The Goods and Services Tax Appellate Tribunal (GSTAT), Kolkata Bench, has held that the 2022 amendment to Rule 43 of the Central Goods and Services Tax Rules, 2017, excluding the value of duty credit scrips from the aggregate value of exempt supplies for Input Tax Credit (ITC) reversal, operates prospectively from July 5, 2022 and cannot be extended to transactions undertaken during financial years 2017-18 to 2019-20.
The bench of S.G. Chattopadhyay (Judicial Member) and Bijoy Kumar Kar (Technical Member) has observed that proceedings under Section 74(1) of the CGST Act cannot be invoked merely because ITC was allegedly wrongly availed. The Revenue must establish fraud, wilful misstatement or suppression of facts with an intention to evade tax. Finding no such material in the case, the GSTAT held the Section 74 show-cause notice unsustainable and directed the proper officer to determine the tax liability by treating the notice as one issued under Section 73 in terms of Section 75(2) of the CGST Act.
The dispute arose after the adjudicating authority directed reversal of proportionate ITC amounting to ₹74,75,604 for FY 2017-18 to FY 2019-20, holding that credit had been availed in relation to exempt supplies. Interest was demanded and an equivalent penalty of ₹74,75,604 was also imposed. The first appellate authority subsequently set aside that order and exonerated the taxpayer, prompting the Revenue to approach the GSTAT.
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The taxpayer was engaged in manufacturing electrical apparatus, including switchgears, voltage limiters, fuses, circuit breakers, surge protection devices, junction boxes, panels and related electrical equipment.
According to the Revenue, scrutiny of GSTR-3B returns showed taxable supplies of about ₹17.37 crore during the three financial years and exempt outward supplies of MEIS duty scrips of approximately ₹10.93 crore. The taxpayer had availed ITC of about ₹1.95 crore. Applying Section 17 of the CGST Act read with Rules 42 and 43, the Department computed excess ITC attributable to exempt supplies at ₹74.75 lakh.
A show-cause notice was consequently issued under Section 74(1) seeking recovery of the allegedly ineligible ITC along with interest and penalty.
The first appellate authority had taken a different view. It relied heavily upon Notification No. 14/2022 dated July 5, 2022, which inserted clause (d) into Explanation 1 to Rule 43.
The amendment excluded the value of specified duty credit scrips from the aggregate value of exempt supplies for the purposes of Rules 42 and 43.
The appellate authority regarded the amendment as clarificatory, procedural and beneficial. It therefore held that the amendment should operate retrospectively and cover MEIS transactions undertaken during FY 2017-18 to FY 2019-20.
On that reasoning, it concluded that proportionate ITC was not required to be reversed merely on account of the sale of the duty credit scrips and set aside the adjudication order.
The Revenue challenged this finding before the GSTAT, arguing that the notification itself made the amendment effective from July 5, 2022 and that the first appellate authority could not rewrite the commencement provision by treating it as retrospective.
The Tribunal identified three principal questions: whether the Revenue’s appeals were barred by the ₹20 lakh monetary limit under CBIC Circular No. 207/1/2024-GST; whether the 2022 amendment excluding duty credit scrips from exempt turnover could be applied retrospectively; and whether Section 74(1) could legally be invoked on the facts of the case.
On the monetary-limit objection, the Tribunal sided with the Revenue. It noted the provisions governing composite orders and exclusions for cases involving recurring questions or interpretation of statutory provisions, rules, notifications and circulars. The GSTAT therefore rejected the taxpayer’s objection to the maintainability of the departmental appeals.
On the substantive Rule 43 issue, however, the GSTAT disagreed with the first appellate authority.
The Tribunal emphasised that Notification No. 14/2022 was published in the Official Gazette on July 5, 2022, and its commencement provision expressly brought the amendment into force from that date.
Significantly, the Bench referred to Section 164(3) of the CGST Act, which empowers the Central Government to give retrospective effect to rules, subject to the statutory limitation. Despite possessing that power, the rule-making authority chose to bring the amendment into force prospectively from July 5, 2022.
The Tribunal therefore found fault with the first appellate authority for applying the amendment retrospectively to transactions undertaken several years earlier merely because the provision was beneficial to the taxpayer.
It observed that the general principle in tax law is that the law applicable to an assessment is ordinarily the law in force during the relevant period unless retrospective application is expressly provided or follows by necessary implication.
The GSTAT further rejected the contention that insertion of clause (d) in Explanation 1 to Rule 43 merely clarified the existing legal position.
The Tribunal noted that duty credit scrips became exempt supplies through Notification No. 35/2017 dated October 13, 2017. At that stage, however, taxpayers were not given the benefit of excluding the value of such scrips from exempt turnover while calculating proportionate ITC reversal.
It was only about four years later that the Government inserted clause (d) into Explanation 1 to Rule 43 and specifically excluded the value of duty credit scrips from exempt supplies for the relevant ITC calculation.
According to the Bench, the wording did not indicate that the amendment was introduced merely to remove an existing doubt or ambiguity. Rather, it conferred the benefit prospectively from July 5, 2022.
The Tribunal also observed that ITC is concessional in nature and that the taxpayer could not claim retrospective enforcement of the 2022 benefit as a vested right.
Accordingly, the GSTAT concluded that the first appellate authority had erred in extending the amendment retrospectively to FY 2017-18 to FY 2019-20. The rule-making authority intended the amendment to operate prospectively and there was no basis to alter that legislative choice.
Despite deciding the Rule 43 issue in favour of the Revenue, the Tribunal then examined whether the Department was justified in invoking the more stringent provisions of Section 74(1).
The Bench stressed that Section 74 is attracted where tax has not been paid, has been short-paid or ITC has been wrongly availed or utilised by reason of fraud, wilful misstatement or suppression of facts to evade tax.
Thus, merely establishing that credit was inadmissible does not automatically establish the ingredients required for Section 74 proceedings. The provision requires circumstances indicating an intention to evade tax through fraud, deliberate misstatement or suppression.
On examining the taxpayer’s conduct, the Tribunal found that monthly GSTR-3B returns as well as annual returns had been filed. There was no allegation that the annual returns had not been submitted.
More importantly, the taxpayer had produced invoices revealing the sale of duty credit scrips. The Tribunal therefore found no act of non-submission or non-declaration of information from which mala fide intention could be inferred.
The GSTAT also relied upon CBIC Instruction No. 05/2023-GST dated December 13, 2023, which states that Section 74(1) should not be invoked merely because GST has not been paid. There must be material evidence demonstrating fraud, wilful misstatement or suppression of facts to evade tax, and such evidence should form part of the show-cause notice.
Applying these principles, the Tribunal noted 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.
It further stressed that suppression cannot simply be equated with an ordinary omission or non-declaration. There must be deliberate intention on the taxpayer’s part to evade tax.
The taxpayer’s consistent position was that it believed the benefit of clause (d) to Explanation 1 of Rule 43 was retrospectively available. Its GSTR-3B self-assessment was made on that understanding.
Crucially, the Tribunal observed that the taxpayer had never concealed that it had availed ITC in relation to the value of duty credit scrip supplies, while the Department itself was aware that such scrips had been supplied during FY 2017-18 to FY 2019-20.
“When both sides were aware of the fact,” the Tribunal reasoned, the taxpayer could not be accused of fraud or wilful suppression.
The Bench relied on the Supreme Court’s decision in Anand Nishikawa Co. Ltd. v. Commissioner of Central Excise, reiterating that suppression must be construed strictly and must involve deliberate withholding of correct information with an intention to evade duty.
The GSTAT ultimately held that the Revenue had failed to produce any material demonstrating a deliberate intention to evade tax. Consequently, invocation of Section 74(1) was legally incorrect and the show-cause notice issued under that provision could not be sustained.
This finding, however, did not result in the underlying tax issue being completely closed.
The Tribunal invoked Section 75(2) of the CGST Act, which specifically addresses situations where an appellate authority, tribunal or court finds that a Section 74 notice is unsustainable because fraud, wilful misstatement or suppression with intent to evade tax has not been established.
Under Section 75(2), the proper officer must determine the tax payable by treating the notice as though it had been issued under Section 73(1).
The GSTAT directed the proper officer to determine the taxpayer’s tax liability within the statutory period after providing an opportunity of hearing.
With these directions, the Revenue’s three appeals were disposed of.
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