GSTAT Holds That The Exclusion Of Duty Credit Scrips From Exempt Supplies Under Rule 43 Of The CGST Rules Applies Prospectively And Cannot Be Claimed For Past Periods

BRIEF FACTS OF THE CASE¹

• The taxpayer is engaged in the manufacture and supply of electrical apparatus and was also undertaking the sale of MEIS duty credit scrips. During FY 2017-18 to FY 2019-20, the taxpayer had taxable supplies as well as supplies of duty credit scrips, which were treated as exempt supplies.
• The Department alleged that since the taxpayer was engaged in both taxable supplies and exempt supplies, proportionate input tax credit attributable to exempt supplies was required to be reversed in terms of Section 17 of the CGST Act read with Rules 42 and 43 of the CGST Rules.
• Based on the said allegation, the adjudicating authority passed an Order-in-Original confirming reversal of proportionate ITC amounting to INR 74,75,604 for FY 2017-18 to FY 2019-20, along with applicable interest and equivalent penalty under Section 74 of the CGST Act.
• The taxpayer challenged the Order-in-Original before the first appellate authority. It was contended that sale of duty credit scrips should not be treated at par with other exempt supplies for the purpose of ITC reversal, particularly in view of the amendment made to Explanation 1 to Rule 43 of the CGST Rules by Notification No. 14/2022-Central Tax dated 5 July 2022.
• The first appellate authority accepted the taxpayer’s contention and set aside the Order-inOriginal confirming ITC reversal, interest and penalty.
• Aggrieved by the said Order-in-Appeal, the Department filed appeals before the Kolkata Bench of the GSTAT. The case involved 3 different appeals.
• Below are the key issues for consideration before the Hon’ble GSTAT:

1. Whether the Revenue’s appeals were maintainable in view of the monetary limits prescribed under CBIC Circular No. 207/1/2024-GST dated 26 June 2024 for filing appeals before the GSTAT.

2. Whether the amendment made to Explanation 1 to Rule 43 of the CGST Rules by excluding duty credit scrips from the value of exempt supplies could be applied retrospectively to FY 2017-18 to FY 2019-20.

3. Whether invocation of Section 74 of the CGST Act was sustainable in the absence of material evidence of fraud, wilful misstatement or suppression of facts to evade tax.

GSTAT OBSERVATIONS:

Maintainability of Revenue’s appeal

• n maintainability, the GSTAT held that the CBIC monetary limit circular binds departmental officers but not the Tribunal, it can only have persuasive value before GSTAT. Further, since the composite order involved three appeals, the monetary limit has to be applied to the total amount involved and not to each individual appeal separately. As the present case involves interpretation of Rules / Notifications, the Revenue’s appeals were maintainable.

Retrospective applicability of amendment to Rule 43

• GSTAT observed that duty credit scrips were treated as exempt supplies from 13 October 2017. However, the exclusion of duty credit scrips from the value of exempt supplies under Rule 43 was introduced vide Notification No. 14/2022-Central Tax dated 5 July 2022, with prospective effect.
• The GSTAT further held that although the rule-making authority had the power to give retrospective effect under Section 164(3) of the CGST Act, it consciously chose to make the amendment prospective.
• Accordingly, it was held that the amendment was not clarificatory or curative in nature and could not be applied retrospectively to transactions undertaken during FY 2017-18 to FY 2019-20.

Invocation of Section 74

• The GSTAT held that Section 74 cannot be invoked merely on account of alleged wrongful availment of ITC, unless supported by material evidence of fraud, wilful misstatement or suppression of facts with intent to evade tax
• Since the taxpayer had filed GST returns and produced invoices for the sale of duty credit scrips, and no investigation or evidence of suppression was brought on record, invocation of Section 74 was held to be unsustainable.
• However, the GSTAT directed the proper officer to determine the tax liability under Section 73, in terms of Section 75(2), after granting an opportunity of hearing to the taxpayer.

AURTUS COMMENTS

• It is noteworthy that Explanation 1 itself commences with the words ‘it is hereby clarified that the aggregate value of exempt supplies shall exclude’, language ordinarily associated with a legislative clarification rather than the creation of a fresh substantive right. On that basis, a credible view therefore continues to exist that the insertion of clause (d) to Explanation 1 of Rule 43 was clarificatory and curative in nature and ought therefore to have been given retrospective effect. The exclusion of duty credit scripts merely made explicit what the scheme always intended.
• This position is also supported by the observations of the Supreme Court in Zile Singh v. State of Haryana [AIR 2004 SC 5100], wherein the Court observed, inter alia, that:
  • If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospective.
  • An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act.
  • It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended.
  • An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act which was already implicit.
  • A clarificatory amendment of this nature will have retrospective effect.
• It is, however, relevant to note that the present Tribunal ruling, as well as the judgment of the Chhattisgarh High Court in Bharat Aluminium Company Ltd. v. State of Chhattisgarh [WA No. 736 of 2025], has taken the contrary view that the insertion of clause (d) to Explanation 1 of Rule 43 operates prospectively.
• It is pertinent to note that a key consideration weighing with the Chhattisgarh High Court in Bharat Aluminium Company Ltd. v. State of Chhattisgarh appears to have been that, while inserting clause (d) to Explanation 1 of Rule 43, the legislature did not expressly exercise the power under Section 164(3) of the CGST Act to give the amendment retrospective effect. On that basis, the Court proceeded on the footing that the amendment would operate prospectively. However, an equally plausible view is that the absence of an express retrospective notification under Section 164(3) is not determinative where the amendment is in the nature of an explanation intended to clarify the existing legal position. Section 164(3) is essentially an enabling provision empowering the Government to accord retrospective operation to delegated legislation; it does not displace settled principles of statutory interpretation under which explanatory, declaratory or curative amendments may, by their very nature, be construed as retrospective notwithstanding the absence of an express retrospective clause.
• Therefore, even though clause (d) was not brought into force retrospectively under Section 164(3), it remains open to contend that the use of the expression “it is hereby clarified”, read in the context of the scheme of Rules 42 and 43, reflects a legislative intent to merely clarify what was always implicit in the law, thereby warranting retrospective application in accordance with established interpretative principles.
• Following the 2022 amendment, many audits, scrutiny proceedings and adjudications effectively proceeded on the basis that the sale value of duty credit scrips stood excluded from the value of exempt supplies even for the period prior to the amendment, and several disputes were resolved or settled on that understanding.
• The ruling could, however, encourage the department to revisit ITC reversals in respect of such duty credit scrips sold for the pre-amendment period and seek proportionate reversals under Rules 42/43. Hence, taxpayers who considered the issue to have attained finality may face fresh litigation. That said, any attempt to invoke the extended period of limitation would be susceptible to challenge, given that the controversy arises from a pure question of statutory interpretation. The use of the expression "it is hereby clarified" in Explanation 1, coupled with the existence of a bona fide and legally sustainable view that the amendment operated retrospectively, may make it difficult to establish the elements of fraud, wilful misstatement or suppression that ordinarily underpin invocation of the longer limitation period.

Footnote

1 Commissioner of CGST and Cx , Kolkata North Commissionerate Vs. Power Tech Global Pvt. Ltd [APL/62/KLK/2026, APL/74/KLK/2026, APL/75/KLK/2026 ]

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