Prospective Operation of Explanation 1(d) to Rule 43 CGST Rules & Denial of ITC on Electricity Supplied to Residential Townships – A Commentary on Bharat Aluminium Company Ltd. v. State of Chhattisgarh (2025)

1. Introduction

Bharat Aluminium Company Limited (“BALCO”), a leading aluminium manufacturer, sought judicial review of an appellate order that had denied it refund of Input Tax Credit (ITC) on GST Compensation Cess paid on imported coal. Two core disputes emerged:

Whether ITC on coal used to generate electricity supplied to BALCO’s employees’ township formed part of “business” under s. 2(17) read with s. 16(1) CGST Act.
Whether the 5 July 2022 insertion of Explanation 1(d) to Rule 43 CGST Rules—excluding Duty Credit Scrips (DCS) from “aggregate value of exempt supply”—operates retrospectively so as to nullify ITC reversal for periods prior to that date.

The Chhattisgarh High Court dismissed BALCO’s five writ petitions, thereby affirming that (i) electricity supplied for residential consumption is outside the business nexus for ITC purposes; and (ii) Explanation 1(d) is prospective, leaving pre-5 July 2022 DCS supplies within the reversal machinery of ss. 17(2) & Rules 42/43.

2. Summary of the Judgment

The Court upheld the orders of the Assistant Commissioner (State Tax) and the Joint Commissioner (Appeals) directing BALCO to reverse/repay ₹40,14,605 of ITC.
Electricity diverted from BALCO’s 540 MW captive plant to the township lacks an integral connection with manufacturing; therefore, coal attributable to such diversion does not qualify for ITC (Rule 42).
Sale of Duty Credit Scrips is an “exempt supply” until 5 July 2022; ITC attributable thereto must be reversed. Explanation 1(d) to Rule 43 (inserted 5 July 2022) is not retrospective and cannot revive earlier claims.

3. Analytical Commentary

3.1 Precedents Cited and Their Influence

(a) Maruti Suzuki Ltd. v. CCE (2009) 9 SCC 193

Maruti ruled that CENVAT credit on inputs used to make electricity is admissible only when the electricity is consumed within the factory. Excess electricity sold/vended is outside the credit chain. The High Court analogised township supply to “sold” electricity: both lie beyond manufacturing needs.

(b) CCE v. Gujarat Narmada Fertilizers Co. Ltd. (2009) 9 SCC 101

In GNFC, the Supreme Court sanctioned proportionate reversal of credit for electricity cleared to a township or power grid. This decision formed the bedrock for denying BALCO’s refund on coal consumed for township electricity.

(c) “Credit-as-Concession” Line of Cases – Jayam & Co. (2016), Godrej & Boyce (1992), MK Agro Tech (2017)

These judgments reaffirm that ITC is a statutory concession, not an inherent right; eligibility hinges on strict satisfaction of conditions. The High Court invoked this principle to emphasise that ambiguities are resolved against the claimant unless the statute clarifies otherwise.

(d) Cases Cited by Petitioner

BALCO relied on ITC Ltd., Ultratech, Cinemax and S.A. Builders to argue “commercial expediency.” The Court distinguished them as pre-GST CENVAT/income-tax rulings not confronting Maruti/GNFC’s specific ratio on captive electricity. Consequently they carried limited persuasive weight.

3.2 Court’s Legal Reasoning

3.2.1 Definition of “Business” & Nexus Test

Section 16(1) CGST allows ITC only on goods/services “used in the course or furtherance of business.” Although “business” in s. 2(17) includes ancillary activities, the Court held that residential welfare activities—even if beneficial to employee morale—are not integrally connected. They are incidental conveniences, not production enablers.

3.2.2 Application of Rule 42 (Common Credit) & Form-G Data

BALCO’s own Form G revealed 13,88,641 kWh consumed by the township in Feb-2019. Rule 42 mandates proportionate reversal where inputs are used for both taxable and non-taxable outputs. Because township supply mirrors “non-business”/“exempt” usage, reversal became inevitable.

3.2.3 Prospectivity of Explanation 1(d)

Key reasoning threads:

Section 164(3) CGST empowers retrospective rules, yet Notification 14/2022 expressly granted retrospection to certain clauses (7, 9, 10) but not to Rule 43’s amendment. Legislatures choose their words deliberately; silence here implies prospectivity.
Applying Sundaram Pillai & Sree Sankaracharya Univ. principles, an explanation is retrospective only when it clarifies an existing ambiguity. Pre-2022 law was crystal-clear: DCS supply was exempt via Notification 35/2017; Rules 42-43 mandated reversal. Hence Explanation 1(d) broadens the category of exclusions and is substantive, not clarificatory.
ITC being a concession, any expansion thereof must be strictly construed and ordinarily applies prospectively unless explicitly back-dated.

3.3 Likely Impact of the Judgment

Manufacturers operating townships, hospitals or other welfare facilities must separately meter/segregate electricity, or forgo ITC on coal and other inputs consumed therein.
Tax positions that treated Explanation 1(d) as “curative” for past periods may need reconsideration; refund claims premised on retrospective effect are likely to be rejected.
The decision underscores the judiciary’s deference to Supreme Court precedent on credit apportionment, reinforcing consistency between pre-GST CENVAT jurisprudence and GST ITC architecture.
States’ revenue authorities may intensify audits of captive power generators, particularly in mining, fertilizers, cement and metal sectors.

4. Complex Concepts Simplified

Input Tax Credit (ITC): A mechanism permitting a registered person to offset the tax paid on procurement (inputs/input services) against the tax payable on outward supplies. Think of it as a “running credit balance.”
Compensation Cess: An additional cess levied on certain sin/luxury goods (e.g., coal) to compensate states for GST revenue loss.
Duty Credit Scrip (DCS): A transferable paper licence awarded to exporters under the Foreign Trade Policy. It serves as a currency to pay customs duty but, since Oct 2017, its supply is exempt from GST.
Rule 42/43 CGST Rules: Statutory formulae to identify the portion of ITC attributable to taxable vs. exempt supplies or capital goods; imposes reversal of the ineligible portion.
Explanation to a Rule: An appended clarification that becomes part of the rule itself. Retrospective effect is given only when the legislature or delegated authority clearly intends, or where the explanation merely clarifies an existing ambiguity.

5. Conclusion

The Chhattisgarh High Court’s decision delivers two pivotal messages. First, employee-centric amenities—however desirable—do not per se qualify as “business” for ITC purposes unless a tight, indispensable nexus with production is shown. Power supplied to a township remains outside the credit chain. Second, the GST Council’s 2022 relaxation excluding Duty Credit Scrips from exempt-supply calculations is not a panacea for past reversals; its benefit starts from 5 July 2022. The ruling thereby cements the prospectivity doctrine in GST rule-making and harmonises GST ITC logic with earlier Supreme Court decisions in CENVAT matters.

Stakeholders must revisit internal credit apportionment, ring-fence welfare consumption, and temper expectations regarding retrospective policy reliefs. Courts, meanwhile, are likely to rely on the BALCO precedent when confronted with similar claims until a higher judicial forum rules otherwise or the rule-making authority confers explicit retrospective effect.