Interest liability on ITC reversal due to credit note

[Aap Consulting Pvt. Ltd.]

Dear Experts,

Please guide. 

Invoice received in - Nov 2021

ITC availed and utilized in - Dec 2021

Credit note issued by supplier in Feb 2022

ITC reversed in Dec 2022

We have already paid interest from Feb 22 to Dec 22; however, the department is seeking interest from date of availment and utilization of ITC ie. Dec 21

As per my understanding, the ITC became reversible only after issuance of credit note, hence no interest liability for the period prior to issuance on Credit Note.

Also technically the entire tax was deposited in governments account in Dec 21 only and the supplier reduced the tax liability (pertaining to credit note amount) only in Feb 22.

[Sadanand Bulbule]

Reversal obligation arises only after supplier issues a credit note (Feb 2022).  Hence, interest liability (u/s 50) can only be computed from Feb 2022 until actual reversal in Dec 2022. You have already discharged this interest; no further liability arises.

Reliance can be placed on Supreme Court judgment in Ecom Gill Coffee Trading (2023 (3) TMI 533 - Supreme Court) and CBIC Circular 137/07/2020-GST clarifying that interest is on “wrongly availed and utilized ITC,” not otherwise.

Your treatment, paying interest from December 2022 is correct. Departments demand from December 2021 is not sustainable. You can respond accordingly.

[KASTURI SETHI]

Dear Querist,

You are on right track. There is no legal force in the contention of the department.

[Shilpi Jain]

Also, it is a settled principle that interest is only a compensation for any loss that has occurred to the exchequer. Pratibha processors decision of the Supreme Court can be relied in this case and no further interest should become liable assuming the supplier had paid the taxes.

What was the reason for the credit note though? Could add some more reasons for taking the above stand.

AI Summary

Interest liability on reversed ITC limited to period from credit note issuance, earlier interest demand unsustainable. Interest on reversed ITC arises only for the period during which the credit was wrongly availed and utilized after the event triggering reversal. Where a supplier issued a credit note in February 2022 and ITC was reversed in December 2022, interest should be computed from issuance of the credit note until actual reversal; demands for interest from the earlier date of availment are unsupportable under the cited authority and administrative guidance.