GST UPDATE ON MADRAS HC DECISION ON LEVY OF INTEREST ON WRONG AVAILMENT OF ITC

GST UPDATE ON MADRAS HC DECISION ON LEVY OF INTEREST ON WRONG AVAILMENT OF ITC:-

The mechanism to be adopted for computation of interest under GST Laws has been a subject matter of discussion and litigation since its inception. The tussle of the assessees in convincing their point that interest should be computed on “Net Tax Liability” after adjusting the available balance of input tax credit in their electronic credit ledger is evidenced from the number of decisions pronounced by High Courts and the consequent retrospective amendment made in section 50 of the CGST Act, 2017. Nonetheless, the battle does not end with the retrospective amendment as another issue that arises is whether interest is payable on the wrongful availment of credit when the amount of such wrongly availed credit was reversed voluntarily by the assessee by filing DRC-03. The issue recently came before the Hon’ble Madras High Court in the case of M/S F1 AUTO COMPONENTS PVT. LTD. [W.P. NO. 6631 OF 2021] which is the subject matter of discussion of our present update.

The petitioner challenged the levy of interest on cash remittances as well as remittances by way of adjustment of electronic credit ledger. As far as the levy of interest on remittance by way of adjustment of input tax credit was concerned, the same was set aside on the grounds that the issue is clearly covered by the decision given in the case of MAANSAROVAR MOTORS PRIVATE LIMITED VS THE ASSISTANT COMMISSIONER, POONAMALLEE DIVISION, CHENNAI [W.P. NO. 28437 OF 2019] wherein it was held that interest is leviable after adjustment of ITC available with the assessee. However, as regards interest liability on amount paid by way of remittance in cash was concerned, the Hon’ble High Court held that such interest is compensatory in nature for the loss of revenue and so it should be mandatorily upheld. However, the Hon’ble High Court categorically stated that the provisions of section 42 are not invoked in the present case as it can be invoked only in a situation where the wrongful availment of input tax credit is due to mismatch which is on account of error in the database of revenue. This decision is beneficial to the assessee as the Hon’ble High Court held that since it is not the case of mismatch under section 42 of the CGST Act, 2017, it is simply case of wrongful availment of input tax credit. This has resulted in levy of interest at lower rate of 18% as against the higher rate of 24% where wrongful availment of input tax credit is on account of mismatch under section 42 of the CGST Act, 2017. The rates of interest can be taken from the Notification No. 13/2017-Central Tax dated 28.06.2017.

It is worth mentioning that if the wrongly availed input tax credit has not been utilised by the assessee, interest liability should not arise. This view has been consistently taken by numerous High Courts both in negative list era and GST era. Reference may be made to the decision given by Hon’ble Patna High Court in the case of M/S COMMERCIAL STEEL ENGINEERING VS STATE OF BIHAR [W.P. NO. 2125 OF 2019] wherein it was concluded that interest is to be charged from the assessee only if the wrongful availment of input tax credit was used for reducing output tax liability. The decision seeks to provide relief to the assessees who inadvertently claimed wrong input tax credit, say for example- if the amount of input tax credit available was wrongly reflected as 1,00,000/- instead of Rs. 10,000/-. In such a scenario, levying interest for wrongful availment of input tax credit when the said credit was not utilised against output tax liability is sheer harassment and unbearable burden on the assessee. Consequently, revenue authorities ought to take a lenient view in case of unintentional clerical mistakes occurred in claiming input tax credit because the assessee has not been provided with the facility to revise their GSTR-3B return.

The decision given in the case of M/S F1 AUTO COMPONENTS PVT. LTD. does not touch upon the aspect of the requirement of interest when the wrongly availed input tax credit has not been utilised against output tax liability, nonetheless, it does provide the petitioner the benefit of reduced interest rate of 18% as against 24% by concluding that the provisions contained in section 42 are not attracted in the present case. However, in our humble opinion, we wish to point out that a major observation was missed while pronouncing this decision. If the provisions contained in section 50 of the CGST Act, 2017 are minutely observed, it is found that it pertains to “interest on delayed payment of tax” and not for “recovery of wrongful availment of input tax credit”. Moreover, the sub-section (3) of the section 50 contains provision to levy 24% interest only where there is excess/undue claim of input tax credit under section 42(10) or 43(10) of the CGST Act, 2017 which has been clearly denied by the High Court. Consequently, it is respectfully submitted that the assertion that interest is compensatory and mandatorily leviable requires re-consideration, particularly when there is mere wrongful availment of ITC without attracting section 42/43 of CGST Act, 2017. The interpretation which equates wrongful availment of input tax credit with the short payment of tax definitely needs to be re-visited in light of the explicit provisions contained in section 50 of the CGST Act, 2017. Expert views from our netizens would be whole-heartedly welcomed.

This is solely for educational purpose.

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GST UPDATE ON MADRAS HC DECISION ON LEVY OF INTEREST ON WRONG AVAILMENT OF ITC

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