The Goods and Services Tax Appellate Tribunal (GSTAT), Pune Bench, has held that the non-operation of FORM GSTR-2 does not extinguish the statutory liability to pay interest on input tax credit relating to supplies for which suppliers were not paid within 180 days.

The Bench of Shridhar Mahadeo Bhosale (Judicial Member) and Dr. Nirmal Kumar Soren (Technical Member) upheld an interest demand of ₹3,80,408 concerning the financial year 2018-19. It also held that an agreement permitting payment to suppliers after two years could not extend the statutory deadline.

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The Tribunal separately sustained denial of ITC of ₹31,115 for failure to produce supporting documents, together with consequential interest to be quantified, and upheld a ₹20,000 penalty.

The dispute arose from an audit of a Pune-based proprietary concern engaged in trading plywood, veneered panels and similar laminated wood. While the audit covered July 2017 to March 2020, the disputed demand related to April 2018 to March 2019.

The department raised two objections. First, the taxpayer had availed ITC on invoices issued by a supplier whose GST registration had been cancelled retrospectively. Second, it had not paid interest on credit relating to purchases for which suppliers remained unpaid beyond 180 days.

A show cause notice dated March 10, 2023, issued under Section 73(1), proposed recovery of ₹31,115 in IGST credit on eight invoices issued between July 18 and October 16, 2018. The supplier’s registration had been cancelled with effect from July 3, 2017.

The notice also proposed recovery of ₹3,80,408 in interest for delayed supplier payments.

The adjudicating authority confirmed both demands and imposed penalties totalling ₹48,040. The first appellate authority sustained the demands while reducing the total penalty to ₹20,000.

Before the Tribunal, the taxpayer argued that Rule 37, as applicable during 2018-19, required details of unpaid supplies to be furnished in FORM GSTR-2. Since the form was never made operational, compliance in the prescribed manner was allegedly impossible.

It further argued that Rule 37(3) linked the endpoint of interest to payment of the amount added to output tax liability. According to the taxpayer, interest could not arise when there was no mechanism to make that addition.

The taxpayer also submitted that subsequent amendments to Rule 37 could not apply to the disputed period. It relied on financial hardship during the COVID-19 pandemic and an arrangement with suppliers allowing payment after two years.

The Tribunal accepted that the amended provisions quoted by the first appellate authority and the department did not govern 2018-19. However, it found that the provisions applicable during that year independently created the liability.

Under the then applicable second proviso to Section 16(2), failure to pay the supplier the value of the supply along with tax within 180 days required an amount equal to the ITC availed to be added to the recipient’s output tax liability, together with interest.

The Bench explained that the Act created the substantive obligation, while the Rules prescribed the manner of compliance. Consequently, GSTR-2’s non-operation affected the reporting mechanism without removing the underlying liability.

It noted that GSTR-3B provided for reversal of credit. Amounts due could also be paid voluntarily under Section 73(5), with intimation through FORM GST DRC-03 under Rule 142(2).

The taxpayer had not claimed that it attempted reversal or payment of interest and was prevented from doing so. The Tribunal therefore rejected reliance on the principle that the law does not compel an impossible act.

The Bench rejected the argument that interest could not run because the credit amount had never been added to output tax liability.

Such an interpretation would allow a recipient who failed to comply to escape interest, while a recipient who reversed the credit would bear it. The Tribunal held that a taxpayer could not rely on its own default to extinguish the liability.

For the disputed period, Rule 37(3) provided for interest from the date of availing credit until payment of the amount added to output tax liability. The endpoint assumed compliance with the reversal mechanism; failure to follow that mechanism did not remove the obligation.

The Tribunal also rejected reliance on the agreement permitting payment to suppliers after two years.

The relevant statutory failure was failure to pay within 180 days, rather than failure to pay at any time. A private arrangement between supplier and recipient could not enlarge the period fixed by the legislation.

Eventual payment did not erase the intervening liability. The third proviso to Section 16(2) permitted the recipient to avail credit again after paying the supplier, demonstrating that the statutory scheme expressly contemplated delayed payment.

The Bench further found that no applicable relaxation had been shown for the 2018-19 invoices on account of the pleaded COVID-19 hardship.

The taxpayer had not challenged the invoices, period or arithmetic underlying the interest calculation at any stage. The Tribunal accordingly upheld the demand of ₹3,80,408, comprising IGST interest of ₹3,59,786 and CGST and SGST interest of ₹10,311 each.

On the separate ITC demand of ₹31,115, the Tribunal relied on the taxpayer’s failure to discharge the burden of proof under Section 155.

No invoices, payment records, evidence of transport or receipt of goods, or supplier ledger had been filed before it. A bare assertion that the conditions of Section 16(2) were satisfied was insufficient.

The Tribunal expressly left open whether retrospective cancellation of a supplier’s registration, by itself, justified denial of credit. Its finding rested on the absence of documents establishing eligibility.

The taxpayer had already paid ₹31,115 through DRC-03 on January 21, 2025, by debit to its electronic credit ledger, without interest. The proper officer was directed to quantify the consequential interest in accordance with Section 50.

The Tribunal upheld the ₹20,000 penalty under Section 73(9) of the CGST Act read with the fourth proviso to Section 20 of the IGST Act.

Ten per cent of the disputed tax of ₹31,115 amounted to ₹3,111.50, below the statutory minimum of ₹10,000. Applying the aggregation provision for integrated tax, the Bench sustained the combined minimum penalty of ₹20,000.

This penalty is related to the ITC demand. The first appellate authority had already held that the separate penalty imposed on the interest demand could not stand.

The taxpayer had also challenged an error in FORM GST DRC-07, where interest had been entered in the tax column, showing IGST tax of ₹3,90,901 instead of ₹31,115.

Its representative informed the Tribunal that the summary had since been rectified. The Bench therefore held that this ground no longer survived.

The Tribunal directed the proper officer to quantify the remaining interest and adjust the ₹39,091 pre-deposit and the ₹31,115 DRC-03 payment against the determined demand. Any balance payable must then be communicated to the taxpayer.

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