Karnataka High Court Rules GSTR-2A Mismatch Insufficient to Deny ITC on Imports and SEZ Procurements: Biocon Limited Case

Background and Overview

The Karnataka High Court recently delivered a significant ruling in the matter of Biocon Limited Vs State of Karnataka, offering critical judicial guidance on the permissibility of denying Input Tax Credit (ITC) solely on the basis of a mismatch between GSTR-3B and GSTR-2A, particularly where the discrepancy arises from import transactions and procurements made from Special Economic Zone (SEZ) units.

The case arose from an audit conducted for Financial Year 2018-19, culminating in an Order-in-Original dated 22.02.2024 passed by the Deputy Commissioner of Commercial Taxes under Section 73(9) of the CGST/KGST Act, 2017. The final demand confirmed by the adjudicating authority included tax liability of ₹30,37,84,642/-, interest of ₹29,14,02,162/-, and penalty of ₹3,03,78,464/-, totalling a substantial sum that the assessee contested before the High Court.

The Audit Proceedings and Demand History

The controversy originated from audit observations by the tax department for the tax period April 2018 to March 2019. The sequence of proceedings was as follows:

  1. The audit team initiated observations and issued notices following reconciliation checks.
  2. A pre-intimation was issued in Form GST DRC-01A dated 06.12.2023 demanding payment of ₹1,15,15,27,040/- along with applicable interest under Section 73(5) of the CGST/KGST Act, 2017.
  3. The assessee submitted a reply on 14.12.2023.
  4. Thereafter, a Show Cause Notice (SCN) dated 29.12.2023 was issued under Section 73(1) of the CGST/KGST Act, demanding ₹90,82,01,601/- along with interest and penalty.
  5. The assessee filed a detailed written reply on 29.01.2024, participated in a personal hearing, and also submitted written submissions.
  6. The adjudicating authority ultimately passed the impugned Order-in-Original dated 22.02.2024 under Section 73(9) of the CGST/KGST Act.

Aggrieved by the final order, the assessee filed a Writ Petition before the Karnataka High Court seeking, among other reliefs, a Writ of Certiorari to quash the impugned order on the grounds that it was passed in violation of principles of natural justice, inconsistency in approach, and contrary to the provisions of law.

The Core Dispute: ITC Denial of ₹20,00,82,381 Due to GSTR-2A Mismatch

Nature of the Allegation

The most critical issue before the Court concerned the denial of ITC amounting to ₹20,00,82,381/- on the allegation that the ITC claimed by the assessee in GSTR-3B for the period April 2018 to March 2019 exceeded the ITC visible in GSTR-2A. The department's audit team, upon comparing monthly IGST credits reported in GSTR-3B under Table 4(A)(4) and 4(A)(5) with auto-drafted entries in GSTR-2A (Part A and Part B, excluding RCM supplies), found what it characterised as an excess availment of ITC in violation of Section 16(2) of the CGST/KGST Act.

The department computed the shortfall/excess figures on a month-by-month basis across the entire financial year and arrived at a net excess IGST ITC of ₹20,00,82,381/-, on which it levied interest at 18% for 64 months amounting to ₹19,20,79,085/- and a penalty of ₹2,00,08,238/-, demanding a total of ₹41,21,69,705/- under this head alone.

The Assessee's Explanation

The assessee offered a detailed reconciliation both in its reply to the DRC-01A and subsequently to the SCN. The core explanation was straightforward: