Bhagwati Construction vs. Union of India – Gujarat High Court on Refund Eligibility When Tax Paid via ITC Ledger (2022)

 Bhagwati Construction vs. Union of India – Gujarat High Court on Refund Eligibility When Tax Paid via ITC Ledger (2022)

📌 Background

Refund and reimbursement of GST often generate disputes, particularly in cases where the mode of tax payment (cash ledger vs. credit ledger) becomes a ground for denial.

In Bhagwati Construction vs. Union of India [2022 (5) TMI 183 – Gujarat High Court], the assessee, a railway contractor, faced denial of reimbursement merely because tax was discharged partly through the electronic credit ledger instead of the cash ledger.

This ruling clarified that Input Tax Credit (ITC) utilization is a legally recognized mode of payment and is as good as tax paid in cash.

📂 Facts of the Case

• Assessee: Bhagwati Construction, engaged in execution of railway contracts.
• Contract: Awarded by the Railway Board before the GST regime.
  • Under Madras VAT, liability was only 0.6% of contract value (lump sum scheme).
  • Service tax was fully exempt.
• Post-GST impact:
  • GST law increased tax liability on the same contract.
  • Assessee filed representation seeking reimbursement of additional GST burden.
• Railways’ Response:
  • Western Railways issued a Joint Procedure Order permitting reimbursement of such additional GST.
  • However, while processing the claim, the Deputy Chief Engineer questioned why ITC was shown as “Nil” when tax had been paid using ITC.
  • Assessee clarified:
    • No ITC available on goods used in this particular contract.
    • ITC utilized was from other eligible contracts.
  • Despite clarification, Railways denied reimbursement, stating that only amounts paid via electronic cash ledger qualify.

❓ Point of Dispute

Whether reimbursement of GST on pre-GST contracts executed post-GST can be denied merely because tax was discharged using ITC (credit ledger) instead of cash ledger?

📑 Submissions by the Assessee

• ITC = Tax paid:
  • ITC is a legally recognized mode of tax payment under Sections 16 & 49 of the CGST Act.
  • It represents tax already paid by suppliers into Government treasury.
• No distinction in law:
  • The GST law does not differentiate between taxes paid via cash ledger and credit ledger.
  • Both are valid modes of payment of output tax.
• Refund denial unsustainable:
  • Reimbursement cannot be restricted only to cash payments when ITC represents tax already paid.

📑 Submissions by the Revenue

• The Revenue did not oppose reimbursement in principle.
• Their contention was only procedural:
  • Assessee failed to prove payment of tax through cash ledger.
  • Therefore, reimbursement was withheld.

⚖️ Legal Principles & Court’s Findings

The Gujarat High Court analyzed provisions of the CGST Act, 2017:

1. Section 16(1) – Eligibility of ITC
   • Taxpayer entitled to claim credit of GST paid on inputs/input services used in business.
2. Section 49 – Payment of tax
   • Output tax liability can be discharged using:
     • Balance in electronic cash ledger, or
     • Balance in electronic credit ledger (ITC).
   • Both are recognized as valid modes of payment.
3. Nature of ITC
   • ITC represents tax already paid by suppliers and deposited with Government.
   • Utilization of ITC is only a mechanism of set-off, not avoidance of tax.
4. Court’s Observations
   • ITC is “as good as tax paid” by the taxpayer.
   • Distinction made by Railways between cash ledger vs. credit ledger is legally untenable.
   • Reimbursement cannot be denied on this artificial ground.

Held

• Utilization of ITC from electronic credit ledger is a legally recognized mode of payment.
• Refund/reimbursement cannot be denied on the basis that part of tax was paid using ITC.
• Impugned communication of Railways rejecting refund was quashed.
• Railways directed to forthwith release reimbursement as per pay order.

✅ Impact of Bhagwati Construction Judgment

• Validates ITC utilization: Confirms that ITC is a legitimate tax payment.
• Protects contractors: Especially for pre-GST contracts executed post-GST.
• Prevents arbitrary denials: Ensures authorities cannot refuse reimbursement on procedural grounds.
• Guides government entities: Railways and PSUs must follow this precedent.

🔑 Key Takeaways

1. No legal difference between cash ledger and credit ledger payments under GST.
2. Refund/reimbursement cannot be denied merely because output tax was paid via ITC.
3. ITC is “as good as tax paid” – reiterated judicially.
4. Contractors executing pre-GST contracts post-GST can claim reimbursement of additional GST burden without procedural hindrance.

📢 Why This Case Matters

The Bhagwati Construction ruling is a landmark for contractors and businesses dealing with government contracts transitioning from pre-GST to GST regime.

It clarifies a key principle: the mode of payment (cash vs. credit) is irrelevant as long as tax has been duly discharged. By quashing the arbitrary denial of reimbursement, the Court reinforced the credibility of ITC as a valid tax payment mechanism.

This judgment ensures that taxpayers are not penalized for adopting one legitimate mode of tax payment over another and strengthens the integrity of the GST framework.

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