No Cess Applicable On Coal Used As An Input For Manufacturing Finished Goods Used For Domestic Supply: In Calcutta High Court

The coal used as an input in the production of finished goods for domestic consumption is exempt from cess, according to a decision by the Calcutta High Court.

In the case of Electro Steel Castings Ltd v. The Assistant Commissioner (W.P.A No. 17567 of 2021), the single bench of Honorable Justice Md. Nizamuddin made the observation that goods subject to a nil rate of cess would be construed as exempt supplies for the purposes of the formula specified in Rule 89 (4) of the CGST Rules. As a result, it merits to be disregarded when determining adjusted total turnover.

Facts of the case:

The petitioner/assessee company is displeased by the CGST authorities’ inaction and refusal to pay the refund amount with applicable interest in accordance with the order issued by the appellate authority despite repeated requests.

The CGST authorities argued that the Appellate authority’s order is perverse because it does not take into account the definition of “non-taxable supply” as it is stated in the CGST Act of 2017.

The CGST authorities argued that the sanctioning authority correctly rejected a portion of the assessee company’s refund claim and correctly included domestic supply in the adjusted total turnover. The assessee company cannot sustain its claim for a refund based on the order of the appellate authority.

The question at hand was whether to apply Rule 89(4) of the CGST Rules as applicable mutatis mutandis to the Cess Act when calculating the refund of credit of compensation cess to be made under Section 54(3) of the CGST Act. In accordance with Rule 89(4) of the CGST Rules, the domestic turnover of finished goods that are not taxable under the Cess Act may be subtracted from the adjusted total turnover.

The provisions of Sections 9(2) and Section 11 of the Cess Act, read with Section 54 of the CGST Act, read with Rule 89(4) of the CGST Rules, govern the refund of ITC of Cess in cases of zero-rated supply of goods.

The formula prescribed under Rule 89 (4) of the CGST Rules categorically excluded the value of exempt supplies other than zero-rated supplies in the calculation of adjusted total turnover. Since “exempt supply” has not been defined under the Cess Act, the definition of exempt supply contained in Section 2 (47) of the CGST Act shall apply mutatis mutandis for the computation of the refund of ITC of Cess by the application of the provisions of Section 11, Section 9 and Section 2 (2) of the Cess Act.

According to the assessee, the CGST authorities disregarded the phrase “mutatis mutandis” found in Section 2 (2) of the Cess Act. The CGST authority has not provided any explanation for why domestic supplies of finished goods subject to a zero percent compensation cess cannot be regarded as exempted supplies.

Court’s Findings:

The court pointed out that cess is comparable to the elements of GST, which is an amalgam of State taxes that was constitutionally approved before the GST regime went into effect. The Central Goods and Services Tax Rules, 2017 were modified and incorporated into the Goods and Services Tax Compensation Cess Rules, 2017, which went into effect on July 1, 2017. All of the provisions of the CGST and IGST Acts would be directly applicable to the levy, collection, and refund of the Cess Act in light of the deliberate use of the phrase “mutatis mutandis” in Section 11 of the Cess Act. For the purposes of the Act, the terms “tax” and “cess” shall have the same meaning.

For the purposes of calculating a refund under Rule 89(4) of the CGST Rules, domestic supplies of finished goods that are not subject to Compensation Cess are to be counted as exempted supplies, the court ruled.

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Judgement Reviewed By Manju Molakalapalli.

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