Sikkim High Court Recognises Refund of Unutilised Input Tax Credit upon Business Closure

Introduction

In SICPA India Private Limited & Anr. v. Union of India & Ors. (WP(C) No. 54 of 2023, decided on 10 June 2025), the Sikkim High Court confronted a long–standing grey area in the Goods and Services Tax (GST) regime: whether a registered person is entitled to a refund of unutilised Input Tax Credit (ITC) remaining in its Electronic Credit Ledger after discontinuance of business.

The Petitioners, manufacturers of security inks, had stopped their operations in Sikkim, disposed of their plant and machinery, reversed ITC attributable to such disposals, yet found themselves with a sizable credit balance of ₹ 4.37 crores. The Assistant Commissioner and, on appeal, the Additional Commissioner rejected the refund claim relying on the literal text of Section 54(3) of the Central Goods and Services Tax Act, 2017 (CGST Act). The primary controversy revolved around the interplay between Sections 49(6) and 54(3), and whether the two-limb refund entitlement in Section 54(3) is exhaustive.

Summary of the Judgment

• The Court held that there is no express statutory bar against granting refund of unutilised ITC when a business is closed.
• Section 49(6) expressly permits refund of balances in the Electronic Cash/Credit Ledger in accordance with Section 54; Section 54(3) cannot be read as a prohibition where the statute is otherwise silent.
• The appellate order dated 22-03-2023 was quashed; the Department was directed to refund the entire unutilised ITC.
• Argument of alternative statutory remedy (appeal to the GST Appellate Tribunal under Section 112) was rejected, the Court invoking its plenary powers under Article 226.
• The decision sets a precedent that unutilised ITC constitutes a vested right that cannot be denied absent clear legislative prohibition.

Detailed Analysis

1. Precedents Cited & Their Influence

1. State of U.P. v. Indian Hume Pipe Co. Ltd. (1977 2 SCC 724) – The Supreme Court recognised that availability of an alternative remedy does not bar High Court jurisdiction. The Sikkim High Court relied on this to entertain the writ despite the statutory appellate remedy.
2. M/s. Godrej Sara Lee Ltd. v. Excise & Taxation Officer (AIR 2023 SC 781) – Re-affirmed the plenary nature of Article 226 powers; shaped the Court’s dismissal of the “alternative remedy” objection.
3. Slovak India Trading Co. (P) Ltd. v. CCE (Karnataka HC, MANU/KA/0709/2006) – Granted refund of unutilised CENVAT credit on factory closure. This analogical precedent under the earlier Central Excise regime heavily influenced the Court’s view that tax credits accrue as a right and cannot be retained on business closure.
4. Shabnam Petrofils (P) Ltd. v. Union of India (2019 SCC OnLine Guj 6910) & Eicher Motors Ltd. v. Union of India (1999 2 SCC 361) – Both stress that modvat/CENVAT credits are property of the assessee and cannot be confiscated sans authority. They provided the constitutional underpinning (Article 300A – right to property) for refund of ITC.

2. Court’s Legal Reasoning

1. Statutory Construction.
   
   • Section 49(6) explicitly allows refund of ledger balances after payment of tax, etc.. The qualifying phrase in accordance with Section 54 was interpreted as prescribing procedure, not restricting eligibility.
   • Section 54(3) is a benefit-conferring provision for ongoing businesses (zero-rated supplies or inverted duty structure). Absence of business closure in Section 54(3) does not translate into a prohibition. Expression “in cases other than” merely circumscribes automatic refund right for unutilised ITC at period end; it does not address final exit situations governed by Section 49(6).
2. Doctrine of Vested Right.
   The Court echoed Eicher Motors that ITC, once validly availed, becomes an indefeasible right akin to property. Retaining it without express statutory sanction would violate Article 265 of the Constitution (no tax except by authority of law).
3. Closure Scenario v. Ongoing Trade.
   Section 29(5) deals with reversal of ITC on cancellation of registration but is silent on surplus ITC. By negative implication, the legislature did not intend to deny refund; it simply left the mechanics to Section 49(6).
4. Rejection of Alternative Remedy Objection.
   Following Godrej Sara Lee, the Court exercised discretion because only pure questions of law (interpretation of Sections 49 & 54) arose, no complex fact finding was required.

3. Potential Impact on GST Jurisprudence

• National Persuasive Value. Although a High Court decision, taxpayers across India will cite it to claim refunds on business closure. Unless reversed by the Supreme Court, GST authorities elsewhere must weigh its reasoning.
• Administrative Adjustments. GSTN refund modules currently cater mainly to Section 54(3) categories. A new refund category—“business discontinuance”—may be required for seamless electronic processing.
• Legislative Clarification. The Union Government may consider amending Section 54 or issuing a clarificatory circular to accept or counter the precedent, especially to avert litigation floodgates.
• Corporate Exit Planning. Companies winding up a GST registration can now factor ITC refunds into their closure strategy, improving cash-flow on exit.
• Broader Fiscal Principle. The judgment buttresses the constitutional constraint that indirect taxes collected in excess must be refunded absent a clear legislative mandate to the contrary.

Complex Concepts Simplified

Input Tax Credit (ITC)

Credit of GST paid on inputs (goods/services) that can be used to offset output GST liability. Functions like a running balance in favour of the taxpayer.

Electronic Credit Ledger (ECL)

Online ledger on the GST portal where a taxpayer’s accumulated ITC is reflected.

Section 49(6)

Provision allowing refund of any remaining balance in the Cash or Credit Ledger after settling all tax dues, subject to Section 54 procedure.

Section 54(3)

Provides automatic refund of unutilised ITC in two limited situations: zero-rated supplies (exports/SEZ) and inverted duty structure. Silent on business closure.

Alternative Remedy Rule

Judicial self-imposed restraint advising High Courts to avoid writs when an efficacious statutory appeal is available; not an absolute bar.

Doctrine of No Tax Retention without Authority of Law (Article 265)

Constitutional principle that funds collected as tax cannot be kept by the State unless a valid law permits such retention.

Conclusion

The Sikkim High Court’s ruling in SICPA India fills a significant legislative void by recognising that a taxpayer’s unutilised ITC, on legitimate cessation of business, must be refunded. The Court harmonised Sections 49 and 54, embraced earlier CENVAT jurisprudence, and reinforced constitutional safeguards against unlawful enrichment by the State. Practically, the decision empowers exiting businesses and signals to GST administrators that silence in the statute should not default to denial of taxpayer rights. Unless countermanded by higher judicial or legislative action, the judgment is poised to influence refund claims and reshape GST compliance architecture nationwide.