The Bombay High Court recently granted an interim stay on an order instructing Enzene Biosciences Ltd (petitioner) to reverse proportionate input tax credit (ITC) on interest income earned on fixed deposits (FDs).
The court stayed the demand for the petitioners until the final disposal of the petition, subject to a deposit of 10 per cent of the demand. The court has also sought a response from the Maharashtra State and Revenue Department.
Click here to connect with us on WhatsApp
“Pending the final disposal of this petition, the demand in the impugned order dated April 16, 2024, is stayed subject to the petitioner depositing in this court 10 per cent of the tax amount of Rs 7,54,33,308 (seven crore fifty-four lakh 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 the explanation to Rule 43(1)(b) of the Maharashtra Goods and Service Tax 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 banks while there was hardly any taxable turnover.
Since a sizable portion of the total turnover included the interest from the FDs, Revenue denied the proportionate ITC by placing reliance on the explanation to Rule 43(1)(b) of the CGST Rules, 2017.
Per the explanation to Rule 43(1)(b), 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 argued that the explanation to Rule 43(1)(b) of the rules uses the expression “accepting the deposit” and not “extending the deposit.”
It stated that in this case, since no interest has been earned by the petitioner on account of “accepting the deposit,” the benefit of the said explanation would not be available.
The petitioner, on the other hand, argued that the explanation to Rule 43(1)(b) of the rules is contrary to the recommendations made in the 25th GST Council meeting, which favoured the same legal position subsisting in the pre-GST era.
They sought to read down the language appended to the explanation by interpreting the expression “accepting the deposit” as “extending the deposit.”
The petitioner also relied on the Supreme Court judgement in Mohit Minerals, which held that recommendations of the GST Council are sacrosanct.
Harpreet Singh, partner, Deloitte India, said the outcome of this case would be closely watched by the industry as most companies are not reversing proportionate input GST towards interest income from fixed deposits, relying on the intent behind the provision to extend the benefit of non-reversal for interest income.
Yogesh Kale, executive director, Nangia Andersen India, said the explanation to sub-rule 1(b) creates an exception by providing that input tax credit in respect of capital goods used during the construction phase of buildings or apartments intended for sale, for which the entire consideration is received before obtaining the completion certificate, shall be considered to be nil. “It would be interesting to see what the High Court rules on the constitutional validity of the said provision,” he said.
First Published: Oct 14 2024 | 8:04 PM IST