The Goods and Services Tax Appellate Tribunal (GSTAT), Kolkata Bench, has held that credit notes issued for returned goods must be deducted from turnover while calculating refunds of accumulated input tax credit under Rule 89(4) of the CGST Rules, 2017, subject to the statutory time limit applicable to the adjustment.

The  bench of Sunil Kumar Singh (Judicial Member) and Bijoy Kumar Kar (Technical Member) dismissed the department’s appeal against a ₹2,79,084 refund granted to a tea supplier. Although it found that credit notes worth ₹1,01,510 relating to an earlier financial year could not be excluded from adjusted total turnover, the correction did not affect the taxpayer’s entitlement: the refund claimed remained below the recalculated maximum permissible amount.

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The respondent/assessee has based in Siliguri, supplies tea falling under HSN 0902 in both domestic and international markets. The order records that the goods attract GST at 5% and that the company exports goods without payment of tax.

For April–June 2021, the company applied for a refund of accumulated input tax credit amounting to ₹2,79,084 under Section 54(3)(i) of the CGST Act, 2017.

After scrutinising the application, the jurisdictional Assistant Commissioner sanctioned the entire amount through an order in Form GST RFD-06 dated November 17, 2021.

The Commissioner subsequently reviewed the sanction and directed the authorised officer to challenge it before the first appellate authority. That appeal was rejected, leaving the refund intact. The Revenue then approached the GSTAT.

The department’s challenge before the Tribunal was confined to the treatment of credit notes totalling ₹12,04,575 while computing “adjusted total turnover” under Rule 89(4).

According to the department, the first appellate authority had wrongly permitted deduction of these credit notes. It argued that the records did not clearly establish whether the notes related to invoices issued during April–June 2021 or to supplies from earlier tax periods.

The department also questioned the identification of the underlying invoices and contended that the facts had not been properly examined before allowing the turnover adjustment.

No other ground of appeal was raised by the Revenue.

The company maintained that credit notes had to be accounted for because they reduced the taxable value of supplies.

The company argued that once a credit note is issued and disclosed in GST returns in accordance with Section 34, the corresponding reduction must be reflected in the refund calculation. Otherwise, adjusted total turnover would remain artificially inflated even though the taxable value had already been reduced.

The company initially stated that ₹2,00,558 of the credit notes related to an earlier period, while ₹10,04,017 related to invoices issued during the refund period. It also maintained that the earlier-period notes had been reported within the permissible time limit.

However, the Tribunal’s examination of the records revealed a different breakdown.

The bench scrutinised the GSTR-1 voucher register, a Chartered Accountant’s certificate and the related documents.

It found that credit notes worth ₹11,03,065 related to invoices raised during April–June 2021, while the remaining ₹1,01,510 related to invoices from financial year 2019–20.

The Tribunal also verified that the credit-note entries in the CA certificate matched the GSTR-1 statements for the refund period. The monthly amounts recorded in the order were ₹7,14,444 for April 2021, ₹1,29,239 for May 2021 and ₹3,60,890 for June 2021.

On this evidence, the bench rejected the Revenue’s general contention that the periods and underlying invoices could not be identified.

Referring to Section 34(1), the Tribunal explained that credit notes may arise where the taxable value or tax charged exceeds what is payable, goods are returned, or the supplies are deficient.

In the context of returned goods, the bench reasoned that taxable turnover must be adjusted because those goods no longer form part of the supply.

It consequently held that the corresponding credit-note amount must be deducted from total turnover for the purpose of calculating the refund under Rule 89(4).

The ruling thus recognised that turnover used in the refund formula must reflect qualifying credit-note adjustments.

The Tribunal nevertheless found a defect in three credit notes totalling ₹1,01,510.

These notes were issued on June 16, 2021, against invoices dated October 26, 2019, and March 31, 2020. The underlying supplies therefore belonged to the financial year 2019–20.

Applying Section 34(2) to that period, the bench treated September 30, 2020, as the relevant outer deadline. Since the notes were issued only in June 2021, it held that their value could not be excluded from adjusted total turnover.

The order reproduced the subsequently amended provision referring to November 30, but expressly noted that this amendment took effect from October 1, 2022. Its decision on the disputed notes applied the earlier deadline relevant to the supplies in question.

The taxpayer’s refund application disclosed zero-rated turnover of ₹34,12,395, adjusted total turnover of ₹5,94,51,193 and net ITC of ₹59,68,865.

After adding back the inadmissible credit-note adjustment of ₹1,01,510, the Tribunal increased adjusted total turnover to ₹5,95,52,703.

Applying the Rule 89(4) formula to the corrected figures, it calculated the maximum permissible refund as: ₹34,12,395 × ₹59,68,865 ÷ ₹5,95,52,703 = ₹3,42,018.

The refund actually claimed and sanctioned was only ₹2,79,084—well below the revised ceiling.

The Tribunal concluded that even after disallowing the adjustment for the earlier-year credit notes, the taxpayer remained entitled to the entire refund already granted.

The GSTAT upheld the first appellate authority’s order and dismissed the Revenue’s appeal, directing the parties to bear their own costs.

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