Rule 43 Amendment Excluding Duty Credit Scrips from Exempt Supplies Applies Prospectively; Section 74 Cannot Be Invoked Absent Suppression: GSTAT, Kolkata Bench
Summary: The GSTAT, Kolkata Bench in the case of Commissioner, CGST & CX, Kolkata North Commissionerate v. M/s Power Tech Global Private Limited partially allowed the appeals filed by the Revenue and held that the benefit of exclusion of the value of Duty Credit Scrips from the aggregate value of exempt supplies, introduced by insertion of clause (d) in Explanation 1 to Rule 43 of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”) vide Notification No. 14/2022-Central Tax dated July 05, 2022, operates prospectively and cannot be applied retrospectively for the FY 2017-18 to FY 2019-20. However, since the Revenue failed to establish fraud, wilful misstatement or suppression of facts with intent to evade tax, the Tribunal held that the Show Cause Notice issued under Section 74(1) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) was not sustainable and, invoking Section 75(2) of the CGST Act, directed the proper officer to re-determine the tax liability deeming the notice to have been issued under Section 73 of the CGST Act, after granting an opportunity of hearing. The Tribunal further held that the Revenue’s appeals were maintainable because the dispute involved interpretation of Rule 43 and therefore fell within the exception to the monetary-limit restriction under Circular No. 207/1/2024-GST. It found that clause (d) was a prospective benefit rather than a clarification of an existing ambiguity, and that the taxpayer’s returns and invoices disclosed the relevant transactions, leaving no material evidence of deliberate suppression. The ruling therefore distinguishes the prospective operation of the Rule 43 amendment from the separate failure of the Section 74 proceedings.
Facts
M/s Power Tech Global Private Limited (“the Respondent”) is engaged in the manufacture of electrical apparatus such as switchgears, circuit breakers, surge protection devices, panels, etc. During the FY 2017-18 to FY 2019-20, apart from taxable supplies, the Respondent also sold Duty Credit Scrips received as export incentives under the Merchandise Exports from India Scheme (“MEIS”). The Duty Credit Scrips were notified as an exempt supply w.e.f. October 13, 2017 vide Notification No. 35/2017-Central Tax (Rate) dated October 13, 2017.
On scrutiny, the Revenue noticed that the Respondent had a total taxable turnover of Rs. 17,37,61,985/-, exempt turnover of Rs. 10,93,43,077/- on account of outward supply of MEIS Duty Credit Scrips and had availed common Input Tax Credit (“ITC”) of Rs. 1,95,15,412/-. As per the Revenue’s computation in terms of Section 17(2) of the CGST Act read with Rules 42 and 43 of the CGST Rules, proportionate ITC of Rs. 74,75,604/- attributable to exempt supplies was liable to be reversed. Accordingly, a Show Cause Notice dated August 01, 2024 (“the SCN”) was issued under Section 74(1) of the CGST Act alleging wilful suppression of facts, and the Adjudicating Authority, vide Order-in-Original dated February 02, 2025, confirmed the demand along with interest and equal penalty.
On appeal, the First Appellate Authority, vide Order-in-Appeal dated July 08, 2025 (“the Impugned Order”), set aside the Order-in-Original by treating the amendment made vide Notification No. 14/2022-Central Tax dated July 05, 2022 as clarificatory, procedural and beneficial in nature, thereby applying it retrospectively, placing reliance on Sedco Forex International Drill Inc. v. Commissioner of Income Tax, Dehradun [AIR 2006 SC 428], Hitendra Vishnu Thakur v. State of Maharashtra [(1994) 4 SCC 602], Suchitra Components Ltd. v. Commissioner of Central Excise, Guntur [(2006) 12 SCC 452], Allied Motors (P) Ltd. v. Commissioner of Income Tax [(1997) 224 ITR 677 (SC)] and the Advance Ruling of the Telangana State Authority for Advance Ruling in TSAAR Order No. 12/2023 dated May 24, 2023.
Aggrieved thereby, the Revenue preferred the present appeals before the GSTAT under Section 112(1) of the CGST Act. The Respondent raised a preliminary objection that the appeals were barred by the monetary limit of Rs. 20,00,000/- fixed for filing appeals before the GSTAT vide Circular No. 207/1/2024-GST dated June 26, 2024.
Issues
Whether the appeals filed by the Revenue were maintainable in view of the monetary limit of Rs. 20 lakhs prescribed vide Circular No. 207/1/2024-GST dated June 26, 2024 for filing appeals before the GSTAT?
Whether the insertion of clause (d) in Explanation 1 to Rule 43 of the CGST Rules vide Notification No. 14/2022-Central Tax dated July 05, 2022, excluding the value of Duty Credit Scrips from the aggregate value of exempt supplies, can be applied retrospectively for the FY 2017-18 to FY 2019-20?
Whether the Revenue was legally correct in invoking Section 74(1) of the CGST Act against the taxpayer in the given facts and circumstances of the case?
Held
The GSTAT, Kolkata Bench in Appeal Nos. APL/62/KLK/2026, APL/74/KLK/2026 and APL/75/KLK/2026 held as under:
Observed that, a CBIC circular issued under Section 120(1) read with Section 168(1) of the CGST Act binds the departmental officers but has no binding effect on the Tribunal, though it carries persuasive value [relying on the Principal Bench ruling in Dow Chemical International Private Limited v. Commissioner of State Tax, Mazgaon dated June 04, 2026]. In terms of para 3(viii) of Circular No. 207/1/2024-GST, where a composite order disposes of more than one appeal/demand notice, the monetary limit applies on the total amount of tax, interest, penalty or late fee and not on each individual appeal; further, para 4(iv) excludes matters involving recurring issues and/or interpretation of the Act, Rules, Notifications or Circulars. As the dispute concerns the interpretation and applicability of Rule 43, the appeals were maintainable.
Noted that, the Duty Credit Scrip was not an exempt supply before October 13, 2017 and was incorporated as an exempt supply vide Notification No. 35/2017-Central Tax (Rate); the benefit of exclusion of its value from the aggregate value of exempt supplies was extended only four years later, with prospective effect from July 05, 2022, as per the commencement clause of Notification No. 14/2022-Central Tax.
Noted that, although Section 164(3) of the CGST Act empowers the Central Government to give retrospective effect to the Rules, the rule-making authority, in its wisdom, enforced the amendment prospectively. Looking to the language of Explanation 1 and clause (d), it cannot be presumed that the provision was inserted to clarify any doubt or ambiguity; it was inserted to provide the benefit of exclusion from a prospective date. ITC being concessional in nature, the taxpayer cannot claim its enforcement retrospectively as a vested right [relying on Sree Sankaracharya University of Sanskrit v. Dr. Manu [(2023) 19 SCC 30]].
Held that, the First Appellate Authority was not correct in applying the amendment in Rule 43 retrospectively in favour of the taxpayer, as the judgments relied upon by it were rendered on entirely different legal and factual issues.
Observed that, the taxpayer duly filed its monthly returns in Form GSTR-3B as well as annual returns, disclosed the transactions and produced the invoices of sale of Duty Credit Scrips; the facts were known to both sides. “Suppression of facts” must be construed strictly and cannot be equated with ordinary non-declaration; the act must be deliberate and wilful to evade tax [relying on Anand Nishikawa Co. Ltd. v. Commissioner of Central Excise, Meerut [(2005) 7 SCC 749] and CBIC Instruction No. 05/2023-GST dated December 13, 2023]. No investigation was carried out and no material evidence of fraud, wilful misstatement or suppression of facts was brought on record by the Revenue.
Held that, the SCN issued under Section 74(1) of the CGST Act is not sustainable in the present case.
Directed that, in terms of Section 75(2) of the CGST Act, the proper officer shall determine the tax liability of the taxpayer, deeming the notice to have been issued under Section 73(1) of the CGST Act, within the statutory period and after providing an opportunity of hearing to the taxpayer.
Our Comments
Section 17(2) of the CGST Act restricts ITC to the extent attributable to taxable supplies (including zero-rated supplies) where goods or services are used partly for effecting taxable supplies and partly for exempt supplies, and Rules 42 and 43 of the CGST Rules prescribe the mechanism for such proportionate reversal of common credit. Explanation 1 to Rule 43 (applicable to Rule 42 as well) enumerates specific exclusions from the “aggregate value of exempt supplies”. Pursuant to the recommendations of the 47th GST Council Meeting, clause (d) was inserted in the said Explanation vide Notification No. 14/2022-Central Tax dated July 05, 2022 to exclude the value of supply of Duty Credit Scrips, thereby relieving exporters from reversal of common ITC on sale of such scrips. The present ruling makes it clear that this relief is available only from July 05, 2022, and for the prior period, the sale of Duty Credit Scrips, being an exempt supply w.e.f. October 13, 2017, continues to attract proportionate reversal under Rules 42 and 43.
Prospective Operation of the Amendment
The Tribunal’s reasoning on prospectivity is consistent with the settled principle laid down by the Constitution Bench of the Hon’ble Supreme Court in Commissioner of Income Tax v. Vatika Township Private Limited [(2015) 1 SCC 1], that legislation is presumed prospective unless retrospective operation is provided expressly or by necessary implication, and with Sedco Forex International Drill Inc. (supra), which holds that an Explanation which changes the law, rather than clears an ambiguity, is not presumed to be retrospective. On a contrary note, the Hon’ble Supreme Court in W.P.I.L. Ltd. v. Commissioner of Central Excise, Meerut [(2005) 3 SCC 73] held that a notification which is merely clarificatory of an existing position operates retrospectively; the dividing line, therefore, lies in whether the amendment clarifies an existing entitlement or confers a new benefit. The Tribunal has taken the view that clause (d) confers a fresh benefit, and hence the beneficial-construction line of cases such as Suchitra Components Ltd. (supra) and Allied Motors (P) Ltd. (supra) was held distinguishable.
Invocation of Section 74 and Suppression
On the second limb, the ruling reinforces the consistent judicial view that Section 74 of the CGST Act cannot be invoked mechanically. Fraud, wilful misstatement or suppression of facts, with the intent to evade tax, is the jurisdictional foundation of Section 74, and where the transactions stand duly disclosed in the statutory returns and the dispute is purely interpretational, the extended machinery must fail. This proposition finds support in Pushpam Pharmaceutical Company v. Collector of Central Excise, Bombay [1995 Supp (3) SCC 462], Anand Nishikawa Co. Ltd. (supra), Continental Foundation Joint Venture v. Commissioner of Central Excise [(2007) 10 SCC 337] and Uniworth Textiles Ltd. v. Commissioner of Central Excise, Raipur [(2013) 9 SCC 753], wherein it has been consistently held that mere omission or non-payment does not amount to suppression, and the burden of proving mala fide intent squarely lies on the Revenue. The Tribunal has also drawn strength from the definition of “suppression” in Explanation 2 to Section 74A(12) of the CGST Act and CBIC Instruction No. 05/2023-GST dated December 13, 2023 (issued pursuant to the Hon’ble Supreme Court’s direction in Northern Operating Systems Private Limited), which cautions the field formations against mechanical invocation of Section 74(1).
Consequences of Section 75(2) Redetermination
The direction under Section 75(2) of the CGST Act carries significant practical consequences. Once the charge of fraud, wilful misstatement or suppression fails, the proper officer must re-determine the liability as if the notice were issued under Section 73, whereby the penalty exposure stands reduced from an equivalent penalty to 10% of the tax, and the re-determination remains subject to the limitation discipline of Section 73(10) read with Section 75(3) of the CGST Act. Taxpayers facing Section 74 demands on account of ITC reversal for sale of Duty Credit Scrips for the period prior to July 05, 2022 should, therefore, closely examine both the disclosure trail in their returns and the limitation implications flowing from such re-determination.
*****
(Author can be reached at [email protected])
