Legal Win: Companies Can Claim Import Tax Credits Without Restrictive Procedural Barriers Under Rule 36(4)

The HC ruled in favor of the transferor company regarding Input Tax Credit (ITC) claims on imports. The court set aside show-cause notices issued by tax authorities, finding that ITC restrictions under Rule 36(4) do not apply to import-related invoices. The HC mandated that the proper officer must grant a personal hearing, consider prior proceedings, and allow the company to explain discrepancies in tax returns. The case was remanded for fresh consideration with procedural fairness.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

• Whether the transferor company was entitled to claim Input Tax Credit (ITC) on IGST paid on imports despite discrepancies between GSTR-2A and GSTR-3B returns for the tax period April 2018 to March 2019;
• Whether the restriction on availment of ITC under sub-rule (4) of Rule 36 of the CGST Act, 2017 applies to invoices related to import of goods and other categories outside the ambit of sub-section (1) of Section 37;
• Whether the proper officer was justified in initiating proceedings and issuing show-cause notices against the transferor company without granting an opportunity of personal hearing as mandated under Section 75(4) of the CGST Act;
• Whether the prior proceedings and explanations submitted by the transferor company regarding the difference in ITC claimed were appropriately considered by the authorities;
• The procedural propriety and legality of the orders dated February 5, 2024 and May 15, 2024 passed under Section 73 of the CGST Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to ITC on IGST paid on imports despite discrepancies in GSTR-2A and GSTR-3B

Relevant legal framework and precedents: The Court referred to Circular No.123/42/2019-GST dated November 11, 2019 issued by the Government of India, Ministry of Finance, Department of Revenue, Central Board of Indirect Taxes and Customs. The circular clarifies that the restriction on availment of ITC under sub-rule (4) of Rule 36 of the CGST Act applies only to invoices/debit notes which suppliers are required to upload under sub-section (1) of Section 37. It explicitly excludes ITC claims related to IGST paid on imports, documents issued under Reverse Charge Mechanism (RCM), and credit from Input Service Distributors (ISD), provided eligibility conditions are met.

Court's interpretation and reasoning: The Court accepted the submission that the transferor company was entitled to claim ITC on imports since such invoices are not required to be uploaded by suppliers under Section 37(1). The difference of Rs. 1,84,15,984/- noted between GSTR-2A and GSTR-3B was largely attributable to ITC claimed on imports amounting to Rs. 1,80,46,140/-. The remaining difference of Rs. 3,69,844/- had been reversed by the transferor company in March 2019, thus explaining the discrepancy.

Key evidence and findings: The transferor company had explained the difference in response to a pre-show-cause notice (GST DRC-01A), and the authorities had initially accepted this explanation and dropped proceedings. However, subsequent show-cause notices were issued again on the same issue.

Application of law to facts: The Court found that the transferor company's claim of ITC on imports was legally permissible and the explanation for the difference in returns was valid.

Treatment of competing arguments: The respondents argued that since the transferor company did not respond to the later show-cause notice, the explanation was not considered. The Court noted this but emphasized the legal entitlement of the petitioner to claim ITC on imports and the necessity of allowing them to present their case.

Conclusions: The transferor company was entitled to claim ITC on IGST paid on imports notwithstanding the difference in GSTR-2A and GSTR-3B returns.

Issue 2: Applicability of restriction on ITC availment under Rule 36(4) and Section 37(1)

Relevant legal framework and precedents: The Court relied on Circular No.123/42/2019-GST and the provisions of the CGST Act, particularly Rule 36(4) and Section 37(1), which govern the uploading of invoices by suppliers and restrict ITC availment if invoices are not uploaded.

Court's interpretation and reasoning: The Court reiterated that the restriction on ITC applies only to invoices/debit notes that suppliers are mandated to upload under Section 37(1). ITC related to imports, RCM, and ISD credits fall outside this ambit and are not subject to such restrictions.

Application of law to facts: Since the ITC claimed by the transferor company was primarily on imports, the restriction under Rule 36(4) did not apply.

Conclusions: The restriction on ITC availment under Rule 36(4) is not applicable to ITC claimed on import of goods.

Issue 3: Failure to grant opportunity of personal hearing under Section 75(4) of the CGST Act

Relevant legal framework and precedents: Section 75(4) of the CGST Act mandates that before passing any order under Section 75, the proper officer must grant the person concerned an opportunity of being heard.

Court's interpretation and reasoning: The Court noted that the show-cause notices issued did not provide the transferor company an opportunity of personal hearing. This procedural lapse was significant as the opportunity to be heard is a mandatory requirement and a fundamental principle of natural justice.

Key evidence and findings: The respondents conceded that no personal hearing was offered before passing the impugned orders.

Application of law to facts: The Court held that the failure to grant a hearing vitiated the orders passed by the proper officer.

Treatment of competing arguments: While the respondents justified the orders based on the absence of response from the transferor company, the Court emphasized that the procedural safeguard of hearing cannot be bypassed.

Conclusions: The orders passed without granting personal hearing were liable to be set aside and the matter remanded for fresh consideration after hearing the petitioner.

Issue 4: Consideration of prior proceedings and explanations submitted by the transferor company

Court's interpretation and reasoning: The Court observed that the same issue had been raised previously and the transferor company's explanation was accepted, leading to dropping of proceedings. The re-initiation of proceedings on the same ground without considering the earlier acceptance was questionable.

Application of law to facts: The Court found that the transferor company's inability to respond to the later show-cause notice was due to the ongoing amalgamation process, which was a relevant fact to be considered.

Conclusions: The respondents ought to have taken into account the earlier acceptance and the peculiar circumstances before proceeding.

Issue 5: Legality and propriety of the orders dated February 5, 2024 and May 15, 2024

Court's interpretation and reasoning: Given the failure to grant hearing and the valid explanation for the difference in ITC claims, the Court found the impugned orders unsustainable.

Conclusions: The orders were set aside and the matter remanded for fresh decision on merits after providing the petitioner an opportunity of hearing.

3. SIGNIFICANT HOLDINGS

The Court held:

"The restriction of availment of ITC is imposed only in respect of invoices/debit notes, details of which are required to be uploaded by suppliers under sub-section (1) of Section 37 and which have not been uploaded. Therefore, taxpayers may avail full ITC in respect of IGST paid on import, documents issued under Reverse Charge Mechanism (RCM), credit revenue from ISD, etc., which are outside the ambit of sub-section(1) of Section 37, provided that eligibility conditions for availment of ITC are met in respect of the same."

"No opportunity of personal hearing was given, which is mandatorily required to be provided under Section 75 (4) of the said Act."

"The petitioner should be afforded with an opportunity to appropriately explain the discrepancy that had occurred including the difference in relation to the GSTR-2A and GSTR-3B filed by the transferor company."

Core principles established include:

• The entitlement to claim ITC on IGST paid on imports is not subject to the restrictions under Rule 36(4) and Section 37(1) of the CGST Act;
• Procedural fairness mandates that no order under Section 75 can be passed without granting the taxpayer an opportunity of personal hearing;
• Authorities must consider prior proceedings and explanations before initiating fresh proceedings on the same issue;
• Where procedural lapses occur, the appropriate remedy is to set aside the impugned orders and remand for fresh consideration on merits.

Final determinations:

• The orders dated February 5, 2024 and May 15, 2024 were set aside;
• The matter was remanded to the proper officer for fresh decision after granting personal hearing to the petitioner;
• The petitioner was directed to submit explanation and respond to the notice within the timeframe fixed by the proper officer;
• The petitioner was also directed to pay Rs. 50,000/- to the High Court Legal Services Authority as a condition for relief due to belated approach to the Court.

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