No Mandatory ITC Reversal on Post-Sale Discounts by the Buyer, if GST liability paid by raising Debit Note: Gujarat High Court
The Gujarat High Court in Shree Ambica Auto Sales and Service & Anr. v. Union of India & Anr. held that GST law does not mandatorily require a buyer to reverse input tax credit (ITC) merely because the seller issues post-sale discount credit notes. The petitioners, automobile dealers, had availed ITC on vendor invoices and, upon receiving discount credit notes, issued debit notes and discharged output tax in GSTR-1 and GSTR-3B. Due to incorrect column reporting in GSTR-1, a mismatch arose on the GST portal, leading authorities to coerce ITC reversal of ₹10.99 crore and issue a show cause notice proposing ₹34.26 crore reversal, despite ₹42.75 crore tax already paid. The Court found the situation revenue neutral and observed that Section 15(3)(b) does not impose a mandatory ITC reversal obligation on buyers. Interpreting Sections 37(3) and 39(9) purposively, it allowed rectification beyond statutory timelines where no revenue loss occurred, quashed the demand order, and directed reopening of the GST portal for correction.
Facts:
Shree Ambica Auto Sales and Service & Anr. (“the Petitioners”) are dealers of Tata Motors vehicles who availed ITC on vendor invoices, issued debit notes on receiving post-sale discount credit notes from vendor, discharged output tax thereon via GSTR-1/GSTR-3B, but faced ITC mismatch due to wrong column reporting of debit notes in GSTR-1.
Union of India & Anr. (“the Respondents”) coerced reversal of Rs.10,99,06,850/- ITC via DRC-03 during inspection, issued SCN dated October 06, 2023 proposing Rs.34,26,33,614/- ITC reversal against Rs.42,75,68,473/- tax already paid, and passed order dated December 26, 2023 refusing appropriation.
The Petitioners’ contention was that impugned order dated December 26, 2023 is without jurisdiction as tax paid exceeded proposed reversal and that the vendor bears disallowance risk under Section 15(3)(b) if buyer does not reverse ITC per Section 43. Therefore, no mandatory reversal exists at the buyer’s end, and they seek rectification of GSTR-1 for the impugned period.
The Respondent did not dispute no revenue loss if rectification permitted, but denied appropriation confirming demand requiring refund claim on debit note tax. The Petitioners’ grievance was that the payment was coerced, despite revenue neutrality and that denial of rectification causing prejudice despite no tax liability, hence approaching via R/Special Civil Application No.1277/2024 and 783/2021 before this court.
Issue:
Whether the buyer is mandatorily required to reverse ITC on post-sale discount credit notes issued by seller, and whether rectification/amendment of GSTR-1/GSTR-3B is permissible beyond due date in revenue neutral mismatch cases due to portal reporting error?
Held:
The Hon’ble Gujarat High Court in R/Special Civil Application No. 1277 of 2024 held as under:
- Observed that, the Petitioners claimed ITC on vendor invoices, issued debit notes on credit notes for discounts, admitted output tax liability thereon in GSTR-1/GSTR-3B, effectively reducing ITC.
- Noted that, GST portal matching considers only buyer-reported credit notes received, ignores buyer-issued debit notes despite tax paid thereon reducing ITC, causing GSTR-2A mismatch from wrong GSTR-1 column reporting.
- Held that, no difference in actual tax liability even assuming authorities’ stand, tax paid Rs.42,75,68,473/- exceeds proposed reversal Rs.34,26,33,614/- and is a revenue neutral situation.
- Observed that, there is no statutory provision under the GST Acts mandatorily requiring the buyer to reduce input tax credit on the basis of credit notes issued by the seller and that the vendor liable under Section 15(3)(b) if buyer does not reverse.
- Held that, provisions of Section 37(3) read with Sections 38, 39(9), 39(10) require purposive interpretation allowing bona fide inadvertent rectification despite portal limits/provisos where no revenue loss, as GST electronic regime accommodates human errors without illegal gain.
- Quashed order passed by the Respondents dated December 26, 2023 and directed respondents to open GST portal within four weeks for Petitioners to amend/rectify GSTR-1/GSTR-3B within ten days or accept manual application if portal not opened, with consequential relief.
Our Comments:
The judgment relies on Bombay HC in Star Engineers I Pvt. Ltd. v. Union of India [Writ Petition No.15368 of 2023, dated December 14, 2023], directing amendment/rectification of GSTR-1 beyond due date via portal/manual where inadvertent reporting error caused mismatch but no revenue loss and purposively interpreting Section 37(3) r/w 39(9) beyond provisos for bona fide errors in electronic GST regime.
Relevant Provisions:
Section 15(3)(b) of the CGST Act, 2017:
“15. Value of Taxable Supply.-
(3) The value of the supply shall not include any discount which is given-
(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b) after the supply has been effected, if-
(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.”
Section 37(3) of the CGST Act, 2017
37. Furnishing details of outward supplies. –
“(3) Any registered person, who has furnished the details under sub-section (1) for any tax period shall, upon discovery of any error or omission therein, rectify such error or omission in such manner as may be prescribed, and shall pay the tax and interest, if any, in case there is a short payment of tax on account of such error or omission, in the return to be furnished for such tax period:
Provided that no rectification of error or omission in respect of the details furnished under sub-section (1) shall be allowed after the thirtieth day of November following the end of the financial year to which such details pertain, or furnishing of the relevant annual return, whichever is earlier.
Provided further that the rectification of error or omission in respect of the details furnished under sub-section (1) shall be allowed after furnishing of the return under section 39 for the month of September, 2018 till the due date for furnishing the details under subsection (1) for the month of March, 2019 or for the quarter January, 2019 to March, 2019.”
Section 39(9) of the CGST Act, 2017
39. Furnishing of returns.-
“(9)Where any registered person after furnishing a return under sub-section (1) or sub-section (2) or sub-section (3) or subsection (4) or sub-section (5) discovers any omission or incorrect particulars therein, other than as a result of scrutiny, audit, inspection or enforcement activity by the tax authorities, he shall rectify such omission or incorrect particulars in the return to be furnished for the month or quarter during which such omission or incorrect particulars in such form and manner as may be prescribed, subject to payment of interest under this Act:
Provided that no such rectification of any omission or incorrect particulars shall be allowed after the thirtieth day of November following the end of the financial year to which such details pertain, or the actual date of furnishing of relevant annual return, whichever is earlier.”
******
(Author can be reached at info@a2ztaxcorp.com)
Author Bio
