360° Professional Guide: ITC Blocking, Reversal & Defence During GST Audit

By CA Surekha S Ahuja

Input Tax Credit (ITC) forms the foundation of the Goods and Services Tax (GST) framework. It ensures tax neutrality and prevents cascading by allowing credit of taxes paid on inputs and input services. However, in recent years, departmental audits and investigations have increasingly resulted in arbitrary ITC blockings and reversal proposals, often without adequate legal basis or proper appreciation of facts.

This guidance note presents a comprehensive legal, procedural, and judicial analysis of ITC blocking, reversal, and eligibility under GST, viewed from the taxpayer’s standpoint. It also integrates case law, departmental practices, and strategic responses during audits.

Statutory Framework Governing ITC

1. Section 16 of the CGST Act, 2017: Grants entitlement to ITC when four conditions are satisfied—
   (a) Possession of a valid tax invoice;
   (b) Receipt of goods or services;
   (c) Tax charged has been actually paid to the Government; and
   (d) Returns have been duly filed.

2. Section 17(5): Enumerates specific cases where ITC is blocked (e.g., personal use, food and beverages, motor vehicles, club memberships, etc.). These restrictions are exceptions and must be strictly construed.

3. Rule 86A of the CGST Rules, 2017: Authorizes the proper officer to block ITC in the Electronic Credit Ledger (ECL) where he has “reasons to believe” that such credit has been fraudulently availed or is ineligible. However, this power is conditional upon recording such reasons in writing and is valid only for a period of one year unless extended through lawful proceedings.

4. Sections 65 and 66: Empower the department to conduct audits and special audits, respectively, and form the practical basis for ITC-related verifications.

Eligible and Ineligible ITC: Core Distinction

Category	Eligibility	Legal Reference	Remarks
Inputs and input services used for business	Eligible	Section 16(1)	ITC is allowable if used for taxable output supplies.
Inputs used for personal consumption or exempt supplies	Not eligible	Section 17(1) & (2)	Proportionate reversal required where used partly for exempt output.
Motor vehicles and personal consumption items	Not eligible	Section 17(5)(a)–(h)	Exceptions apply where used for transport or supply.
Capital goods used in business	Eligible	Section 16(1)	ITC admissible; depreciation cannot include GST portion.
Fund-raising and share issue expenses	Eligible	Section 16(1); supported by Sutherland Global Services v. ACIT	ITC allowable if directly linked with business activities.
Surplus temporarily invested in mutual funds	Partially eligible	Section 17(1)/(2)	ITC not to be reversed unless business ceases to be principal activity.

ITC Blocking Under Rule 86A: Legal Discipline and Judicial Limits

Rule 86A empowers tax officers to block credit where there are valid “reasons to believe” that ITC has been availed fraudulently. However, several courts have emphasized that this provision cannot be exercised mechanically or on generic alerts.

In M/s Pilcon Infrastructure Pvt. Ltd. v. State of U.P. (2025), the Allahabad High Court held that mere receipt of a generic DGGI alert alleging a supplier to be non-operational does not constitute “reasons to believe.” The Court ruled that absence of recorded, specific reasons in writing renders ITC blocking illegal.

Similarly, in Tata Steel Ltd. v. State of Jharkhand (2020), it was observed that blocking ITC without proper verification violates the principle of reasonableness and cannot continue indefinitely.

The expression “reasons to believe” has been judicially interpreted to mean an objective satisfaction based on tangible material, not mere suspicion or departmental communication. The taxpayer has a right under Rule 86A(2) to submit representation for unblocking.

Departmental Audit and ITC Verification

During a GST audit under Section 65, officers typically examine:

• Invoice-level matching between GSTR-2B, GSTR-3B, and books of accounts.

• Payment evidence to suppliers.

• Validity of suppliers’ GST registration.

• Purpose and nature of goods or services utilized.

• Linkage of ITC to taxable business output.

Where discrepancies are noticed, officers may propose reversal or invoke Rule 86A. However, reversal or blocking can only be justified when statutory conditions under Section 16(2) or restrictions under Section 17(5) are demonstrably violated. A mismatch or alert by itself does not constitute sufficient ground.

Judicial Precedents Supporting Taxpayer Entitlement

1. Dai Ichi Karkaria Ltd. v. CCE (1999) 7 SCC 448 — ITC, once validly availed, is a vested and indefeasible right that cannot be curtailed arbitrarily.

2. Arise India Ltd. v. Commissioner of Trade & Taxes (Delhi HC) (2018) 97 VST 471 — Bona fide purchasers cannot be denied ITC for supplier default when tax has been paid and transactions are genuine.

3. Safari Retreats Pvt. Ltd. v. Union of India (2019) 70 GSTR 500 — ITC on construction activities allowed when used for business; liberal interpretation preferred.

4. Gujarat Narmada Fertilizers Co. Ltd. v. CCE (2009) 19 STR 409 — ITC disallowance requires direct nexus between input and exempt output; incidental use does not warrant reversal.

5. Sutherland Global Services v. ACIT (2020) 117 taxmann.com 247 — Legal and professional services used for business expansion and fund raising are eligible for ITC.

Fund-Raising Expenses and Surplus Investments

1. Fund-Raising Expenses:
Legal, professional, and consulting costs incurred for raising equity or debt are eligible for ITC if the funds are utilized for business operations or expansion. The rationale is that such activities contribute directly to taxable business output and form part of the overall value creation process.

2. Temporary Investment of Surplus in Mutual Funds:
Temporary parking of surplus funds does not transform a trading or manufacturing entity into an investment business. Therefore, ITC reversal cannot be justified merely because a portion of the working capital was invested in mutual funds. Reversal may only be considered proportionately if inputs are used in relation to exempt activities, following the principle established in Gujarat Narmada Fertilizers.

Common Departmental Objections and Taxpayer Responses

Departmental Ground	Legal Counter and Reasoning
Supplier not traceable or inactive	Buyer cannot be penalised if bona fide; ITC allowable under Arise India.
ITC blocked based on alert	Jurisdictional officer must record independent reasons in writing; Pilcon Infrastructure applicable.
ITC on capital/fund-raising expenses	Direct business nexus exists; covered under Sutherland Global Services.
Proportionate reversal due to surplus investments	Predominant use test applies; temporary investments not a basis for reversal.
Time-barred invoice or payment delay	ITC can be reclaimed upon subsequent payment; Rule 37 compliance suffices.
Procedural discrepancies	Substantial compliance doctrine applies; minor errors cannot defeat substantive rights (Dai Ichi Karkaria).

Audit-Stage Defence Strategy for Taxpayers

1. Documentation Discipline: Maintain invoice-wise reconciliation, supplier confirmations, and proof of tax payment.

2. Seek Written Grounds: Always request the officer to provide the statutory basis for proposed reversal or blocking.

3. Submit Detailed Representation: Explain business nexus and bona fide compliance; quote case law.

4. Proportional Approach: Where any part of input relates to exempt or non-business use, offer only proportionate reversal.

5. Challenge Arbitrary Blocking: File representation under Rule 86A(2); if ignored, approach appellate or writ remedy.

Legal and Compliance Perspective

Courts across jurisdictions have consistently reaffirmed that ITC is a fundamental component of GST’s value chain. Blocking or reversal without statutory justification undermines the seamless credit flow and contradicts legislative intent. The Supreme Court in Dai Ichi Karkaria Ltd. categorically held that once credit accrues legitimately, it cannot be withdrawn or restricted arbitrarily.

Tax officers must, therefore, exercise powers under Rule 86A with circumspection, ensuring that “reasons to believe” are objectively recorded. Taxpayers, on their part, should maintain a high standard of compliance, documentation, and audit preparedness to defend their claims effectively.

Conclusion

Input Tax Credit is a statutory right, not a concession. It reflects the essence of GST — a unified, value-added tax system designed to eliminate cascading and promote transparency. Any action by the department that blocks or reverses ITC without clear legal basis disrupts this equilibrium and burdens honest taxpayers.

Taxpayers should approach audits with clarity, confidence, and preparedness — equipped with sound legal understanding and documentary evidence. In parallel, the administration must apply the law judiciously, distinguishing genuine transactions from fraudulent ones based on objective material rather than suspicion.

A balanced, evidence-based approach on both sides is essential to preserve the integrity of the ITC mechanism — the true “soul” of the GST regime.

Cost Record Maintenance: The Hidden Backbone of Financial Control and Strategic Decision-Making

Integrating Cost, Financial, and Stock Records for Sustainable Compliance and Profitability

Introduction: Beyond Bookkeeping — Cost Records as a Strategic Engine

Under Section 148(1) of the Companies Act, 2013 and the Companies (Cost Records and Audit) Rules, 2014, certain classes of companies are required to maintain cost records in the prescribed manner (Form CRA-1).
Yet, most businesses view it merely as a compliance task — not realizing that cost record maintenance, when properly integrated with financial and stock systems, becomes a strategic tool for cost control, pricing, and resource optimization.

In an economy defined by global competition, cost inflation, and thin margins, integrated cost records empower management to make informed decisions with real-time clarity on product profitability and operational efficiency.

Legal Framework and Applicability

A. Statutory Basis

• Section 148(1), Companies Act, 2013: Central Government may direct certain companies to maintain cost records for specified products/services.

• Rule 3 & 5 of the Companies (Cost Records and Audit) Rules, 2014: Lay down the coverage, maintenance requirements, and reconciliation with financial statements.

B. Applicability Criteria

Category	Total Turnover	Product/Service Turnover	Requirement
Regulated Sectors (Table A)	₹50 crore or more	₹25 crore or more	Maintain cost records in CRA-1
Non-Regulated Sectors (Table B)	₹100 crore or more	₹35 crore or more	Maintain cost records in CRA-1
Universal Rule	≥ ₹35 crore turnover (any company listed in Rule 3)	N.A.	Cost record maintenance mandatory

Exemptions from Cost Record Maintenance

As per Rule 4(3) of the Cost Records and Audit Rules, cost record maintenance is not required for:

1. Micro and Small Enterprises (MSMEs) as defined under MSMED Act, 2006.

2. Companies operating entirely from Special Economic Zones (SEZs).

3. 100% Export-Oriented Units (EOUs) — where the whole production is exported.

4. Trading companies — where no manufacturing or service provision occurs.

5. Pure service providers like HR outsourcing, manpower supply, consultancy, advertising, etc., not listed in the Rule 3 tables.

6. Job workers manufacturing exclusively under others’ brand names and not owning production.

Industry-Specific Interpretation

Industry Type	Cost Record Applicability	Rationale
Automobile Parts (Domestic Sales)	✅ Required (Table B)	Manufacturing of components covered; turnover-based threshold applies.
Automobile Parts (Export)	❌ Exempt	100% export exemption under Rule 4(3)(ii).
Garment Exporters (100% Export)	❌ Exempt	Entire production exported.
Garment Manufacturers (Domestic Market)	✅ Required	Textile sector under Table B.
Traders / Distributors	❌ Exempt	No manufacturing activity.
HR Service / Outsourcing Firms	❌ Exempt	Not covered service activity.
SEZ Manufacturing Unit	❌ Exempt	Rule 4(3)(ii) exemption.

Integration of Cost Records with Financial and Stock Systems

A. The Triangular Structure of Business Data

Record Type	Maintained By	Core Objective
Financial Records	Accounts & Finance Team	Present monetary transactions and results
Stock Records	Production / Stores	Capture quantitative material flow
Cost Records (CRA-1)	Costing Department	Determine per-unit cost, cost of sales, and margin

These three must reconcile seamlessly.
As per Rule 5(2) of the 2014 Rules:

“The cost records shall be maintained in such manner as to enable the company to calculate per unit cost of production, cost of sales and margin, and to reconcile such records with the audited financial statements.”

Hence, cost record maintenance is not separate from accounting — it is the quantitative mirror of the financial system.

Cost–Stock–Finance Alignment Matrix

Cost Record Element	Source Record	Financial Linkage
Raw Material Consumption	GRN, Issue Register	Purchase Ledger
Work-in-Progress	Process Register	WIP Inventory
Finished Goods	FG Register	Closing Stock
Power & Fuel	Utility Meters	Expense Ledger
Direct Labour	Time Sheets	Payroll Accounts
Factory Overheads	Cost Centre Analysis	Expense Schedules
Sales & Distribution	Dispatch Records	Sales Ledger
Scrap / By-products	Scrap Register	Other Income

Such integration ensures reliability, allowing reconciled cost data to inform:

• Pricing decisions

• Budgeting and forecasting

• Internal cost control reviews

GST and Cost Record Synergy

Under Section 35 of CGST Act, 2017, businesses must maintain stock records showing input-output flow.
These must be consistent with cost records under Rule 5 of the Cost Rules.

Mismatch between GST records and cost records (e.g., raw material consumption vs output yield) can:

• Create red flags in audits,

• Distort cost computation, and

• Affect ITC eligibility or valuation.

Hence, integrating HSN codes with cost centres in ERP ensures full compliance harmony between GST, costing, and financial reporting.

Practical Compliance Checklist — Cost Record Maintenance

Step	Key Requirement	Documentation
1	Assess applicability (Rule 3)	Turnover breakup, product list
2	Maintain cost records in CRA-1 format	Product/service cost sheets
3	Reconcile with financial and stock ledgers	Monthly reconciliation sheet
4	Validate accuracy with standard costing	Variance analysis reports
5	Integrate with ERP or accounting software	Link cost centres and GL codes
6	Retain cost data for minimum 8 years	Signed copies or digital archive
7	Board review of cost performance	Internal cost statements

Strategic and Operational Benefits

Benefit Area	Impact
Pricing & Profitability	Enables precise cost-plus and competitive pricing models.
Decision Support	Provides real-time data for product mix and resource allocation.
Internal Control	Detects inefficiencies, wastages, or cost leakages early.
Regulatory Preparedness	Strengthens defense during GST, Income Tax, or Transfer Pricing reviews.
Budgeting & Forecasting	Facilitates realistic budgets and variance control.
Sustainability Tracking	Enables energy and resource cost mapping for ESG goals.

Cost–Benefit Evaluation

Aspect	Cost of Compliance	Value Derived
System Setup (ERP/Formats)	Moderate	Long-term control and transparency
Data Maintenance	Routine	Strategic insights on cost behavior
Reconciliation Effort	One-time discipline	Financial reliability & efficiency
Decision Support Output	Continuous	Cost optimization and better pricing

Verdict:
Even where audit is not mandatory, maintaining cost records is one of the most value-accretive management practices.
It aligns operations, improves cost visibility, and builds investor and lender confidence in the integrity of financial reporting.

The 360° Conclusion

Cost record maintenance is not an isolated compliance formality — it is a management discipline that integrates finance, operations, and strategy.

• For manufacturers, it’s a legal and managerial necessity.

• For exporters and SEZs, it provides internal benchmarks and cost validation for pricing abroad.

• For service providers and traders, it’s a best-practice system for profit monitoring and resource optimization.

In essence, a company that maintains cost records as part of its financial architecture is not just compliant — it is competitive. 

Simplified GST Registration Scheme under Rule 14A

A New Compliance Pathway for Small Taxpayers

Effective from 1 November 2025 | Issued by the Goods and Services Tax Network (GSTN)

In a continued push towards ease of doing business and tax simplification, the Government of India has introduced the Simplified GST Registration Scheme under Rule 14A of the CGST Rules, 2017, effective 1 November 2025.

The reform aims to help small suppliers and service providers enter the GST system through a trust-based, self-declaration mechanism. By combining Aadhaar authentication, auto-approval within three working days, and output tax liability–based eligibility, the new framework seeks to reduce compliance cost while maintaining registration integrity.

Legal Framework and Objective

Rule 14A of the CGST Rules provides an optional registration mechanism for persons whose total monthly output tax liability—including CGST, SGST/UTGST, IGST and Compensation Cess—does not exceed ₹2.5 lakh.

The provision is designed for small B2B suppliers who wish to register voluntarily but fall below conventional turnover thresholds. The ₹2.5-lakh limit effectively corresponds to an annual taxable turnover of approximately ₹30 lakh, positioning the scheme as a mid-layer between unregistered entities and fully compliant regular taxpayers.

The key objective is to simplify onboarding for genuine small businesses, promote voluntary compliance, and reduce the procedural hurdles that have historically discouraged early formalisation.

Eligibility Criteria and Core Features

• The taxpayer must, on self-assessment, determine that the total monthly output tax liability does not exceed ₹2.5 lakh.

• Supplies should be made to registered persons (B2B transactions).

• A taxpayer cannot hold more than one simplified registration in the same State or Union Territory under the same PAN.

• Aadhaar authentication is mandatory for the Primary Authorised Signatory and at least one Promoter or Partner.

• Registration is granted electronically within three working days of ARN generation, subject to successful Aadhaar verification.

This streamlined process significantly shortens the registration cycle and eliminates manual verification, aligning with the broader move toward faceless tax administration.

Application Process

Applicants opting for the simplified scheme should:

1. Access the GST portal and select “Yes” for the option “Registration under Rule 14A” while filing Form GST REG-01.

2. Complete Aadhaar authentication for the designated individuals.

3. Upon successful verification, receive automatic electronic approval within three working days.

This digital-first procedure represents a shift from conventional scrutiny-based approval to a time-bound, authentication-led clearance system.

Withdrawal from the Scheme

Taxpayers may withdraw from the scheme at any time, provided the following conditions are met:

• All returns from the effective date of registration to the date of withdrawal application have been filed.

• The taxpayer has filed:

  • Returns for at least three months, if withdrawing before 1 April 2026, or

  • At least one return, if withdrawing on or after 1 April 2026.

• No amendment or cancellation application for registration under Rule 14A should be pending.

• No proceedings under Section 29 of the CGST Act (cancellation of registration) should be initiated or pending.

The exit procedure ensures that only compliant taxpayers can transition out of the scheme, preserving the reliability of the simplified registration base.

Comparative Overview: Simplified vs Regular Registration

Parameter	Simplified Registration (Rule 14A)	Regular Registration
Basis of Eligibility	Output tax liability ≤ ₹2.5 lakh per month	Turnover-based or mandatory registration
Type of Supplies	B2B only	B2B and B2C
Aadhaar Authentication	Mandatory	Optional in some cases
Approval Time	3 working days (system-generated)	Up to 7 working days, may involve verification
Multiple Registrations	Not allowed in same State/UT for same PAN	Permitted where business verticals differ
Withdrawal	Allowed with conditions	Officer-approved cancellation
Process Nature	Self-assessment and digital	Scrutiny and approval-based

Compliance and Practical Implications

The Simplified Registration Scheme is not merely a procedural relief but a compliance strategy for emerging businesses. Taxpayers should adopt internal controls to ensure continuous eligibility and avoid unintentional breaches of the ₹2.5-lakh monthly cap.

Professionals advising small clients should emphasise the following:

• Maintain monthly tax computation records to substantiate self-assessment.

• Avoid using this registration for B2C supplies, which are outside its scope.

• If the output tax consistently exceeds the limit, migrate to regular registration proactively.

• File all returns on time, as non-compliance restricts withdrawal or may trigger cancellation under Section 29.

• Align internal reporting and accounting systems to monitor cumulative liability in real time.

Policy Significance

The introduction of Rule 14A reflects the maturing of India’s GST system into a tiered compliance architecture—Composition Scheme, QRMP, and now Simplified Registration—each serving different taxpayer segments.

By reducing registration friction, promoting faster integration into the tax base, and relying on digital verification instead of manual vetting, the government reinforces its commitment to trust-based compliance and minimal touch governance.

This reform particularly benefits startups, consultants, and service providers catering exclusively to registered clients, enabling them to obtain GST registration quickly and establish business credibility without excessive compliance cost.

Conclusion

The Simplified GST Registration Scheme under Rule 14A is a pragmatic and progressive reform—bridging the gap between voluntary registration and formal compliance. It embodies the shift from “control and verification” to “trust and authentication,” signalling India’s evolving approach to tax governance.

For small taxpayers, it offers an accessible entry point into the formal economy; for professionals, it opens a new advisory dimension focused on eligibility management, compliance readiness, and migration planning.

With the introduction of Rule 14A, GST compliance becomes not just simpler—but smarter, faster, and more aligned with the realities of modern business.

India–US Tax Treaty: Article 10 on Dividend Taxation

Withholding Tax Implications for Individuals and Corporate Shareholders – A Practical Compliance Guide

Why Understanding Article 10 Matters

Cross-border dividends between India and the United States have grown rapidly with expanding investments in listed shares, unlisted equity, and startup holdings. However, one of the most frequent compliance errors by both companies and advisors relates to applying the wrong withholding tax rate under the India–US Double Taxation Avoidance Agreement (DTAA).

Article 10 of this treaty governs how dividends are taxed when paid from one country to a resident of the other. Many investors assume that holding more than 10% shares automatically qualifies for a 15% concessional rate, even for individuals.
In reality, this is not correct — and applying the wrong rate can lead to TDS defaults, penalties under Section 271C, and loss of foreign tax credit (FTC) benefits.

This guide explains how Article 10 works, the logic behind it, and how to apply the correct rate with complete documentation — helping professionals and businesses avoid costly errors.

Legal Framework: What Article 10(2) of the Treaty Says

Under Article 10(2) of the India–US DTAA, the tax on dividends is capped as follows:

(a) 15% — if the beneficial owner is a company which owns at least 10% of the voting stock of the company paying the dividends.
(b) 25% — in all other cases.

In essence:

Beneficial Owner Type	Voting Stock Held	Applicable WHT Rate
Company	≥10%	15%
Company	<10%	25%
Individual (any %)	Any	25%

Key takeaway:

• The 15% concessional rate applies only when the shareholder is a company (not an individual) and owns 10% or more voting stock.

• All individual shareholders, regardless of their shareholding, fall under the 25% category.

Compliance Steps to Determine and Apply the Correct Rate

For every dividend paid between India and the US, follow this six-step compliance flow to ensure proper withholding and documentation:

1. Identify the shareholder type
   → Is it a company or an individual?
   Only companies are eligible for the 15% rate.

2. Verify beneficial ownership
   → Confirm that the shareholder is the true beneficial owner of the dividend (not a nominee or conduit).

3. Check shareholding percentage
   → The 15% rate applies only if the company holds ≥10% voting stock.
   → Otherwise, default to 25%.

4. Collect documentation

   • Tax Residency Certificate (TRC)

   • Form 10F

   • Beneficial ownership declaration

   • Corporate proof of shareholding

5. Apply the rate and deduct TDS
   → Use Form 15CA/15CB to remit dividend under correct treaty clause.

6. Maintain documentation trail
   → For defense during tax audit or scrutiny. Non-compliance may lead to interest under Section 201(1A) and penalty under Section 271C.

Illustrative Examples

Scenario	Shareholder Type	Voting Power	Applicable Rate	Remarks
U.S. company holds 12% in Indian company	Company	≥10%	15%	Eligible for lower rate
U.S. company holds 5%	Company	<10%	25%	Below threshold
U.S. individual holds 15%	Individual	≥10%	25%	Individual – not eligible
Indian company pays dividend to U.S. individual	Individual	Any %	25%	Covered under “all other cases”

Treaty Logic and Policy Rationale

The differential treatment between companies and individuals reflects deliberate treaty design. The underlying policy reasoning includes:

• Promoting genuine FDI: Encourages long-term corporate investments rather than short-term individual holdings.

• Simplified administration: Easier verification of company ownership versus individual tracing.

• Anti-abuse protection: Prevents individuals from misusing high shareholdings to claim lower rates.

• OECD model alignment: Global standard — reduced dividend rates reserved for corporate investors with substantial ownership.

Thus, the treaty benefits are intentionally entity-specific, not shareholding-size-specific.

Domestic Law vs. Treaty Rate – Which One Applies?

Under Indian domestic tax law, dividends to non-residents are taxed at 20% (plus surcharge and cess) under Section 115A, read with Section 195.

• If the treaty rate (25%) is higher, apply the lower domestic rate (20%).

• If claiming treaty benefit, ensure complete TRC, Form 10F, and beneficial ownership documentation.

• Missing documentation leads to automatic application of domestic rate and potential denial of treaty relief.

Note: Choosing between the domestic rate and treaty rate should always be based on whichever is more beneficial to the taxpayer but backed by full compliance.

Avoiding Defaults: Key Risks and Practical Safeguards

Common Mistake	Risk / Penalty Exposure	Prevention Tip
Applying 15% rate to individuals	Short deduction → penalty u/s 271C + interest u/s 201(1A)	Verify shareholder type before applying rate
Missing TRC/Form 10F	Disallowance of treaty benefit	Obtain both before remittance
Incorrect entry in Form 15CB	Professional liability and audit objection	Quote correct treaty clause and reasoning
Ignoring beneficial ownership test	Treaty denial	Maintain ownership and control proofs

Professional Tip: Document your rate analysis in the Form 15CB working paper to demonstrate due diligence during scrutiny.

Decision Matrix: Determine the Correct Withholding Rate

Below is a visual decision matrix for quick reference during compliance or tax audit review:

                         START
                           │
                           ▼
               Is shareholder a COMPANY?
                      ├─────────────┐
                      │             │
                      ▼             ▼
                    YES             NO
                      │             │
                      │             ▼
                      │       INDIVIDUAL / OTHERS → 25%
                      │
                      ▼
     Does it own ≥10% voting stock of payer company?
                      ├─────────────┐
                      │             │
                      ▼             ▼
                    YES             NO
                      │             │
                 Apply 15%       Apply 25%
                      │
                      ▼
           Collect TRC + Form 10F + BO proof
                      │
                      ▼
            Deduct TDS & file Form 15CA/CB
                      │
                      ▼
               ✅ COMPLIANT REMITTANCE

Recommendations

• Individuals are not eligible for the 15% rate under the India–US DTAA, regardless of shareholding size.

• The 15% concessional rate applies only to corporate shareholders holding 10% or more voting stock.

• Ensure complete documentation — TRC, Form 10F, and beneficial ownership proof — before applying the treaty rate.

• In all other cases, apply 25% (or lower domestic rate of 20%) as applicable.

• Maintain internal audit notes or Form 15CB justification to avoid penalties and ensure defendable compliance.

Accurate interpretation of Article 10 of the India–US DTAA is not just a technical issue — it’s a matter of regulatory compliance and risk control.

Whether you’re a CFO, tax consultant, or NRI investor, applying the correct withholding rate and maintaining proper documentation ensures peace of mind, avoids TDS defaults, and enables smooth foreign tax credit claims abroad.

In cross-border taxation, precision is protection — get the structure, paperwork, and rate right before you remit.

DGFT Extends RoDTEP Annual Return Filing Deadline for FY 2023-24: How Exporters Can Maximise Benefits

The Directorate General of Foreign Trade (DGFT) has extended the deadline for filing the annual return under the RoDTEP scheme for FY 2023-24 to 30th November 2025, with a nominal composition fee of ₹10,000. This extension provides exporters with a critical opportunity to claim embedded indirect tax credits, optimise export costs, and enhance global competitiveness—all while remaining fully compliant.

What is RoDTEP and Why It Matters

RoDTEP (Remission of Duties and Taxes on Exported Products) reimburses exporters for indirect taxes and levies embedded in export products that are not refunded through GST or Customs exemptions.

Examples of eligible taxes:

• State VAT on inputs

• Excise duties on raw materials

• Local levies such as mandi tax, electricity duty, and other cesses

Benefit: Exporters receive electronic duty credit scrips, which can be used to pay customs duties on imports, thereby improving cash flow and reducing export costs.

Who Can Benefit: Simplified Eligibility

RoDTEP is broadly accessible to all exporters, with no minimum turnover or export value requirement. Eligible participants include:

• Manufacturers and merchant exporters

• Domestic Tariff Area (DTA) units

• Special Economic Zones (SEZs)

• Export Oriented Units (EOUs)

• Advance Authorization holders (benefits reinstated from June 2025)

Mandatory requirements:

• Valid Import Export Code (IEC)

• Registration with Customs

• Access to the DGFT portal and Digital Signature Certificate (DSC)

• Declaration of RoDTEP claim on shipping bills

What Expenses Are Covered

RoDTEP reimburses embedded indirect taxes and levies such as:

• Fuel, utilities, and packaging costs

• Local taxes and cesses not refundable under other schemes

Excludes: Direct taxes like income tax, customs duties on exports, or any taxes already refunded.

Key Conditions to Keep in Mind

• Only exports with correctly declared shipping bills qualify.

• Re-exports and deemed exports are not eligible.

• Overlaps with other schemes such as EPCG or Advance Authorization are regulated to prevent double claims.

• Accurate reconciliation of GST, Customs, and DGFT data is essential.

Step-by-Step Filing Process

1. Collect Documents: Export invoices, GST returns, customs filings.

2. Reconcile Taxes: Verify eligible taxes against actual payments.

3. Prepare Annual Return: File on the DGFT portal with supporting records.

4. Pay ₹10,000 Fee: Nominal and mandatory.

5. Submit Before 30th November 2025: Timely filing prevents loss of credit.

6. Claim Scrips: Use electronic duty credit scrips against import customs duties.

Tips to Maximise Benefits

• Plan Import Usage: Scrips are valid for approximately 18 months; schedule imports to utilise credits fully.

• Amendments Allowed: Partial or corrected filings can be submitted before the deadline.

• Monitor RoDTEP Rates: Updated periodically; stay informed via DGFT notifications.

• Maintain Records: Keep shipping bills, invoices, GST returns, and reconciliations ready for audits.

• Compliance Ready: DGFT or Customs may audit claims; ensure documentation is complete.

The extended deadline is an opportunity, not just a compliance requirement. Exporters who act promptly can:

• Reclaim embedded indirect taxes

• Reduce overall export costs

• Strengthen global competitiveness

• Avoid penalties or forfeiture of credits

This is a strategic chance to optimise export operations and working capital while staying fully compliant with DGFT regulations.

Conclusion:
The DGFT’s extension to 30th November 2025 allows exporters to leverage RoDTEP fully. By reconciling taxes, filing accurate returns, and claiming duty credit scrips, businesses can reduce export costs, enhance competitiveness, and secure a tangible financial advantage. Timely action is the key to unlocking the full potential of this scheme.

Form 10-IC Filed Incorrectly? Relief Possible — ITAT Mumbai Recognizes Technical Lapse under Section 115BAA

Introduction: When One Wrong Click Costs 8% Tax

In today’s digital compliance environment, a single wrong selection on the income-tax portal — such as filing Form 10-IB instead of Form 10-IC — can change the company’s tax rate from 22% to 30%, creating unexpected tax demands, interest, and penalties.
This issue has surfaced repeatedly, and the recent Mumbai ITAT ruling in ACIT v. Magik Kraft (P.) Ltd. [[2025] 179 taxmann.com 632 (ITAT Mumbai)] provides much-needed relief and guidance.

Understanding the Legal Framework

Section 115BAA of the Income Tax Act, 1961, allows domestic companies to pay tax at 22%, provided they exercise this option by filing Form 10-IC as per Rule 21AE of the Income-tax Rules, 1962.

To avoid confusion, here’s the quick mapping:

Applicable Section	Concessional Rate	Prescribed Form	Applicable Entity
Section 115BA	25%	Form 10-IB	Certain domestic manufacturing companies (before 115BAA regime)
Section 115BAA	22%	Form 10-IC	All domestic companies (subject to conditions)
Section 115BAB	15%	Form 10-ID	New manufacturing companies incorporated after 1.10.2019

Filing the wrong form — even if the intention is correct — leads to denial of the concessional rate by CPC systems, as the technical validation is form-specific.

Case Summary: ACIT v. Magik Kraft (P.) Ltd.

The assessee, a domestic company, had opted for the 22% rate under Section 115BAA but inadvertently uploaded Form 10-IB instead of Form 10-IC. Consequently, CPC processed the return at 30%, raising a demand.

Before the Commissioner (Appeals), the assessee pleaded that the lapse was purely technical, not substantive. The CIT(A) agreed, holding that:

“Filing of Form 10-IC is a procedural requirement. Once substantive eligibility is established, such an inadvertent filing error can be rectified.”

The CIT(A) directed the Assessing Officer to allow the assessee to file Form 10-IC correctly and grant the concessional rate after verifying compliance.
The assessee complied by submitting Form 10-IC electronically and manually, after which the ITAT upheld the CIT(A)’s reasoning — confirming that the benefit of Section 115BAA could not be denied merely for a procedural lapse.

Why This Matters: The Systemic Gap

Currently, the income-tax portal offers no online rectification path for replacing an incorrect form (e.g., 10-IB instead of 10-IC). The CPC processes the return based on whatever form is uploaded, and no online correction mechanism exists even through Revised Return or Rectification u/s 154.

Thus, taxpayers and professionals often face a dead end — unless they:

1. Approach the Jurisdictional Assessing Officer (JAO) with a written application, citing CIT(A) or ITAT precedents; and

2. File the correct form electronically (if portal window allows) and manually (if closed) to demonstrate bona fide compliance.

Procedural Path: Practical Guidance for Rectification

If your client or company has made such an error, the following steps can help ensure lawful correction before escalation:

1. Identify the error clearly — Verify which form was uploaded and for which section the concessional rate was claimed.

2. Check CPC processing status — Whether the return has been processed u/s 143(1) or assessment completed.

3. Prepare an application to the Jurisdictional AO —

   • Explain the bona fide mistake.

   • Quote ACIT v. Magik Kraft (P.) Ltd. and earlier relief-based precedents (e.g., PCIT v. Wipro Ltd.).

   • Attach the correct Form 10-IC duly filed/attempted electronically.

4. File rectification u/s 154 or seek implementation of appellate order — The AO is empowered to give effect to such rectification if the conditions under Section 115BAA are substantively fulfilled.

5. Maintain supporting evidence — E-mail trail, screenshots of filing, tax computation showing intent to opt for Section 115BAA, and copy of acknowledgment.

This practical approach can often prevent the need for appeal, saving significant time and litigation cost.

Analytical Insight: Substance Over Form

The decision reinstates a core judicial principle — procedural errors cannot override substantive rights.
Where the taxpayer:

• Meets all eligibility criteria under Section 115BAA, and

• Demonstrates clear intent to opt for concessional taxation,

then an inadvertent e-filing lapse should not defeat statutory relief.
The ITAT has reaffirmed that substance must prevail over technical form, especially in automated systems where human error has no corrective outlet.

Important Points

• Double-verify form mapping before submission:
  Even experienced teams confuse 10-IB with 10-IC due to similar nomenclature. Implement internal pre-filing checklists.

• If error occurs: Act promptly—apply to the JAO with precedent-based support before escalation.

• Systemic recommendation: CBDT and CPC should consider enabling a correction mechanism or permitting post-facto validation when intent and conditions are demonstrably satisfied.

Conclusion

The Magik Kraft ruling is more than an isolated relief — it’s a precedent of fairness in a system that sometimes penalizes genuine human error.
It reminds professionals that timely rectification, proper representation, and awareness of remedial jurisprudence can protect clients from avoidable tax burdens.