Reversed ITC Cannot Be Reclaimed Under Section 16(5): AAR

The West Bengal Authority for Advance Ruling (AAR) has held that the retrospective insertion of Section 16(5) of the CGST Act does not entitle a taxpayer to reclaim Input Tax Credit (ITC) that was earlier reversed pursuant to an advance ruling. The Authority ruled against Eastern Coalfields Limited (ECL), holding that re-availment of such reversed credit would effectively amount to a refund, which is specifically barred under the Finance (No. 2) Act, 2024.

The dispute originated from a longwall mining project undertaken by Eastern Coalfields Limited through M/s China Coal Overseas Development Co. Ltd. and its assignee, M/s Gayatri Projects Limited (GPL). GPL had issued invoices for services rendered during January, February and March 2020, on the basis of which ECL availed ITC. However, since GPL filed its GST returns for the relevant supplies belatedly in November 2020, the West Bengal AAR, through its ruling dated 9 August 2021, held that the credit was inadmissible under Rule 36(4) of the GST Rules and directed ECL to reverse the ITC. The credit was accordingly reversed.

Subsequently, Section 16(5) was inserted through the Finance (No. 2) Act, 2024 with retrospective effect from 1 July 2017. Relying on this amendment, ECL approached the Authority seeking clarification on whether it could now reclaim the ITC that had earlier been reversed.

Before the Authority, ECL argued that the retrospective amendment altered the legal position from the very inception and therefore the earlier denial of ITC could no longer survive. It contended that the amendment was beneficial in nature and intended to regularise availment of ITC for past tax periods. According to the applicant, reclaiming previously reversed credit could not be equated with seeking a refund.

The Authority examined the scope of Section 16(5) and observed that the provision merely extends the time limit for availing ITC for specified financial years and overrides only the restriction contained in Section 16(4).

“For the above noted financial years eligibility and conditions of availing ITC should be understood keeping aside the provisions of Section 16(4). However, the other guiding sub-sections of Section 16, especially Section 16(2), continue to apply.”

The AAR noted that ECL had already availed the disputed ITC within the prescribed time and the earlier rulings were based on non-compliance with Rule 36(4) and the conditions governing eligibility of credit. Therefore, the retrospective insertion of Section 16(5) did not create any new entitlement in favour of the applicant.

The Authority further examined Section 150 of the Finance (No. 2) Act, 2024, which prohibits refund of tax paid or ITC reversed that would not have been paid or reversed had the amendment existed earlier.

“Any reclaim of ineligible and reversed Input Tax Credit is practically synonymous with refund, which is excluded from the scope of Section 150 of the Finance (No. 2) Act, 2024.”

Holding that re-availment of the reversed credit would amount to a refund barred by the statute, the Authority answered the question in the negative and ruled that Eastern Coalfields Limited is not entitled to reclaim the ITC earlier reversed on invoices issued by Gayatri Projects Limited for January, February and March 2020.

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