JANUARY 12, 2015

By Shailesh P Sheth, Advocate

"It's a terrible American weakness to believe that if you've got a problem, all you have to do is pass a law." - Kindman Brewster Jr.

THE proposals relating to Indirect Taxes mooted by the Finance Minister (FM) vide Union Budget, 2014 presented on 10th July, 2014 might be 'short in numbers' but are certainly 'long in effect'! Whereas the budgetary proposal relating to 'mandatory deposit' at the appellate stage might have come as a 'pleasant surprise' to the Assessees, the re-introduction of the condition of 6 months' time limit for taking CENVAT Credit has surely come as a 'rude shock' to them!

Vide Budgetary Notification No. 21/2014-CE (NT) dated 11th July, 2014, a 'six months' time limit has been prescribed for the purpose of taking CENVAT Credit on 'Inputs' as well as 'input services'. This has been done by insertion of Third Proviso to Rule 4 (1) [relevant for 'inputs'] of the CENVAT Credit Rules, 2004 ('CCR') and Sixth Proviso in Rule 4 (7) (relevant for 'input services') of CCR. Both these new Provisos are identically worded and read as under:

"Provided also that the manufacturer or the provider of output service shall not take CENVAT Credit after six months of the date of issue of any of the documents specified in sub-rule (1) of Rule 9."

These amendments have been made effective from 1st September, 2014.

Other relevant Budgetary amendments:

At this stage, it would also be essential to take note of other relevant Budgetary amendments made simultaneously to Rule 4 (7) of CCR and Rule 7 of Point of Taxation Rules, 2011 ('POTR'). These amendments are as follows:

(i) Amendments to Rule 4 (7) of CCR:

Vide Notification No. 21/2014-CE (NT) Ibid, sub-rule (7) of Rule 4 of CCR has been further amended so as to substitute First and Second Provisos by the following provisos, namely:

"Provided that in respect of input service where whole of the service tax is liable to be paid by the recipient of service, credit shall be allowed after the service tax is paid:

Provided further that in respect of an input service, where the service recipient is liable to pay a part of service tax and the service provider is liable to pay the remaining part, the CENVAT credit in respect of such input service shall be allowed on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9:

Provided also that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9, except in respect of input service where the whole of the service tax is liable to be paid by the recipient of service, is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT Credit availed on such input service and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT Credit paid earlier subject to the other provisions of these rules."

(ii) Amendment to Rule 7 of POTR:

Vide Notification No. 13/2014-ST dated 11th July, 2014, Rule 7 of POTR has been amended in the following manner:

a) For the words "contained in these rules", the words and figures "contained in rules 3, 4 or 8" have been substituted'

b) For the First Proviso, the following proviso has been substituted namely:

"Provided that where the payment is not made within a period of three months of the date of invoice, the point of taxation shall be the date immediately following the said period of three months:"

It is pertinent to note here that the above amendments have been made effective from 11 th July, 2014 itself.

The implications of the above amendments and the various issues arising therefrom are discussed and analyzed hereinafter.

6 months' time limit for taking CENVAT Credit – "Revisiting the Past; Painful Present; Frightful Future!"

The present-day 'CENVAT Credit Scheme' has its roots in the erstwhile 'MODVAT Credit Scheme' that was introduced by the then FM (Late) Dr. V. P. Singh vide his Union Budget, 1986 that undisputedly, remains one of the most historic Union Budgets ever presented by any FM! The MODVAT/CENVAT Scheme – in essence, an 'Input Tax Credit (ITC) Scheme' – had many 'Avatars' in the past and operated under the aegis of different Rules at different points of time with varying scope. Effectively, the scheme has thus been operative for more than 28 years.

What is, however, significant is that except for a brief period covering end of June, 1995 to end of March, 2000, the Rules governing MODVAT/CENVAT Credit Scheme (including the current CCR) never had any provision prescribing a time limit for taking MODVAT/CENVAT Credit on 'Inputs' and/or 'Input Services' as the case may be.

For some inexplicable reasons, however, a time limit of 6 months for taking MODVAT Credit on 'Inputs' had been introduced by the Central Government by insertion of a proviso in Rule 57G of the erstwhile Central Excise Rules, 1944 ('CER') vide Notification No. 28/95-CE (NT) dated 29 th June, 1995. The Proviso read as under:

"Provided further that the manufacturer shall not take credit after six months of the date of issue of any of the documents specified in first proviso to this sub-rule:"

The readers may notice an uncanny similarity between this Proviso inserted in the erstwhile Rule 57G and the new Provisos inserted in Rules 4(1) and 4 (7) of CCR for similar purpose and reproduced above.

However, if the 'entry' of this restrictive provision in the statute in June, 1995 was 'sudden', its 'exit' was equally 'abrupt'! The Proviso inserted in the erstwhile Rule 57G remained operative only till 31.03.2000. Since then, such restriction never re-appeared in MODVAT Rules or CENVAT Rules.

It is, therefore, rather disturbing and equally distressing to see the 'Ghost of the Past' rearing its head again! The re-introduction of the condition prescribing '6 months' time limit' for taking CENVAT Credit on 'Inputs' (and 'input services') – after it was omitted nearly 14 years' ago – has obviously left the Assessees and the Tax Advisors perplexed, to say the least! For the unsuspecting Assessees, this restriction has naturally come as 'bolt from the blue' and they are still trying to come to terms with it!.

This artificial and arbitrary restriction is certainly going to create lots of hassles and headaches for the hapless Assessees. This is particularly so since the mechanisms for taking CENVAT Credit on 'Inputs' and 'Input Services' are quite different, though both are governed by the same set of Rules i.e. CCR, 2004. While the Assessees may suffer the pangs of pain in the present, they are equally apprehensive about the future. The question uppermost in their minds is 'What if this obsession with the time limit continues even in the eagerly-awaited GST Regime?' Considering the bureaucratic tendency to revel in the past even while stepping in future, this frightening possibility cannot be ruled out!

"Bureaucracy defends the status quo long past the time when the quo has lost its status ." [ Dr. Laurence J. Peter]

Be that as it may, as the restriction is 'reality' as of now, let us consider and deal with the various issues arising out of these amendments.

CENVATable documents issued prior to 01.09.2014 – Applicability of time limit – "Lesson from the past…!"

The first and foremost question that arises is whether the time limit of 6 months for taking CENVAT Credit on inputs and input services effective from 1st September, 2014 would apply to the CENVATable documents issued prior to this date or not.

As stated above, the new Provisos introduced in Rules 4 (1) and 4 (7) of CCR prescribing the time limit of 6 months for taking CENVAT Credit on inputs and input services have come into effect from 1st September, 2014.

A strong view is, therefore, being expressed that as the amendments are effective prospectively, the restriction cannot apply to the CENVATable documents issued prior to 01.09.2014. It is argued that since prior to 01.09.2014, there was no time limit prescribed for taking CENVAT Credit on inputs/input services, the time limit now prescribed cannot be made applicable to the CENVATable documents issued prior to this date.

It is also strongly contended that right to CENVAT Credit is a substantial right and once this right is vested in or earned by the Assessee, it becomes an indefeasible right that cannot be taken away or disturbed in any manner.

However, though the arguments may sound quite strong and attractive, the Assessees may find themselves fighting a losing battle on this count. A similar issue had arisen for consideration before the Hon'ble Supreme Court in the case of Osram Surya (P) Ltd.V/s. CCE, Indore – 2002–TIOL-64-SC-CX. In this case, the issue was whether the time limit of 6 months introduced in the erstwhile Rule 57G on 29th June, 1995 would apply to the invoices issued prior to this date or not. The Hon'ble Apex Court was hearing a batch of appeals arising from the judgment of the Larger Bench of the Appellate Tribunal in the case of Kusum Ingots & Alloys Ltd. Vs. CCE – 2000 (120) ELT 214 (Tri-LB), wherein the issue had been decided in favour of the Revenue. The Hon'ble Supreme Court, while upholding the Order of the Larger Bench of the Tribunal, observed and held at para 7 of the judgment, as under:

"7. Having heard the arguments of the parties and after considering the rule in question, we think that by introducing the limitation in the said proviso to the rule, the statute has not taken away any of the vested rights which had accrued to the manufacturers under the Scheme of Modvat. That vested right continues to be in existence and what is restricted is the time within which the manufacturer has to enforce that right. The appellants, however, contended that imposition of a limitation is as good as taking away the vested right. In support of their argument, they have placed reliance on a judgment of this Court in Eicher Motors Ltd. v. Union of India - 2002-TIOL-149-SC-CX-LB wherein this Court had held that a right accrued to an assessee on the date when it paid the tax on the raw-materials or the inputs would continue until the facility available thereto gets worked out or until those goods existed. In that background, this Court held that by Section 37 of the Act, the authorities concerned cannot make a rule which could take away the said right on goods manufactured prior to the date specified in the concerned rule. In the facts of Eicher's case (supra), it is seen that by introduction of Rule 57F(4A) to the Rules, a credit which was lying unutilized on 16-3-1995 with the manufacturer was held to have lapsed. Therefore, that was a case wherein by introduction of the rule a credit which was in the account of the manufacturer was held not to be available on the coming into force of that rule, by that the right to credit itself was taken away, whereas in the instant case by the introduction of the second proviso to Rule 57G, the credit in the account of a manufacturer was not taken away but only the manner and the time within which the said credit was to be taken or utilized alone was stipulated. It is to be noted at this juncture that the substantive right has not been taken away by the introduction of the proviso to the rule in question but a procedural restriction was introduced which, in our opinion, is permissible in law. Therefore, in our opinion, the law laid down by this Court in Eicher's case (supra) does not apply to the facts of these cases. This is also the position with regard to the judgment of this Court in Collector of Central Excise, Pune & Ors. v. DaiIchiKarkaria Ltd. & Ors.- 2002-TIOL-79-SC-CX-LB ."

Readers, in this regard, may also refer to the judgement very recently rendered by the Single Member Bench of the Appellate Tribunal, Mumbai in the case of Ashok Leyland Ltd. Vs. CCE – 2014-TIOL-2102-CESTAT-MUM.

It is a settled legal position that the eligibility to the CENVAT Credit on inputs, capital goods or input services has to be determined by an Assessee on the basis of the statutory provisions as in operation on the date of claiming such credit. Therefore, if, on the date of taking/availing CENVAT Credit, the time limit of 6 months' so introduced is operative, the same has to be adhered to.

It is undeniable that the amendment under discussion is purely a procedural one and cannot be considered to be a substantial amendment. It is a settled principle of law that procedural amendments would generally apply retrospectively, unless specified contrary by legislature. This principle has been explained by the Privy Council in the case of Delhi Cloth & General Mills Ltd. Vs. I.TaxCommr. - AIR 1927 PC 242 as follows:

"While provisions of a statute dealing merely with matters of procedure may properly, unless the construction be textually inadmissible, have retrospective effect attributable to them, provisions which touch a right in existence at the passing of the statute are not to be applied retrospectively in the absence of express enactment or necessary intendment."

See, Jose Da Costa & Anr. Vs. BascoraSadasiva Sinai Narcornim - AIR 1975 SC 1843, wherein the principle laid down by Privy Council in DCM's case (supra) was quoted with approval.

In Memon Abdul Karim Haji Tayab Vs. Dy.Custodian General, New Delhi – 1964 AIR 1256 SC, the Hon'ble Supreme Court observed as under :

"It is well settled that procedural amendments to a law apply, in the absence of anything to the contrary, retrospectively in the sense that they apply to all actions after the date they come into force even though the actions may have begun earlier or the claim on which the action may be based may be of an anterior date."

See, also (1) Narhari Vs. Pannalal – AIR 1977 SC 164

(2) National Woolen Mills Vs. CCE – 1991 (56) ELT 613 (Tribunal)

(3) Rochiram& Sons Vs. UOI – 2008-TIOL-123-SC-CUS

Here, it is also worth-noting the distinction between 'Retrospectivity' and 'Retroactivity' of a provision. This has been explained by the Hon'ble Supreme Court in the case of Jay Mahakali Rolling Mills V/s. UOI – 2007-TIOL-139-SC-CX in the following words:

"9. "Retrospective" means looking backward, contemplating what is past, having reference to a statute or things existing before the Statute in question. Retrospective law means a law which looks backward or contemplates the past; one, which is made to affect acts or facts occurring, or rights occurring, before it comes into force. Retroactive statute means a statute, which creates a new obligation on transactions or considerations or destroys or impairs vested rights."

Viewed in the light of the principles of law enunciated in the above judicial rulings, the conclusion is inescapable that the time limit of 6 months for taking CENVAT Credit on inputs or input services introduced w.e.f. 01.09.2014 would apply while claiming such credit after this date even if the relevant CENVATable documents are issued prior to this date.

"Every law is an infraction of liberty."
[Jeremy Bentham]

(The author is Sr. Advisor – Indirect Tax – BDO India LLP)

To be Continued…

See:- 6 months' validity of CENVATable Documents - "Old Ghost comes calling ….!" [Part-II]