Appellate Authority allows payment of incremental tax liability without interest w.r.t issuance of debit notes due to price escalation

 This Tax Alert summarizes a recent order passed by the Commissioner CGST (Appeals) , being the First Appellate Authority, regarding the applicability of interest on differential tax pursuant to issuance of debit notes for upward revision of price.

The key observations of the Commissioner (Appeals) are:

• A debit note for price escalation is a ‘supplementary invoice’ and not a ‘revised invoice’. It increases the supplier’s tax liability and the same must be paid in the return for the period in which the debit notes were issued.
• Time of supply on issuance of debit notes cannot be determined under Section 12(2) of the Central Goods and Services Tax Act, 2017 (CGST Act). Rather, it should be determined under the residuary provision of Section 12(5) i.e., the date on which return under Section 39 is required to be filed.
• Interest liability under Section 50(1) arises only if there is a failure to pay tax within the prescribed period. Since tax on debit notes was paid in the same return period in which the debit notes were issued, there was no failure to pay tax within the prescribed period.
• Applying for provisional assessment under GST is optional, not mandatory. It serves as a facility for taxpayers who are unable to ascertain the correct value or applicable tax rate for their goods or services at the time of issuing the initial invoice.

Basis above, the Appellate Authority set aside the order passed by proper officer demanding interest and penalty on issuance of debit notes.

Comments:

• The Order, while from the first appellate authority, gains relevance as it addresses a situation most commonly prevalent in the continuous supply contracts where debit notes are raised basis commercial terms on price escalations.
• Under the erstwhile excise regime, the Larger Bench of the Supreme Court had held that interest was payable on differential excise duty paid post removal of goods, when the price at the time of removal was subject to revision under the escalation clause. [TS-309-SC-2019-EXC].
• The order passed by the Commissioner (Appeals) could be contested by the department before the higher appellate forums.