, only the supplier could have claimed refund of ITC under Section 16(3).
  • The SEZ unit itself was not entitled to claim such refunds.
  • Refund applications should have been filed by the suppliers, not the assessee.

⚖️ Legal Principles and Court’s Analysis

1. Supplies to SEZ qualify as Zero-rated
   • Under Section 16 of the IGST Act, supplies to SEZ units are treated as exports.
   • Exports cannot be burdened with taxes. The intent of the law is to make them fully tax-neutral by allowing refund of accumulated ITC.
2. Supplier vs. SEZ unit entitlement
   • For services procured at the head office and distributed via ISD to the SEZ unit, the supplier cannot claim refund, since such services are not themselves zero-rated.
   • The SEZ unit is the exporter of goods/services, and hence, it alone is entitled to claim refund of accumulated ITC on such inputs and input services.
3. Scope of Section 54 and Rule 89
   • Section 54(3) of the CGST Act allows refund of unutilized ITC in case of zero-rated supplies made without payment of tax.
   • Proviso to Section 54(3) specifically permits refund in cases of SEZ supplies.
   • Rule 89(1) of the CGST Rules prescribes refund procedure but does not bar SEZ units from claiming ITC refund.
4. Purpose of Refund Mechanism
   • The Court emphasized that refund of ITC on zero-rated supplies is not a concession but a statutory right.
   • The objective is to ensure that exports/SEZ supplies remain tax-free and globally competitive.

🏛️ Court’s Conclusion

The Madras High Court ruled in favor of ATC Tires Pvt. Ltd., holding that:

• Refund of unutilized ITC cannot be denied to an SEZ unit merely because the services were procured at the head office and distributed through ISD.
• The SEZ unit or developer is eligible to claim refund of ITC on goods or services distributed to it through ISD registration.
• Refund benefits under Section 16(3) of the IGST Act read with Section 54 of the CGST Act must be extended to SEZs to uphold the principle of zero-rating.

Thus, the rejection of refund by the Revenue authorities was held to be illegal and unsustainable.

✅ Practical Impact on Businesses

• SEZ Units Empowered: SEZs can directly claim refund of ITC, even when input services are procured centrally at the head office.
• No Supplier Restriction: Suppliers of services to SEZ units are not required to file refund applications; the entitlement rests with the SEZ unit.
• Boost to SEZ Competitiveness: This ruling reaffirms India’s policy of making SEZ exports tax-neutral.
• Clarity on ISD mechanism: Confirms that ITC distributed through ISD is valid and refundable when allocated to SEZ units.

🔑 Key Takeaways

1. Refund of ITC is a statutory right for SEZ units making zero-rated supplies.
2. Suppliers are not entitled to claim such refunds on behalf of SEZ units.
3. ISD credit distribution is a valid mechanism and refunds based on it cannot be denied.
4. The ruling reinforces the principle of zero-rating exports and avoids undue litigation.

📢 Why This Case Matters

The ATC Tires judgment (Madras HC, 2022) provides crucial clarity for SEZ businesses by upholding their right to claim ITC refunds on services and goods routed through head offices under ISD.

It safeguards exporters against arbitrary denial of refunds and reinforces India’s commitment to ease of doing business and export competitiveness under the GST framework.

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