The Goods and Services Tax Appellate Tribunal (GSTAT), Hyderabad State Bench, has held that transitional credit cannot be denied merely because a taxpayer could not file one pre-GST excise return on time due to technical glitches in the government portal, where the taxpayer demonstrated diligence and subsequently completed the filing.

The bench of A. P. Ravi (Judicial Member) and Duvvuri Krishna Srinivas (Technical Member) set aside the appellate order sustaining denial of ₹12.91 lakh in transitional credit, along with interest and a penalty equal to the disputed credit. It also found that the authorities had imposed a penalty under a provision different from the one proposed in the show cause notice and failed to establish fraud, wilful misstatement or suppression of facts.

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The company, engaged in manufacturing and supplying medicaments falling under Chapter 30 of the GST tariff, had carried forward CENVAT credit of ₹12,91,000 through Table 5(a) of Form TRAN-1 under Section 140(1) of the Central Goods and Services Tax Act, 2017.

The department disputed the transition of credit because the company had not electronically filed its ER-1 return for April 2017 before the relevant deadline. It relied on the statutory condition concerning furnishing returns for the six months immediately preceding the introduction of GST.

The company maintained that the delay resulted from technical problems in the erstwhile ACES portal. It had raised helpdesk tickets and informed the jurisdictional Superintendent through a letter dated May 12, 2017. The record also referred to manual submission of the April return.

The April 2017 return was eventually filed electronically on August 27, 2022. The Tribunal noted that the returns for January, February, March, May and June 2017 had been filed on time. Neither the underlying closing credit balance nor the timely filing of TRAN-1 was disputed.

A show cause notice dated January 31, 2022 proposed denial and recovery of transitional credit under Section 74(1), interest under Section 50(3), and penalty under Section 122(2)(a).

The adjudicating authority denied the credit, demanded interest and imposed a 100% penalty under Section 74 read with Section 122(2)(b). The first appellate authority upheld the adverse findings.

The first appellate authority reasoned that credit was subject to statutory conditions and that the company had knowingly claimed transitional credit despite not furnishing all the required returns. It treated this as indicating wilfulness.

Before the Tribunal, the company argued that its eligibility for CENVAT credit under the earlier tax regime was never questioned. The dispute concerned transfer of that credit into GST despite an acknowledged portal failure. It also challenged the invocation of fraud-related provisions when the filing difficulty had been disclosed to the department contemporaneously.

The Tribunal placed particular weight on the department’s acknowledgment of the technical difficulty and the company’s repeated attempts to resolve it.

The adjudicating authority itself had recorded that the taxpayer could not file the April return because of a technical glitch in the CBEC-ACES website, had attempted filing several times, and had lodged tickets with the CBIC Mitra helpdesk. Communications beginning in May 2017 demonstrated continuing efforts to upload the return.

Despite recording these facts, the lower authorities denied relief on the ground that there was no enabling provision, rule or Board clarification permitting transitional credit in such circumstances.

Rejecting that approach, the Tribunal observed, “The technical glitch/blockage caused by the government’s own portal can’t be weaponised to trigger an outright disallowance of vested transitional credit.”

It held that substantive compliance had been achieved belatedly at the first available opportunity, and the department’s insistence on an absolute, literal timeline was misdirected.

The Bench applied the principle expressed by the maxim lex non cogit ad impossibilia—the law does not compel a person to perform an impossible act.

It reasoned that where a taxpayer is prevented from complying by circumstances beyond its control, diligently pursues the matter and completes the requirement when the opportunity becomes available, penalising it for the system failure would be unfair.

The Tribunal distinguished the company’s conduct from that of a taxpayer who had abandoned statutory filing obligations. Timely filing of the other returns, prompt helpdesk complaints and written intimation to the department established diligence.

The Bench also referred to the Bombay High Court’s decision in Johnson Matthey Chemicals India Pvt. Ltd. v. Union of India and the Madras High Court’s decision in Sowmiya Spinners Private Limited v. Deputy Commissioner of GST & Central Excise. As discussed in the order, these decisions supported protection of substantive credit benefits against procedural obstacles and recognition of subsequent compliance in the circumstances considered.

The Tribunal separately found a material inconsistency between the notice and the orders passed against the company.

While the notice proposed a penalty under Section 122(2)(a), the adjudicating and appellate authorities sustained the penalty under Section 74 read with Section 122(2)(b).

The Bench explained that Section 122(2)(a) concerns cases other than those involving fraud, wilful misstatement or suppression, whereas Section 122(2)(b) addresses cases involving those elements. It also found the notice internally contradictory in invoking Section 74(1) alongside the non-fraud penalty provision.

The Tribunal held that the orders violated Section 75(7), which restricts confirmation of demands to the grounds specified in the notice and prohibits demanding tax, interest or penalty beyond the amount specified in it.

Referring to the Supreme Court authorities discussed in its order, the Bench reiterated that the department cannot subsequently build a case on grounds or provisions for which the foundation was not laid in the show cause notice.

The Tribunal found that the notice did not set out foundational facts establishing fraud, wilful misstatement or suppression necessary to invoke Section 74.

The company’s May 2017 intimation and supporting correspondence contradicted the allegation that the filing difficulty had been concealed. The department had not identified any specific information that the taxpayer was obliged to disclose but withheld, or any written request for information with which it failed to comply.

The Bench rejected the inference that an element of wilfulness could be perceived merely because the company claimed credit while the April return remained unfiled electronically.

It held that mechanical use of expressions such as fraud, wilful misstatement or suppression, without supporting facts, demonstrated non-application of mind. Failure to file one return because of circumstances beyond the taxpayer’s control could not be equated with a deliberate intention to claim ineligible credit, particularly when the department had been informed.

The Tribunal also referred to CBIC Instruction No. 05/2023-GST dated December 13, 2023 concerning the need for material evidence when invoking Section 74. Although issued after the period in dispute, it considered the instruction consistent with its reading of the statutory provision.

The Tribunal concluded that the authorities had exceeded the penalty proposals in the notice, that the documented technical glitches did not justify denial of transitional credit in the circumstances, and that fraud, wilful misstatement or suppression had not been established.

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