GSTAT Ernakulam Says ITC Eligibility Must Be Decided Under CGST Act, Sets Aside ₹7.07 Lakh Denial

The Ernakulam Bench of the Goods and Services Tax Appellate Tribunal (GSTAT) on 8 September held that refund of unutilised Input Tax Credit (ITC) cannot be denied on the ground of ineligibility unless the credit is first disallowed through proceedings under the prescribed provisions of the GST law.

A Bench comprising Vice-President Subramanya Rayaprol and Technical Member Ramamoorthi Sriram allowed the appeal filed by Augustan Textile Colours, a unit of Augustan Knitwear Pvt Ltd, and set aside the denial of Rs.7.07 lakh from its refund claim. The Tribunal held:

“...the fundamental legal principle remains that when there are clear and distinct statutory provisions governing the determination of ITC eligibility and refund of unutilized ITC, refund of unutilized ITC cannot be denied on the ground of non-eligibility without a formal proceeding to disallow such ITC under the relevant provision…”

Augustan Textile Colours manufactures garments. Its inputs attracted GST at 18%, while its outward supplies were taxed at 5%, resulting in accumulation of ITC due to an inverted duty structure.

The appellant claimed a refund of Rs.18.41 lakh for the period from July to September 2019. The adjudicating authority rejected Rs.9.72 lakh and sanctioned the remaining amount. The First Appellate Authority subsequently granted partial relief of Rs.2.64 lakh but upheld the rejection of Rs.7.07 lakh.

Before the Tribunal, the appellant argued that the show cause notice merely stated that the refund was inadmissible due to a “wrong ITC claim”. It did not provide invoice-wise details or specify why the credit was ineligible.

The Tribunal found that the notice was vague and did not identify the basis on which the ITC was proposed to be rejected. It relied on the Supreme Court's decision in Commissioner of Central Excise, Bangalore Vs. Brindavan Beverages (P) Ltd., which held that a show cause notice must clearly set out the allegations to enable the taxpayer to properly defend itself.

It also noted that the First Appellate Authority had rejected the ITC on the ground that the goods and services were not used in furtherance of business. This ground had not been raised in the show cause notice. The Bench held that the proceedings were vitiated from the show cause notice stage itself. It observed:

“...even at the SCN stage itself, the present proceedings are vitiated on account of being vague and lacking details, thus depriving the tax payer of a proper opportunity to meet the allegations indicated in the SCN”

Further the Tribunal held that the First Appellate Authority had travelled beyond the scope of the show cause notice by relying on a ground that was never put to the appellant, violating the principles of natural justice.

It relied on Paragraphs 20 and 21 of Circular No.125/44/2019-GST, which provide that where refund is proposed to be rejected on the ground of ineligible ITC, proceedings under Section 73 or 74 must be followed for recovery of such ITC.

The Bench held that refund proceedings under Section 54(3) could not be used to determine the eligibility of ITC when no proceedings under Section 73 or 74 had been initiated to disallow the credit.

It observed that until an order is passed under Section 73 or 74 disallowing the ITC, the credit availed by the appellant is presumed to be valid. It noted that no such proceedings had been initiated against the appellant. It held:

“We find that under the statute, any determination of the eligibility or otherwise of an input tax credit is permissible only under section 73/ 74. There cannot be any disallowance of input tax credit dehors the above provisions. The natural corollary to the above statement is that until and unless an order has been passed under section 73 / 74 disallowing the input credit taken, the input credit is presumed to be in order. In the instant case, no such proceedings been initiated against the appellant”

Accordingly, the GSTAT allowed the appeal and set aside the portion of the appellate order sustaining denial of the Rs.7.07 lakh refund, with consequential relief.

For Appellant: Advocate Padmanathan K.V

For Respondent: Anil Gopinath, Authorized Representative