The Goods and Services Tax Appellate Tribunal (GSTAT), Kolkata Bench, has held that the extended limitation and penal provisions under Section 74(1) of the CGST Act, 2017 cannot be invoked merely because Input Tax Credit (ITC) was allegedly wrongly availed or reversed. 

The bench of S.G. Chattopadhyay (Judicial Member) and Bijoy Kumar Kar (Technical Member) observed that the department must place material on record showing fraud, wilful misstatement or suppression of facts with an intention to evade tax. In the absence of such evidence, the proceedings have to be dealt with under the normal provisions of Section 73 of the CGST Act.

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The appellant/assessee is engaged in the manufacture of electrical equipment designed for distribution and control of electricity, including switchgears, voltage limiters, fuses, circuit breakers, surge protection devices, junction boxes, panels, consoles, cabinets and power capacitors. The company operates from Kolkata and is registered under the CGST Act. 

The dispute concerned the company’s availment of ITC during the financial years 2017-18 to 2019-20. According to the Revenue, the taxpayer had made taxable supplies as well as supplies involving MEIS duty credit scrips, on which the taxpayer had claimed exemption.

Following scrutiny of the taxpayer’s GSTR-3B returns, the department alleged that the company had availed excess ITC attributable to exempt supplies. Applying Section 17 of the CGST Act read with Rules 42 and 43 of the CGST Rules, the department quantified proportionate ITC liable to be reversed at ₹74,75,604. 

A show-cause notice dated August 1, 2024, issued under Section 74(1), proposed recovery of the alleged wrongly availed ITC along with interest and an equivalent penalty. The adjudicating authority subsequently confirmed the demand of ₹74,75,604, together with applicable interest and penalty. 

The taxpayer challenged the adjudication order before the appellate authority. It argued, among other things, that the sale of MEIS duty credit scrips could not be treated in the manner adopted by the department for computing proportionate ITC reversal.

The taxpayer relied upon Notification No. 14/2022 dated July 5, 2022, by which clause (d) was inserted into Explanation 1 to Rule 43 of the CGST Rules. The amendment specifically excluded the value of supply of specified duty credit scrips from the aggregate value of exempt supplies for the purpose of ITC reversal.

The appellate authority accepted the taxpayer’s contention and treated the amendment as having retrospective benefit. It also relied upon judgments of the Supreme Court dealing with retrospective operation of beneficial or clarificatory amendments. On that basis, the appellate authority set aside the adjudication orders. 

The department challenged this decision before GSTAT.

Before GSTAT, the Revenue contended that the sale of duty credit scrips constituted an exempt supply during the relevant assessment period and that the taxpayer was therefore required to reverse ITC attributable to such supplies.

It was also argued that Notification No. 14/2022 was effective from July 5, 2022, and could not be retrospectively applied to transactions undertaken between 2017 and 2020.

The Revenue further maintained that the appellate authority had wrongly extended the benefit of the amended Rule 43 provision to past transactions.

The taxpayer, on the other hand, argued that the amendment was intended to clarify the legal position and that the value of duty credit scrips ought not to have been included in the aggregate value of exempt supplies for ITC reversal. 

An additional issue before the Tribunal concerned the monetary threshold prescribed for departmental appeals.

The taxpayer relied upon CBIC Circular No. 207/1/2024-GST dated June 26, 2024, issued pursuant to the statutory powers under Section 120 of the CGST Act. The circular prescribed monetary limits for departmental appeals—₹20 lakh before GSTAT, ₹1 crore before the High Court and ₹2 crore before the Supreme Court, subject to the exclusions contained in the circular. 

The Tribunal examined Section 120 and Section 168 of the CGST Act and noted that the circular was binding on departmental officers. However, the Tribunal itself was not bound by the circular in the same manner as departmental authorities.

The Bench ultimately held that the present appeals were maintainable because the three matters arose from a common/composite order, and the circular contemplated that the total amount involved in such a composite order could be considered while applying the monetary threshold. 

On the substantive Rule 43 issue, the Tribunal took a different view from the first appellate authority.

The Bench examined the statutory history of Rule 43. It noted that when GST was introduced, duty credit scrips were subsequently brought within the exempt-supply framework through Notification No. 35/2017 dated October 13, 2017, with effect from October 13, 2017.

The Tribunal then examined the later amendment introduced through Notification No. 14/2022 dated July 5, 2022, which inserted clause (d) in Explanation 1 to Rule 43. The clause excluded the value of specified duty credit scrips from the aggregate value of exempt supplies for the purpose of calculating ITC reversal. 

Importantly, the Bench noted that the amendment expressly came into force from July 5, 2022. Although Section 164(3) of the CGST Act empowered the rule-making authority to give retrospective effect to rules, the government did not choose to give this particular amendment retrospective operation.

The Tribunal therefore concluded that the first appellate authority was not correct in applying the amendment retrospectively to transactions undertaken during 2017-18 to 2019-20. 

The Tribunal also relied upon the Supreme Court’s observations concerning the retrospective operation of statutory amendments and clarified that a provision conferring a benefit cannot automatically be treated as retrospectively applicable merely because it is favourable to the taxpayer.

The Bench referred to the Supreme Court’s decision in Sree Sankaracharya University of Sanskrit v. Dr. Manu, among other precedents, and observed that retrospective operation may be appropriate where an amendment is genuinely clarificatory, but the amendment in the present case did not fall within that category. 

Thus, on the Rule 43 question, GSTAT held that Notification No. 14/2022 could not be retrospectively applied to the taxpayer’s transactions of 2017-18 to 2019-20.

Despite rejecting the retrospective application of the amended Rule 43, the Tribunal found a fundamental defect in the department’s invocation of Section 74(1).

Section 74 permits determination of tax where ITC has been wrongly availed or utilised by reason of fraud, wilful misstatement or suppression of facts to evade tax.

The Tribunal carefully examined the factual record and found that the taxpayer had regularly filed its GSTR-3B returns. It had also disclosed its transactions involving duty credit scrips and produced relevant invoices and documents.

The Bench found no material demonstrating that the taxpayer had deliberately concealed information or made a wilful misstatement with the objective of evading tax. 

A significant observation of the Tribunal was that suppression of facts cannot be equated with an ordinary omission or non-declaration.

The Bench examined the statutory definition of suppression introduced in the CGST framework and referred to the Supreme Court’s decision in Anand Nishikawa Co. Ltd. v. Commissioner of Central Excise, Meerut, where the expression “suppression of facts” was held to require a deliberate element rather than merely an omission.

The Tribunal also referred to the Supreme Court’s observations in Pushpam Pharmaceutical Company v. Collector of Central Excise, emphasising that suppression involves a deliberate act and cannot be established merely because some information was not disclosed. 

The Tribunal found support in CBIC Instruction No. 05/2023-GST dated December 13, 2023, issued pursuant to the Supreme Court’s directions in the Northern Operating Systems matter.

The instruction stated, in substance, that Section 74 should be invoked only where there is material indicating fraud, wilful misstatement or suppression of facts with an intention to evade tax. Mere non-payment or short payment of GST, without such an element, would not by itself justify proceedings under Section 74.

The Tribunal noted that the instruction also contemplated material evidence of fraud or wilful misstatement being incorporated into the show-cause notice when Section 74 is invoked. 

In the present case, the Tribunal found that no investigation had been carried out and no evidence was brought on record by the Revenue to establish fraud, wilful misstatement or suppression of facts.

The taxpayer had filed its monthly GSTR-3B returns and had not been accused of failing to file its annual returns. It had also produced invoices concerning the sale of duty credit scrips.

The Bench therefore concluded that there was no material establishing a deliberate intention on the taxpayer’s part to evade tax. 

The Tribunal stressed that the taxpayer and department were both aware of the relevant transactions. Consequently, the case could not be brought within the scope of Section 74 merely because the department subsequently formed a view that the taxpayer had wrongly availed ITC.

The Tribunal ultimately held that the Revenue was not correct in invoking Section 74(1) in the facts of the case.

The Bench observed that the extended provision was unsustainable because the necessary ingredients of fraud, wilful misstatement or suppression of facts were absent.

Accordingly, the Tribunal held that Section 74 was not sustainable in the case and the show-cause notice issued under that provision could not stand in its existing form.

However, the Tribunal did not simply end the proceedings in favour of the taxpayer. It invoked Section 75(2) of the CGST Act, under which where an order or notice issued under Section 74 is found unsustainable because fraud, wilful misstatement or suppression has not been established, the matter can be dealt with under the appropriate normal-demand provision.

The Tribunal directed the proper Revenue officer to determine the liability of the taxpayer in accordance with Section 75(2), within the statutory period and after providing an opportunity of hearing to the taxpayer.

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