The Goods and Services Tax Appellate Tribunal (GSTAT), State Bench at Cuttack, has held that interest based on a breach of Rule 36(4) cannot be sustained when that ground was not contemplated in the original show cause notice. 

The Bench of Suchismita Misra (Judicial Member) and Ananda Satpathy (Technical Member) while confirming a tax demand of ₹1,02,012 arising from disputed input tax credit (ITC) set aside the interest computation and directed fresh calculation after identification of the specific invoices not reflected on the GST portal.

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The ruling distinguishes between the recipient’s obligation to establish eligibility for ITC and the limits within which authorities may levy interest. Although the bench declined to reopen the confirmed tax demand, it granted relief against an interest levy introduced on a ground outside the original notice. 

The appellant/assessee was registered under the Odisha Goods and Services Tax Act, 2017, and supplied works contract services to the Government of Odisha and other customers.

For financial year 2020–21, the company claimed ITC of ₹27,07,095.73 through its GSTR-3B returns. According to the order, the corresponding credit reflected in GSTR-2A stood at ₹15,70,871.43.

The department issued a scrutiny notice in Form ASMT-10 under Section 61 on February 19, 2022, seeking an explanation for the difference. The Tribunal recorded that the taxpayer did not respond to the scrutiny notice or participate in the subsequent adjudication proceedings despite the show cause notice and reminders.

The adjudicating authority consequently raised a demand under Section 73, citing non-compliance with Section 16(2)(c), which requires the tax charged on the relevant supply to have been actually paid to the Government.

The taxpayer challenged the adjudication order before the first appellate authority.

On examining the reconciliation statement and the updated GSTR-2A position, the appellate authority admitted additional ITC of ₹12,20,108.80 and substantially reduced the demand.

Seeking admission of the remaining disputed credit, the taxpayer approached the Tribunal under Section 112 of the Odisha GST Act.

The taxpayer argued that it possessed the invoices supporting the disputed ITC and that the absence of invoice details from GSTR-2A did not necessarily establish that the suppliers had failed to pay tax.

It submitted that suppliers could have discharged their tax liability through their returns or through payments made in Form DRC-03. The recipient, it argued, had no control over whether suppliers uploaded invoice details or paid their tax liabilities.

The taxpayer also relied on the then-existing Section 41, which permitted provisional availment of self-assessed eligible ITC. It contended that requiring a further payment from the recipient could result in tax being paid twice—first to the supplier and subsequently against the departmental demand.

A separate objection concerned interest. Invoking Section 75(7), the taxpayer challenged the levy on a ground that had not been specified in the show cause notice.

It further submitted that the department had compared aggregate figures in GSTR-2A and GSTR-3B without identifying the individual invoices underlying the mismatch. According to the taxpayer, the absence of invoice-level identification impeded its ability to produce evidence of tax payment by the relevant suppliers.

The department maintained that ITC was subject to fulfilment of all the conditions prescribed under Section 16(2), including actual payment of tax to the Government.

It argued that possession of invoices, receipt of supplies and payment of consideration inclusive of tax to the supplier did not, by themselves, establish compliance with Section 16(2)(c).

The department also relied on Section 155, which places the burden of proving eligibility for ITC on the person claiming it.

The Tribunal noted that neither the constitutional validity of Section 16(2)(c) nor the statutory burden under Section 155 had been challenged in the appeal. It therefore considered it unnecessary to examine the constitutional-validity decisions cited by the department.

Examining the provisions applicable to FY 2020–21, the Tribunal held that the earlier Section 41 allowed provisional credit, subject to statutory conditions and restrictions.

The Bench reasoned that provisional availment did not make the credit absolute or dispense with the conditions under Section 16. A taxpayer could not rely on Section 41 to bypass the requirement concerning payment of tax by the supplier.

The Tribunal also examined the erstwhile Section 42, which provided for matching, reversal and reclaim of ITC. It explained that the statutory scheme contemplated addition of unmatched credit to the recipient’s output tax liability and permitted subsequent reduction where the supplier reported the invoice within the prescribed period.

Although Section 42 was subsequently omitted, the Tribunal held that its provisions, as they stood during FY 2020–21, governed the dispute.

The Tribunal acknowledged that the absence of invoice details from the portal was not conclusive proof that tax had not been paid.

However, interpreting the earlier matching and reversal framework, it held that non-disclosure of invoice details attracted consequences under Section 42, including reversal and interest, with reclaim contemplated upon subsequent disclosure within the statutory framework.

On the facts, the Tribunal found that the taxpayer’s reconciliation statement admitted that invoices covering approximately ₹1.02 lakh of ITC had not been uploaded by the corresponding suppliers. It also recorded that no credible evidence had been produced to establish payment of tax by those suppliers.

The Bench noted that the taxpayer had received opportunities to explain the discrepancy during scrutiny, adjudication and appeal. In those circumstances, it declined to grant another opportunity through remand on the tax issue and confirmed the demand of ₹1,02,012.

The Tribunal found that the first appellate authority had computed interest on two separate bases: the unmatched ITC treated as ineligible, and provisional ITC allegedly availed beyond the limit under Rule 36(4).

It explained that Rule 36(4) restricted provisional credit beyond the credit reflected in GSTR-2A. The relaxation permitted under the rule did not make provisional credit final or protect it from reversal where the statutory conditions were not satisfied.

Nevertheless, the Bench held that the interest levy concerning credit beyond the Rule 36(4) limit had not been contemplated in the original show cause notice. That component therefore fell outside the scope of both the original adjudication and the first appellate proceedings.

The Tribunal directed deletion of the interest levied on that basis. 

For interest attributable to the confirmed tax demand, the Tribunal directed fresh computation strictly under the erstwhile Section 42(8), after identifying and specifying the invoices not populated on the GST portal.

The Bench explained that the relevant provision linked interest to the period between availment of credit and its addition to output tax liability. In this case, where the disputed credit had not been reversed through such an addition, it held that interest was to be computed up to payment of the demand.

The Tribunal confirmed the ₹1,02,012 tax demand, set aside the existing interest computation for fresh determination, and deleted the interest component based on Rule 36(4) that was outside the original notice.

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