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Client Challenge
During a GST audit, the department proposed an ITC reversal of ₹80 lakhs under Section 16(2)(d), citing non-payment to related-party creditors beyond 180 days. The client, facing a sizeable demand, was prepared to reverse the credit.
The Problem
- Section 16(2) read with Rule 37(1) requires ITC reversal if payment to a supplier isn’t made within 180 days
- The auditor applied this rule to related-party transactions without accounting for a key exception
- Reversing ₹80 lakhs would have meant an unnecessary cash outflow and an incorrect precedent for future audits
Our Approach
- Identified that the proviso to Rule 37(1) deems payment to have been made within 180 days for related-party transactions covered under Schedule I read with Section 15
- Demonstrated that the 180-day reversal requirement does not apply to related-party supplies by deeming fiction in law
- Presented this position with supporting legal reasoning directly to the audit team
The Result
- The department accepted the position
- No ITC reversal required — ₹80 lakhs preserved
- Client gained a documented precedent for similar related-party transactions going forward
Why This Matters
If your business has related-party transactions and an audit has raised a 180-day ITC reversal demand, the question worth asking is whether Rule 37(1)’s proviso was even considered.