The Goods and Services Tax Appellate Tribunal (GSTAT), Bengaluru, has held that a buyer can retain input tax credit attributable to a discount granted through a financial or commercial credit note where the supplier’s original GST liability remains unchanged. However, a subsequent waiver of the unpaid purchase price does not erase the interest liability arising from failure to reverse proportionate credit under the 180-day payment rule.

The bench of Prabhakaran P M (Judicial Member) and Ravi Jesuraj S (Technical Member) set aside an IGST credit demand of ₹2,33,718 and the penalty imposed under Section 74 of the Central Goods and Services Tax Act, 2017. It nevertheless directed the company to pay interest on proportionate credit of ₹2,33,106 for the period specified in the order.

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The company, engaged in manufacturing engine parts and electrical apparatus, purchased three spot welding machines from Kirpekar Engineering Private Limited in March 2018.

The machines had a taxable value of ₹1,19,18,000, with IGST of ₹21,45,240, taking the total invoice value to ₹1,40,63,240. The company availed the input tax credit in its March 2018 GSTR-3B return.

According to the company, the machines did not meet the agreed specifications. Following negotiations, the supplier agreed to waive the outstanding purchase price. In its findings, the Tribunal recorded that the company had paid ₹1,25,35,100, leaving a balance of ₹15,28,140.

The unpaid liability was written back in the company’s accounts for financial year 2019–20. The supplier subsequently issued a commercial credit note dated November 9, 2021, without adjusting GST.

During an audit covering July 2017 to March 2020, the department questioned the company’s retention of credit attributable to the unpaid amount. This led to a show-cause notice dated March 16, 2022, proposing recovery of ₹2,33,718, along with interest and penalty under Section 74.

The adjudicating authority confirmed the demand on June 16, 2022. The first appellate authority upheld that decision on May 17, 2023.

The department argued that the company had failed to pay the full invoice value, including tax, within 180 days. Consequently, the proportionate input tax credit had to be reversed or paid along with interest under the second proviso to Section 16(2).

The authorities also considered CBIC Circular No. 92/11/2019-GST, dated March 7, 2019, insufficient to support the buyer’s claim. Their view was that the circular addressed the supplier’s position and did not expressly clarify the recipient’s entitlement to retain credit.

The department further defended the invocation of Section 74 on the ground that the issue had surfaced only during the audit.

The company maintained that the outstanding amount represented an agreed commercial discount and that the credit note did not reduce the supplier’s tax liability. It relied on CBIC circulars and the Board’s guidance on the input tax credit mechanism.

The Tribunal examined Circular No. 92/11/2019-GST together with Circular No. 251/08/2025-GST, dated September 12, 2025.

It noted that the later circular expressly clarified that a recipient need not reverse input tax credit attributable to a discount granted through a financial or commercial credit note where the original transaction value and corresponding tax liability are not reduced for GST purposes.

The bench explained that such a credit note settles the commercial amount payable between the parties without changing the tax charged on the original invoice. The supplier cannot use it to reverse the GST already paid on that invoice.

The Tribunal also observed that such commercial credit notes are not reported in the supplier’s GSTR-1 and consequently do not appear in the recipient’s GSTR-2A. They therefore do not alter the credit arising from the original tax invoice.

Although the 2025 circular was issued after the orders of the lower authorities, the Tribunal held that it governed the dispute because it was clarificatory and beneficial.

Referring to Section 168 of the CGST Act and Supreme Court precedents concerning departmental circulars, the bench noted that CBIC’s directions bind departmental officers. It also relied on the principle that a beneficial circular may apply retrospectively.

The Tribunal concluded that the company was entitled to retain the input tax credit after accounting for the supplier’s financial credit note.

The Tribunal separately considered whether the supplier’s waiver could satisfy the requirement for restoring credit under the third proviso to Section 16(2).

It observed that the supplier had paid GST on the full invoice value and had accepted the reduced payment in full settlement. Once the balance price was waived, no further amount towards the supply remained payable by the buyer.

The bench reasoned that the purpose of the payment condition was met where the supplier accepted the reduced amount as full settlement while continuing to bear GST on the undiscounted value.

It also referred to Rule 37(4), under which the time limit in Section 16(4) does not apply to the relevant re-availment of credit.

Accordingly, the Tribunal rejected the conclusion that the company could never retain the proportionate credit attributable to the commercial discount.

The Tribunal nevertheless found that the company had retained the full credit while part of the invoice amount remained payable and unpaid beyond 180 days.

It held that the company should have reversed the proportionate credit after the expiry of that period and re-availed it upon the waiver. The subsequent commercial settlement restored its entitlement to credit but did not extinguish interest accrued during the intervening period.

Applying Rule 37(3) as it existed during the relevant period, the Tribunal directed payment of interest under Section 50 of the CGST Act, read with Section 20 of the IGST Act, on ₹2,33,106.

The interest period runs from the date of availment of credit until the date of receipt and accounting of the supplier’s financial credit note. The order does not quantify the final interest payable.

The Tribunal rejected the department’s justification for the Section 74 penalty.

It found that the unpaid balance had been recorded in the company’s ledger and openly written back in its audited accounts for 2019–20. The audit officers discovered the transaction from those same records.

The bench held that detection during an audit, by itself, does not establish suppression of facts. It regarded the company’s interpretation concerning commercial credit notes as bona fide, particularly because the Board subsequently clarified the recipient’s entitlement to retain credit.

Relying on the Supreme Court’s decision in Continental Foundation Joint Venture, the Tribunal explained that an omission does not amount to suppression unless it is deliberate and intended to evade tax.

It also referred to Section 75(2), which provides for determination under Section 73 where the allegations necessary to sustain Section 74 are not established. Since the notice was within the period allowed under Section 73, the interest liability survived, while the Section 74 penalty was set aside.

The Tribunal modified the impugned order by setting aside the ₹2,33,718 IGST credit demand and the Section 74 penalty, while retaining the obligation to pay interest on ₹2,33,106.

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