AUGUST 28, 2017

By Manasi Khare, Advocate

AFTER the introduction of Goods and Services Tax law, with effect from 01.07.2017, many companies whose final products were exempted under the erstwhile law are now required to discharge GST at varying rates on the supply of the very same products. Such companies were not entitled to avail the credit of the duties [Excise duty or Countervailing Duty, as the case maybe] paid on the capital goods for a period of two years, in terms of Rule 6(4) of the CENVAT Credit Rules, 2004 because the said capital goods were exclusively utilized for the manufacture of exempted goods.

The issue to be examined is whether, the companies are entitled to carry forward the credit of those capital goods in the GST Law,which were acquired after 1.04.2016?Before proceeding to analyze the specific issue at hand, it pertinent to briefly summarize the legal provisions in this regard.

Relevant provisions under CCR, 2004:

Rule 6(4) of the CENVAT Credit Rules, effective from 01.04.2016 , [Not. 13/2016 - Dated 1-3-2016,  refers] provided that no credit shall be allowed on capital goods used exclusively in the manufacture of exempted goods or in providing exempted services for a period of two years from the date of commencement of the commercial production or provision of services, as the case may be, other than the units availing the benefit of SSI exemption.

Relevant provisions under GST Law & allied Rules on Transition:

Section 140(2) of the CGST Act, provides that a registered person, shall be entitled to take, credit of unavailed CENVAT credit in respect of capital goods, not carried forward in a return, under the earlier law, for the period ending with the day immediately preceding the appointed day. The said credit would be available on filing Form GST TRAN-1.

Here,as per the Explanation to sub-section (2) to section 140 of the CGST Act, 2017, 'unavailed CENVAT credit' means the amount that remains after subtracting the amount of CENVAT credit already availed in respect of capital goods from the aggregate amount of CENVAT credit to which the said person was entitled under the existing law.In the case on hand, the term "unavailed CENVAT credit" can, therefore, also be construed to mean the credit which was not at all permitted to be availed due to the then existing provisions of law [rule 6(4) of CCR, 2004 refers] and as narrated in the preceding paragraphs.

It is also to be noted that section 174 of the CGST Act lays down the provision pertaining to 'Repeal and Savings' which provides for the operation of erstwhile laws.

It stipulates that the repeal of the said Acts and the amendment of the Finance Act, 1994 to the extent mentioned in the sub-section (1) or section 173 shall not -

a. affect the previous operation of the amended Act or repealed Acts and orders or anything duly done or suffered thereunder; or

b. affect any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts or orders under such repealed or amended Acts

Analysis:

The following emerges from a reading of the provisions under Rule 6(4) of the Credit Rules, as substituted with effect from 01.04.2016,along with the Transition Provisions viz.,

- Assesses can avail credit even on those capital goods, which were exclusively used in the manufacture of exempted goods, on completion of two years from date of installation of such capital goods.

- As on the appointed day i.e., till 30.06.2017 the assessee may not have completed two years (i.e., two years from the date of installation of such capital goods)

- The CCR, 2004 are not in force from 01.07.2017.

At this juncture, it becomes pertinent to analyse whether companies are entitled to carry forward the credit of the excise duty which would have accrued to them during the period after introduction of the GST Law.

The fact remains that the assesse would have been entitled to the right of credit after a period of 2 years and that should not ideally, be taken away merely by the change of law .

Section 174 of the CGST Act provides that the repeal of the erstwhile Acts should not 'affect any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts or orders under such repealed or amended Acts'. It can be inferred that the Credit Rules provided for a right that was vested in the companies and that the right was only deferred to the extent that its exercise was contingent on completion of two years.

While it is true that the courts have upheld the applicability of repeals and savings clause for the purpose of applicability of erstwhile vested rights and obligations, it does not imply that the legislative intention of the new enactments are not factored in.

The judiciary has also examined the intention of the new legislation in determining the applicability of the repeals and savings clause to conclude if the rights accrued, continue even after the change in law. In the case of India Tobacco Co. Ltd. vs. CTO reported in (1975) 3 SCC 512, it was held that repeal is not a matter of mere form but is of substance, depending on the intention of the legislature. If the intention indicated either expressly or by necessary implication in the subsequent statute was to abrogate or wipe off the former enactment wholly or in part, then it would be a case of total or pro tan to repeal. The only proviso to the aforementioned Repeal and Savings clause of the GST Act states that any tax exemption granted as an incentive against investment through a notification shall not continue as a privilege if the said notification is rescinded on or after the appointed day.

The erstwhile Credit Rules did not contemplate the fate of the beneficial provision if there is change of law. Even the transitional provisions under the GST Law do not explicitly address this specific situation and there is neither an express or implied intention to the contrary in the GST Act.

Conclusion

Therefore, the enquiry of this article is whether it would be in consonance with the provisions of the GST law for such companies to take credit of the duty paid on those capital goods procured after 1.04.2016 (which were used for manufacture of exempted goods earlier but which are taxable in the GST regime), by carrying forward the same as 'unavailed credit' in GST TRAN-1 but not utilize the same for a period of two years from the date of commencement of commercial production.

While it is discernible that the credit eligibility under GST regime may be questioned, if carried forward, the provisions under the Credit Rules should be given a beneficial interpretation for carrying forward the credit and reliance should be placed on the 'Repeal and Savings' clause which provides that the new law shall not affect any rights under the erstwhile Acts/Rules framed thereunder.

This position is not clear and hence the department should ideally issue a clarification expeditiously so that the assessees are able to take such credit before the filing of TRAN-1.

The clarification should also provide a mechanism for availment of such credit after two years from the date of commencement of the commercial production.

Hopefully, the government of the day would not and should not hesitate in providing the much-needed succor to the already ailing manufacturing sector.

(The views expressed are strictly personal.)