The Goods and Services Tax Appellate Tribunal (GSTAT), Ghaziabad State Bench, has set aside a tax demand of ₹2,50,42,960, together with interest of ₹1,84,06,576 and a penalty of ₹25,04,296, in a dispute concerning restoration of credit previously used to pay IGST on supplies subsequently treated as intra-State transactions.
The Bench of Dr. Sanjay Kumar Chandhariyavi (Judicial Member) and Sungita Sharma (Technical Member) observed that the department could not sustain the demand on grounds that had not been adequately disclosed in the show-cause notice. However, the bench clarified that its decision did not automatically validate unilateral recredit through GSTR-3B. It directed reconciliation of the original IGST payment, subsequent CGST and UPGST payments, and the credit already restored, ensuring that the taxpayer received no duplicate refund or credit.
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The appellant/assessee provides information and communication network solutions, optical communication services and data networking construction services.
During scrutiny for the financial year 2019–20, the department compared the credit reflected in GSTR-2A/2B with that claimed in GSTR-3B. It treated IGST credit of ₹2,50,42,960 claimed in February 2020 as excess credit. A separate comparison of GSTR-1 and GSTR-3B resulted in an allegation of short payment of IGST amounting to ₹14,06,477.
A show-cause notice dated January 18, 2023, was issued under Section 73(1), proposing recovery of ₹2,64,49,437, along with interest and penalty.
The company explained that, during the financial year 2017–18, it had mistakenly treated certain supplies to BSNL as inter-State supplies by using BSNL’s GST registrations in other States. It had discharged IGST through its electronic credit ledger.
While preparing GSTR-9 and GSTR-9C in January 2020, the company discovered that the transactions were intra-State supplies attracting CGST and SGST.
The company paid CGST of ₹1,25,21,480 and UPGST of ₹1,25,21,480 through DRC-03 dated February 4, 2020. It subsequently entered ₹2,50,42,960 as credit in its February 2020 GSTR-3B to restore the amount previously used to discharge IGST.
It characterised the entry as an accounting correction following payment under the correct tax heads, rather than a fresh claim of input tax credit on purchases.
The Deputy Commissioner, in an order dated August 29, 2023, accepted the reconciliation concerning the separate ₹14,06,477 mismatch and dropped that demand. However, the authority rejected the ₹2,50,42,960 recredit under Section 16(2), imposed interest of ₹1,84,06,576 and levied a penalty of ₹25,04,296 under Section 73(11).
The first appellate authority upheld the demand on November 18, 2024, holding that the company should have sought a refund of the tax paid under the wrong head instead of restoring credit unilaterally.
GSTAT found that the show-cause notice identified the disputed amount and month and recorded the company’s explanation concerning the original IGST payment and subsequent DRC-03 payments.
However, the notice rejected that explanation through a bare conclusion that the credit was inadmissible, followed by reference to Section 16(2). It did not adequately explain which statutory condition had failed in relation to the restoration claim.
The Tribunal distinguished between two possible allegations: an ineligible claim of purchase credit and an unauthorised restoration of credit previously used to discharge output tax.
If the department disputed the original purchase credit, it needed to identify the relevant inward supplies and the alleged defect. If its objection concerned self-restoration of an output-tax debit, it needed to clearly communicate that factual and legal case.
These allegations required different evidence and responses. A general reference to Section 16(2) did not fairly communicate both.
Referring to the Supreme Court’s decision in Commissioner of Central Excise v. Brindavan Beverages, the Tribunal emphasised that the notice forms the foundation of the department’s case. Identifying the demand amount was insufficient without explaining the basis for recovery.
The Tribunal referred to Section 75(6), which requires an adjudication order to state the relevant facts and reasons, and Section 75(7), which restricts confirmation of a demand to the amount and grounds stated in the notice.
It held that retaining the same demand amount did not permit the department to substitute a different factual case during adjudication or appeal.
A detailed appellate discussion could not retrospectively cure a deficient notice by introducing material grounds that had not been fairly disclosed to the taxpayer.
The Bench also noted that the first appellate order referred to Section 16(2)(aa), concerning supplier-furnished invoice details, although that clause came into force on January 1, 2022, after the disputed February 2020 entry. While this was not the sole basis for relief, the Tribunal stressed that the law applicable to the relevant period had to govern the dispute.
The Tribunal expressly separated the legality of the company’s correction method from the legality of the demand actually raised.
IGST paid on a taxpayer’s outward supplies does not become input tax merely because those supplies are subsequently found to have been classified incorrectly. An entry in a return cannot itself create a statutory credit entitlement.
The Bench identified the refund procedure under Section 19(1) of the IGST Act, read with Rule 89(1A) of the CGST Rules, as the route the company had not followed.
Nevertheless, an irregular correction method could not validate a defective notice or justify confirmation of a demand on undisclosed grounds.
The Tribunal also held that the accepted CGST and UPGST payments could not be ignored. The company’s voluntary disclosure, annual reconciliation and corrective payments were relevant circumstances requiring examination.
The Tribunal held that the company must receive the protection under Section 77(2) concerning interest on Central and State tax payable where supplies initially treated as inter-State are subsequently found to be intra-State.
It separately explained that interest on wrongly availed ITC requires examination under Section 50(3) and Rule 88B. Wrongful availment and utilisation must both be established; availment alone does not establish utilisation.
The relevant ledger balances, debit dates, amount actually utilised and period of wrongful benefit must be identified. Interest could not be imposed on the entire disputed amount without those findings.
The Bench consequently found the ₹1,84,06,576 interest demand unsustainable.
The Tribunal observed that the absence of fraud does not automatically exclude a penalty under Section 73. However, Section 73(11) does not impose a ten per cent penalty on every corrective entry.
Since the underlying finding supporting the disputed credit demand could not stand, the penalty of ₹25,04,296 was also held unsustainable.
GSTAT set aside the adjudication and first appellate orders. Its operative direction set aside the tax demand, consequential interest and penalty insofar as the demand was based on grounds not disclosed in the show-cause notice.
The Tribunal directed recognition of the CGST and UPGST payments made through DRC-03 against the supplies and liabilities to which they related.
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