The Goods and Services Tax Appellate Tribunal (GSTAT), Ghaziabad Bench, has upheld the disallowance of ₹11,11,293 in input tax credit (ITC) claimed by a brick manufacturer, holding that assertions of business use cannot replace documentary evidence establishing eligibility. However, the Tribunal directed that interest on the disallowed credit must be determined strictly on the basis of wrongful availment and utilisation.

The bench of Sanjay Kumar Chandhariyavi (Judicial Member) and Sungita Sharma (Technical Member) distinguished between expenditure expressly covered by blocked-credit provisions, expenditure for which a statutory exception must be proved, and expenditure whose basic connection with the business has not been established. It emphasised that an invoice in the business’s name does not, by itself, establish entitlement to ITC.

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The taxpayer manufactures bricks at a kiln in Dankaur, Gautam Buddha Nagar, Uttar Pradesh.

Proceedings began with a scrutiny notice in Form ASMT-10 issued on November 10, 2023. After no response was received within the prescribed period, the department issued a show-cause notice under Section 73(1) on January 29, 2024.

The notice raised four issues: a difference of ₹6,496.11 between ITC claimed in GSTR-3B and Table 8A of GSTR-9; allegedly blocked credit on various purchases and expenses; estimated turnover discrepancies based on coal consumption; and non-payment of GST under the reverse charge mechanism on royalty paid for soil extraction.

The taxpayer admitted the ITC mismatch but contested the other allegations.

The adjudicating authority accepted its explanation concerning production and coal consumption and dropped the proposed demand on that issue. However, it confirmed the remaining issues through an order dated April 30, 2024, raising an aggregate demand of ₹24,41,889 towards tax, interest and penalty.

The taxpayer’s first appeal was dismissed on July 12, 2024, prompting the second appeal before GSTAT.

The taxpayer argued that the adjudicating officer had rejected its detailed explanations in a single unreasoned paragraph without examining individual invoices and supporting material.

It also contended that most of the first appellate order merely reproduced earlier documents and statutory provisions, with no independent reasoning.

On the merits, the taxpayer maintained that tractors, earthmovers, tyres, electrical equipment and cameras were used in operating or maintaining the kiln. Building materials, it submitted, were used for repairs to the chimney, office and workers’ quarters.

The taxpayer also defended clothing, meals and promotional expenditure as business expenses and relied on the Supreme Court’s decision in Safari Retreats in support of its claim concerning plant-related expenditure.

The Tribunal rejected an excessively narrow approach under which credit is tested only by asking whether an item is necessary for manufacturing bricks.

It explained that Section 16(1) covers goods and services used or intended to be used in the course or furtherance of business. Expenditure may therefore qualify even if it does not physically enter the manufacturing process.

However, business use does not override an express restriction under Section 17(5).

The Tribunal held that authorities must identify the particular blocked-credit clause applicable to each category. Motor vehicles, catering, construction, personal consumption and gifts involve different statutory conditions and cannot be dealt with through a generic invocation of Section 17(5).

It also observed that the motor vehicle and related provisions changed from February 1, 2019. Consequently, invoices for FY 2018–19 required examination against the statutory provisions applicable on their respective dates.

Despite these observations, the Tribunal found that the taxpayer had failed to discharge the burden imposed by Section 155.

It held that written explanations and legal submissions cannot establish underlying facts without supporting evidence. A person claiming an exception to a blocked-credit provision must prove the factual conditions necessary to invoke that exception.

Drawing upon Supreme Court decisions concerning evidentiary burdens and statutory concessions, the Tribunal explained that invoices and payment entries do not invariably conclude the inquiry. Relevant business use, actual transactions and the conditions governing eligibility must also be established.

The central reasoning was that legal argument must follow proof of the foundational facts.

The taxpayer claimed that tyres and tubes were used on tractors, trolleys, JCBs and other equipment for moving bricks and materials.

The Tribunal found that the tractor was not registered in the taxpayer’s name and that the necessary registration material establishing its claimed commercial use had not been produced.

Although a registration document for the Hyva was available, it did not establish that the disputed tyres, tubes, spare parts or services related to that particular equipment.

The record lacked vehicle-wise tyre registers, issue or consumption records, job cards, machinery registers and asset-wise maintenance ledgers connecting the invoices with eligible business assets.

The Tribunal consequently refused credit on the basis of the taxpayer’s unsupported assertions.

For cement, iron, pipes and other building materials, the Tribunal examined the taxpayer’s explanation that they were used for office renovation and chimney repairs.

It observed that renovation and repairs fall within the construction restriction under Section 17(5)(d) to the extent of capitalisation. The taxpayer had not produced fixed asset registers, capitalisation schedules, balance sheets or depreciation records to establish its claim that the expenditure qualified for credit.

The chimney claim similarly required evidence showing that the relevant asset constituted qualifying plant and machinery, including technical drawings, an engineer’s certificate or appropriate asset records.

The Tribunal also referred to the retrospective amendment replacing “plant or machinery” with “plant and machinery” in Section 17(5)(d). It held that the taxpayer could not rely broadly on the functionality reasoning in Safari Retreats to treat the entire kiln premises, offices, quarters or civil structures as qualifying plant.

It clarified that machinery fixed to the earth and qualifying foundations or structural supports could remain eligible where the statutory definition and other conditions were established.

The taxpayer’s own explanation described sarees and clothing distributed during Holi and Diwali as gifts.

The Tribunal held that Section 17(5)(h) expressly blocks credit on goods disposed of as gifts or free samples. Employee welfare or goodwill did not remove that restriction.

Credit on food, beverages and a banquet organised for customers, builders and employees was also rejected. The taxpayer neither supplied food or catering of the same category nor demonstrated a statutory obligation requiring the promotional banquet.

Describing the expense as business promotion was therefore insufficient to establish an exception.

The Tribunal expressly distinguished genuine business travel from vacation benefits extended to employees.

Nevertheless, the taxpayer had not produced itineraries, machinery supplier correspondence, quotations, purchase orders, meeting records or other contemporaneous documents supporting the claimed business purpose of the journeys. The travel and hotel claims were rejected on the record before it.

Similarly, cameras and photography services were not inherently covered by the blocked-credit list. But the taxpayer failed to substantiate business use through promotional material, event records, photographs, customer brochures or comparable evidence.

The taxpayer also contested reverse-charge liability relating to soil royalty and sought relief from interest and penalty by relying on Supreme Court proceedings concerning mineral taxation.

In its discussion of cess, the Tribunal held that a cess lawfully leviable and satisfying Section 15(2)(a) forms part of the value of the underlying taxable supply.

It clarified that the valuation provision cannot validate a cess that was never legally leviable. However, where the cess is lawful and the statutory conditions are satisfied, its inclusion in taxable value follows from the provision.

The Tribunal upheld the findings of the lower authorities on this issue.

The Tribunal rejected the taxpayer’s contention that interest could arise only from the date of adjudication.

However, it held that interest under Section 50(3) requires ITC to have been both wrongly availed and utilised. Mere wrongful availment without utilisation does not attract interest under that provision.

Interest must therefore be calculated for the relevant amount and period of utilisation in accordance with Section 50(3), Rule 88B(3) and the applicable clarification.

The Tribunal affirmed the disallowance of IGST credit of ₹3,50,983, CGST credit of ₹3,80,155 and SGST credit of ₹3,80,155, aggregating to ₹11,11,293.

It directed that corresponding interest be determined strictly under the statutory utilisation rules. The penalty under Section 73 must follow the tax legally sustained and be recomputed wherever necessary.

The appeal on the ITC issue was dismissed, with the Tribunal affirming the authorities’ findings through its detailed reasoning.

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