GSTAT Kolkata: Amendment Excluding Duty Credit Scrips from Exempt Supplies Under Rule 43 CGST Rules Applies Prospectively Only

The Goods and Services Tax Appellate Tribunal (GSTAT), Kolkata Bench, has ruled that the benefit of the 2022 amendment to Rule 43 of the Central Goods and Services Tax (CGST) Rules—excluding the value of duty credit scrips from the aggregate value of exempt supplies for the purpose of input tax credit (ITC) reversal—applies only prospectively from 5 July 2022 and not retrospectively. The Tribunal also found that the invocation of Section 74(1) of the CGST Act, 2017, against the taxpayer was not sustainable in the absence of evidence of fraud, wilful misstatement, or suppression of facts to evade tax.

Background and Proceedings

The appeals before the GSTAT arose from a common order of the Joint Commissioner, CGST & CX, Kolkata, which had exonerated the taxpayer, Power Tech Global Pvt. Ltd., from reversal of ITC, interest, and penalty imposed by the adjudicating authority. The original order had directed reversal of proportionate ITC amounting to Rs. 74,75,604 for the financial years 2017-2020, along with interest and an equivalent penalty, on the ground that the taxpayer availed ITC on exempt supplies—specifically, the sale of duty credit scrips under the Merchandise Exports from India Scheme (MEIS).

The appellate authority had allowed the taxpayer’s appeal, holding that the 2022 amendment to Rule 43 of the CGST Rules, which excluded the value of duty credit scrips from the aggregate value of exempt supplies, was clarificatory and thus applicable retrospectively. The department challenged this finding before the GSTAT, arguing that the amendment was expressly prospective and that the taxpayer was not entitled to ITC on exempt supplies prior to the amendment.

Key Issues Before the Tribunal

The Tribunal considered three principal issues:

1. Whether the appeal was barred by the monetary limit for departmental appeals before the GSTAT as per CBIC Circular No. 207/1/2024-GST dated 26.06.2024.
2. Whether the 2022 amendment to Rule 43 of the CGST Rules could be applied retrospectively to allow ITC on the sale of duty credit scrips for the period 2017-2020.
3. Whether the invocation of Section 74(1) of the CGST Act, 2017, was justified in the facts of the case.

Tribunal’s Analysis and Findings

Monetary Limit for Appeals

The Tribunal held that the CBIC circular fixing a monetary threshold for departmental appeals is binding on tax officers but not on the Tribunal itself. The Tribunal found that, considering the aggregate amount involved in the composite order and the exclusions for recurring issues or interpretation of law, the present appeals were not barred by the monetary limit.

Prospective Application of Rule 43 Amendment

On the core issue, the Tribunal examined the statutory framework and the language of the 2022 amendment. It noted that while the Central Government had the power to give retrospective effect to rules under Section 164(3) of the CGST Act, the commencement clause of Notification No. 14/2022 clearly provided for prospective operation from 5 July 2022. The Tribunal distinguished the Supreme Court decisions relied upon by the appellate authority, observing that the amendment was not merely clarificatory or curative but introduced a substantive change by excluding duty credit scrips from the value of exempt supplies for ITC reversal purposes.

The Tribunal held that input tax credit is a concession and not a vested right, and the benefit of the amendment could not be claimed for periods prior to its coming into force. Accordingly, the appellate authority erred in granting retrospective effect to the amendment and in exonerating the taxpayer from ITC reversal for the period 2017-2020.

Invocation of Section 74(1) of CGST Act

Addressing the invocation of Section 74(1), the Tribunal found that there was no evidence of fraud, wilful misstatement, or suppression of facts by the taxpayer. The taxpayer had duly filed returns and disclosed the sale of duty credit scrips. The Tribunal relied on the statutory definition of “suppression” and relevant CBIC instructions, holding that mere non-payment or erroneous availment of ITC, absent intent to evade tax, does not justify proceedings under Section 74(1). The Tribunal concluded that the show cause notice under Section 74(1) was unsustainable.

Directions and Outcome

In light of its findings, the GSTAT set aside the appellate authority’s order granting retrospective benefit of the Rule 43 amendment. The Tribunal directed the proper officer to determine the taxpayer’s tax liability afresh under Section 75(2) of the CGST Act, 2017, treating the case as one not involving fraud or suppression, and after providing an opportunity of hearing to the taxpayer.

The appeals were accordingly disposed of, with the Registry directed to upload the final order on the GSTAT portal.