ITC rule: Bombay High Court seeks response from state's revenue dept

The Bombay High Court has recently granted an interim stay on a court order asking Enzene Biosciences Ltd to reverse proportionate Input Tax Credit (ITC) on interest earned on fixed deposits(FDs), and directed the pharmaceutical company to pay 10 per cent of the total tax amount.

The court has also sought a response from the Maharashtra State and Revenue Department in the case

“Pending the final disposal of this petition, the demand in the impugned order dated 16 April, 2024 is stayed subject to the Petitioner depositing in this court 10% of the tax amount of Rs 7,54,33,308/- (Seven Crores Fifty Four Lakhs Thirty Three Thousand Three Hundred Eight only) within a period of six weeks from today after giving due notice to the learned counsel for the respondents Nos. 1, 2 and 3. This means that the Petitioner will have to deposit an amount of Rs 75,43,330.8/- within a period of six weeks from today,” the court said. 

Enzene Biosciences Limited and a few other companies have challenged the constitutional validity of Explanation to Rule 43(1)(b) of the Maharashtra Goods and Service Rules, 2017 through a writ petition before the Bombay high court.

During the initial stage of developing the pharmaceutical product, the petitioner (Enzene Biosciences) had incurred a lot of expenditure. The petitioner earned interest income from fixed deposits in the banks, while there was hardly any taxable turnover. 

Since the sizable portion of the total turnover included the interest from the FDs, the revenue department denied the proportionate ITC by placing reliance on the Explanation 1(b) to Rule 43 of the CGST Rules, 2017 (‘Rules’). 

According to the Explanation 1(b) to Rule 43, for the purpose of computing proportionate reversal of ITC on exempted supplies, the value of exempted supplies excludes the value of interest earned by way of accepting deposits, extending loans or advances.

The revenue department had argued that Explanation 1(b) to Rule 43 of the Rules uses the expression “accepting the deposit” and not “extending the deposit”.

It said that in the present case, since no interest has been earned by the petitioner on account of “accepting the deposit”, the benefit of said Explanation would not be available.

The petitioner, on the other hand, argued that Explanation 1(b) to Rule 43 of the Rules is contrary to the recommendations made in the 25th GST Council meeting that favoured the same legal position subsisting in the pre-GST era.

They sought for reading down the language appended to the said Explanation by reading the expression “accepting the deposit” as “extending the deposit”.

The petitioner also relied on SC judgement in Mohit Minerals that held recommendations of GST Council to be sanctimonious.

Harpreet Singh, partner, Deloitte India, said the outcome of this case would be closely watched by the industry as most of the companies are not reversing proportionate input GST towards interest income from fixed deposits, relying on the intent behind the provision to extend the benefit for non-reversal for interest income.