FEBRUARY 28, 2018

By Shailesh Sheth, Advocate & Founder, M/s SPS LEGAL

"Nobody has a more sacred obligation to obey the law than those who make the law." (Jean Anouilh)

The Central Board of Excise and Customs (“the Board”) is at it again…! Hardly a week ago, the Board had issued a ‘one-of-its-kind' Circular summarizing total sixty three orders of the different High Courts which have been accepted by the Department. The objective behind this Circular No. 1063/2/2018-CX dated 16.02.2018, as clearly spelt out therein, is to reduce litigation so that cases on similar questions of law or identical case on facts pending in various Commissionerates across the country can be expeditiously decided.

Even while the taxpayers are marveling at the grace, judicial decorum and openness displayed by the Board and are heaving a huge sigh of relief, the Board dropped a ‘bombshell' on them evaporating all sense of relief ! Close on the heels of the above Circular issued in the context of the erstwhile Indirect tax regime, the Board has, on 23rd February, 2018, issued another Circular No. 33/07/2018-GST sowing the seeds for intense litigation in the coming days in the GST arena.

This highly controversial Circular has been issued by the Board in exercise of the powers ostensibly conferred on it under Section 168 of the Central Goods and Services Act, 2017 (‘the CGST Act') and contains Directions for the purpose of uniformity in the implementation of the Act. Before I deal with the validity and implications of these Directions, it would be advantageous to refer to the Directions issued vide the Circular, the relevant portion of which is reproduced below for the ease of reference:

2. Non-utilization of disputed credit carried forward:

2.1 Where in relation to a certain CENVAT credit pertaining to which a show cause notice was issued under rule 14 of the CENVAT Credit Rules, 2004, which has been adjudicated and where in the last adjudication order or the last order-in-appeal, as it existed on 1st July, 2017, it was held that such CENVAT credit is not admissible, then such CENVAT credit (hereinafter referred to as “disputed credit”), credited to the electronic credit ledger in terms of sub-section (1), (2), (3), (4), (5), (6) or (8) of section 140 of the Act, shall not be utilized by a registered taxable person to discharge his tax liability under this Act or under the IGST Act, 2017, till the order-in-original or the last order-in-appeal, as the case may be, holding that disputed credit as inadmissible is in existence.

2.2 During the period, when the last order-in-original or the last order-in-appeal, as the case may be, holding that disputed credit as inadmissible is in operation, if the said disputed credit is utilized, it shall be recovered from the tax payer, with interest and penalty as per the provisions of the Act.

3. Non-transition of Blocked Credit

3.1 In terms of clause (i) of sub-section (1) of section 140 of the Act, a registered person shall not take in his electronic credit ledger, amount of CENVAT credit as is carried forward in the return relating to the period ending with the day immediately preceding the appointed day which is not eligible under the Act in terms of sub-section (5) of section 17 (hereinafter referred to as ‘blocked credit'), such as, telecommunication towers and pipelines laid outside the factory premises.

3.2 If the said blocked credit is carried forward and credited to the electronic credit ledger in contravention of section 140 of the Act, it shall not be utilized by a registered taxable person to discharge his tax liability under this Act or under the IGST Act, 2017,and shall be recovered from the tax payer with interest and penalty as per the provisions of the Act.

4. In all cases where the disputed credit as defined in terms of para 2.1 or blocked credit under para 3.1 is higher than Rs. Ten lakhs, the taxpayers shall submit an undertaking to the jurisdictional officer of the Central Government that such credit shall not be utilized or has not been availed as transitional credit, as the case may be. In other cases of transitional credit of an amount lesser than Rs. Ten lakhs, the directions as above shall apply but the need to submit the undertaking shall not apply.”

By the tone and tenor of the Directions, one may feel too flabbergasted and shell-shocked even to react to them! Rarely, if ever, has such blatant display of arrogance by the Board been witnessed by the taxpayers! But let us shake off these feelings – howsoever difficult and painful the exercise may be – and critically examine the validity and propriety of the Directions issued by the Board.

So far as the ‘Disputed Credit' carried forward in GST regime is concerned, the Board, in effect, directs its non-utilisation for payment of tax under the CGST Act or IGST Act, 2017 till the relevant Order-in-Original or Order-in-Appeal is in existencepost 1st July, 2017. The Board further directs the recovery of such disputed credit (with interest and penalty) if the same is utilized post-GST introduction, if the subject Order-in-Original or Order-in-Appeal is still in operation. Has the Board forgotten, while issuing these directions, that there was a provision in the form of Section 35F in the (erstwhile) Central Excise Act, 1944 (‘the CEA, 1944') - also made applicable to Service Tax vide Section 83 of the (erstwhile) Finance Act, 1994 (‘the FA, 1994') - that provided for the pre-deposit of duty/tax, interest or penalty demanded while filing of an appeal before Commissioner (Appeals) or Appellate Tribunal and waiver and stay against the recovery of the adjudged demand? That, Section 35F stood amended w.e.f. 6th August, 2014 and a concept of mandatory pre-deposit of 7.5%/10% was introduced in the Statute? Needless to say, the provisions of Section 35F were applicable in case of appeal filed against an Order-in-Original or Order-in-Appeal holding the CENVAT Credit inadmissible leading to the demand or recovery thereofunder Rule 14 of CENVAT Credit Rules, 2004 (‘the CCR, 2004') to which the provisions of Section 11A of CEA, 1944 or Section 73 of FA, 1994 were made applicable.

The validity and propriety of the Directions need to be examined against the above legal backdrop and in light of the following explicit instructions issued by the Board in the recent past on the issue of recovery of confirmed demand during the pendency ofappeal before the appellate authority.

1. Circular No. 984/08/2014-CX dated 16.09.2014:

Vide this Circular, the Board issued the instructions onthe aspect of stay/dispensation of pre-deposit under new provisions of Finance (No.2) Act, 2014 and recovery during pendency of appeal before Tribunal/Commissioner (Appeals). The relevant portion of the Circular is reproduced below:

4. Recovery of the Amounts during the Pendency of Appeal:

4.1 Vide Circular No. 967/1/2013, dated 1st January, 2013, Board has issued detailed instructions with regard to recovery of the amounts due to the Government during the pendency of stay applications or appeals with the appellate authority. This Circular would not apply to cases where appeal is filed after the enactment of the amended Section 35F of the Central Excise Act, 1944 or Section 129E of the Customs Act, 1962.

4.2 No coercive measures for the recovery of balance amount i.e., the amount in excess of 7.5% or 10% deposited in terms of Section 35F of Central Excise Act, 1944 or Section 129E of Customs Act, 1962, shall be taken during the pendency of appeal where the party/assessee shows to the jurisdictional authorities:

(i) proof of payment of stipulated amount as pre-deposit of 7.5%/10%, subject to a limit of Rs. 10 crores, as the case may be; and

(ii) the copy of appeal memo filed with the appellate authority.

4.3 Recovery action, if any, can be initiated only after the disposal of the case by the Commissioner (Appeals)/Tribunal in favour of the Department. For example, if the Tribunal decides a case in favour of the Department, recovery action for the amount over and above the amount deposited under the provisions of Section 35F/129E may be initiated unless the order of the Tribunal is stayed by the High Court/Supreme Court. The recovery, in such cases, would include the interest, at the specified rate, from the date duty became payable, till the date of payment.”

2. Circular No. 1035/23/2016-CX dated 04.07.2016:

This Circular, on the similar issue of ‘recovery during pendency of appeal' came to be issued by the Board in light of the important changes made in law and important judgments rendered on the subject necessitating the review of its earlier Circular No. 967/1/2013-CX dated 01.01.2013. The Board, in particular, took note of the judgment of the Hon'ble High Court of Punjab & Haryana in the case of M/s. PML Industries Ltd. v. CCE – 2013-TIOL-201-P&H-CX holding that during the pendency of stay, irrespective of the conduct of the Assessee, no recovery could be made and the subsequent affirmation of this judgment by the Hon'ble Supreme Court with the dismissal of the SLP [No. 765/2014]filed by the Revenue against the said judgment. Taking note of these judgments, theBoard issued the following instructions:

"4.1 In light of the above judgments, the Circular No. 967/1/2013-CX, dated 1-1-2013 is hereby rescinded and following fresh instructions are given on the subject. It is also clarified that seven circulars which had been rescinded vide Circular No. 967/1/2013-CX, dated 1-1-2013 shall continue to remain rescinded.

4.2 In cases where stay application is pending before Commissioner (Appeals) or CESTAT for periods prior to 6-8-2014, no recovery shall be made during the pendency of the stay application.

4.3 For subsequent period i.e. from 6-8-2014 onwards, instructions contained in Circular No. 984/08/2014-CX, dated 16-9-2014 shall continue to be followed. Section 129E of the Customs Act, 1962 and Section 35F of the Central Excise Act, 1944, as made applicable to Service Tax vide Section 83 of the Finance Act, 1994, was amended vide Finance Act, 2014 with effect from 6-8-2014."

3. Circular No. 1053/2/2017-CX dated 10.03.2017:

In this Master Circular issued on ‘Show Cause Notice, Adjudication proceedings, Closure of proceedings and Recovery of duty', the Board, while referring to the above two Circulars, has stated as under:

“20.2 Recovery during pendency of litigation: Board has issued two circulars on the subject vide Circular No. 984/08/2014-CX, dated 16-9-2014 and Circular No. 1035/23/2016-CX, dated 4-7-2016.

(i) Sub-Section (iii) of Section 35F of the Central Excise Act, 1944 and Section 129E of the Customs Act, 1962 stipulate payment of 10% of the duty or penalty payable in pursuance of the decision or order being appealed against i.e. the order of Commissioner (Appeals). In the event of appeal against the order of Commissioner (Appeals) before the Tribunal, 10% is to be paid on the amount of duty demanded or penalty imposed by the Commissioner (Appeals). This need not be the same as the amount of duty demanded or penalty imposed in the Order-in-Original in the said case.

(ii) In a case, where penalty alone is in dispute and penalties have been imposed under different provisions of the Act, the pre-deposit would be calculated based on the aggregate of all penalties imposed in the order against which appeal is proposed to be filed.

(iii) In case of any short-payment or non-payment of the amount stipulated under Section 35F of the Central Excise Act, 1944 or Section 129E of the Customs Act, 1962, the appeal filed is liable for rejection.

(iv) Section 35F of the Central Excise Act, 1944 has been amended with effect from 6-8-2014 to provide for mandatory payment of 7.5% or 10% of the duty demanded where duty demanded is in dispute or where duty demanded and penalty levied are in dispute for admission of appeal before Commissioner (Appeals) or CESTAT. Once the amount is paid, no coercive action shall be taken for recovery of the balance amount during the pendency of the appeal proceedings before these authorities.

20.3 In cases where stay application is pending before Commissioner (Appeals) or CESTAT for periods prior to 6-8-2014, no recovery shall be made during the pendency of the stay application.”

It is evident from the above consistent instructions issued by the Board that when an Order-in-Original or Order-in-Appeal holding the CENVAT credit inadmissible is challenged by the Assessee before the Commissioner (Appeals) or the Appellate Tribunal by way of an appeal and the provisions of Section 35F, as it stood prior to and post 6th August, 2014, have also been complied with by him, the recovery of such ‘disputed credit' in any mannerby the department cannot be effected at all. The settled legal position recognized by the Board in these instructions would obviously continue to hold good even if the ‘Disputed credit' is carried forward in Electronic Credit Ledger as on 1st July, 2017 by the registered taxpayer in terms of the provisions of Section 140 of the CGST Act, 2017. The aforesaid Directions issued by the Board, effectively providing for freezing the ‘Disputed credit', if unutilized, or its recovery (with interest and penalty), if utilized, notwithstanding the fact that the taxpayer has complied with the provisions of the erstwhile Section 35F of the CEA are therefore, not only contrary to its own standing instructions on the issue, but against the well settled principles of law and are patently invalid. The clever use of the two different expressions ‘in existence' and 'in operation' in the Circular would not really justify or validate the Directions. An Order-in-Original or Order-in-Appeal, needless to say, remains in existence till it is set aside by the competent authority in accordance with law. Such Orders may even legally be considered as ‘in operation' till they are stayed by the competent authority. However, once the conditions prescribed vide Section 35F of the CEA, 1944 are complied with by the Assessee, wouldn't the recovery of the confirmed demand remain stayed during the pendency of appeal? In fact, the Board itself has recognized and acceptedthis legal position vide its aforesaid sterling instructions which either have been forgotten or is it a case of intentional amnesia?

Let us also visualize a few more scenarios and the propriety and applicability of the Directions:

• The Directions obviously would not apply in case of those Assessees who have already utilized the disputed credit (there is no bar to such utilization once the provisions of Section 35F are complied with) prior to 30.06.2017. Isn't this discriminatory?

• What if the appeal is filed by the Assessee along with the mandatory pre-deposit after 01.07.2017 against an Order-in-Original or Order-in-Appeal passed before or after 01.07.2017 holding the CENVAT Credit inadmissible and in the meantime, the disputed credit is carried forward as on 1st July, 2017?

• If the amount of credit carried forward as on 1st July, 2017 is less than the amount of disputed credit, will the entire amount carried forward be attributed to ‘disputed credit' for the purpose of the Directions? Is this permissible in law?

• What happens in those cases where the stay applications of the Assessee filed under Section 35F are pending for disposal as on 01.07.2017 for any reason?

In all such situations, the Directions will either be non-applicable or if applied, are exposed to serious challengeon the grounds of illegality, impropriety and invalidity.

The Directions contained in para 3 of the Circular relating to ‘non-transition of Blocked credit' equally suffer from the vice of illegality and invalidity. The Board has referred to clause (i) of the proviso to sub-section (1) of Section 140 of the CGST Act, 2017 which reads as under:

“Provided that the registered person shall not be allowed to take credit in the following circumstances, namely: -

(i) Where the said amount of credit is not admissible as input tax credit under this Act; or

… ? …”

A plain reading of this clause would convey an impression that even if the CENVAT Credit on any inputs or input services was admissible in the previous regime, if the same is not admissible as input tax credit under the current GST regime in terms of the provisions of the CGST Act, such amount of CENVAT Credit cannot be carried forward by the taxpayer. This innocently worded provision is no less than a monstrous one and has a diabolical design. Unfortunately, the taxpayers across the trade and industry have not paid enough attention to this provision (and many such other provisions of the CGST Act, 2017) and its far-reaching implications. However, the larger issue here is that if the CENVAT Credit was admissible in the erstwhile regime but not admissible in the GST regime (refer exclusions carved out in Section 17(5) of the CGST Act, 2017), can it be prohibited from being carried forward as transitional credit? In CCE, Pune v. Dai Ichi Karkaria Ltd. - 2002-TIOL-79-SC-CX-LB, the Hon'ble Supreme Court has observed as under:

“It is clear from the Modvat Rules, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. The credit is, therefore, indefeasible. It should also be noted that there is no co-relation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available. It is, therefore, that in the case of Eicher Motors Ltd. v. Union of India - 2002-TIOL-149-SC-CX-LB Supreme Court said that a credit under the Modvat scheme was “as good as tax paid.”

In Eicher Motors Ltd. v. UOI- 2002-TIOL-149-SC-CX-LB, the Hon'ble Supreme Court has observed as under:

“By application of Rule 57F (4A) credit attributable to inputs already used in the manufacture of the final products and the final products which have already been cleared from the factory alone is sought to be lapsed, that is, the amount that is sought to be lapsed relates to the inputs already used in the manufacture of the final products but the final products have already been cleared from the factory before 16-3-1995. Thus the right to the credit has become absolute at any rate when the input is used in the manufacture of the final product. The basic postulate, that the scheme is merely being altered and, therefore, does not have any retrospective or retro-active effect, submitted on behalf of the State, does not appeal to us. When on the strength of the rules available certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that right, which had accrued to a party such as availability of a scheme, is affected and, in particular, it loses sight of the fact that provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the assessees concerned. Therefore, the scheme sought to be introduced cannot be made applicable to the goods which had already come into existence in respect of which the earlier scheme was applied under which the assessees had availed of the credit facility for payment of taxes. It is on the basis of the earlier scheme necessarily the taxes have to be adjusted and payment made complete. Any manner or mode of application of the said rule would result in affecting the rights of the assessees.”

The author is of the respectful view that the ratio of the principle laid down in the aforesaid judgements of the Hon'ble Supreme Court would need serious consideration while examining the validity of clause (i) of the proviso to sub-section (1) of Section 140 of the CGST Act, 2017.

The Directions issued by the Board are not restricted merely to ‘non-utilization of Disputed credit or Blocked credit' but also provide for the recovery thereof with interest and penalty in case the same is utilized during the period when the subject Order-in-Original or Order-in-Appeal is in existence/in operation. Such recovery is directed to be made under the provisions of the CGST Act, 2017. The moot question here is whether it is permissiblein law to effect the recovery in this manner under the provisions of the CGST Act, 2017 at all? The only provision for ‘demand and recovery of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason' is contained in Section 73 of the CGST Act, 2017. Can this provision be pressed into service for recovery of the CENVAT Credit carried forward by the taxpayer as on 01.07.2017 though the dispute about its admissibility has been raised by the department in the previous regime and the matter is pending before the appellate authority for resolution as on 01.07.2017? From the conjoint and harmonious reading of Section 2(62) and Section 2 (63) of the CGST Act, 2017 defining the terms ‘input tax' and ‘input tax credit' respectively,it is evident that the term ‘input tax credit' does not take within its ambit the CENVAT Credit – irrespective of whether it is disputed or not - carried forward by the taxpayer as transitional credit under Section 140 of the CGST Act, 2017. The Directions arealso apparently in the teeth of Section 174 of the CGST Act, 2017 dealing with ‘Repeal and Saving' and are exposed to challenge on the ground of lack of sanctity in law.

It is also rather amusing to see that the Directions, vide para 4 of the Circular, also provide for the furnishing of an undertaking by the taxpayers to the Jurisdictional officer of the Central Government to the effect that such credit shall not be utilized or has not been availed as transitional credit, as the case may be. Such undertaking is directed to be furnished in case the Disputed credit/Blocked credit is higher than Rs.10 lakhs. Mercifully(?), in case the amount is less than Rs.10 lakhs, the filing of undertaking has been dispensed with. The only question here is whether prescribing of such condition of filing of undertaking has any sanctity in law or any statutory backing whatsoever? Again, when larger issues of law are involved, is it permissible for the Board to create two classes of taxpayers merely on the basis of the amounts involved in so far as the furnishing of undertaking is concerned, assuming, of course that such direction of furnishing undertaking is valid in the first place ?

Finally, the resort to Section 168 of the CGST Act, 2017 for issue of such Directions itself is also highly debatable. This Section empowers the Board to issue instructions or directions, if considered necessary or expedient, for the purpose of uniformity in the implementation of the Act. The apparent legislative intent behind this provision is to make it beneficial and in the interest of the taxpayers. Can this provision be used by the Board as ‘recovery mechanism', either directly or indirectly? It is to be noted that prior to 01.07.2017, no diverse or discriminatory practice was prevalent so far as the recovery of the confirmed demand during the pendency of appeal/stay application was concerned in view of the clear and explicit instructions issued by the Board from time to time and referred to supra. Where is the justification, therefore for the Board to suddenly step in to ‘achieve uniformity in the implementation of the CGST Act, 2017' when there did not exist any diversity or discrimination nor is there any change in the legal position post 1st July, 2017? The only 'uniformity' the Directions may achieve is in the matter of ' recovery ' while implementing the CGST Act, if that is the objective of the Board!

It is crystal clear that the Directions issued by the Board are aimed at, nothing but, ‘revenue mop-up'! It is a well-known fact that there is a huge gap between the projected revenue collections andthe actualrevenue collections on Indirect Tax front post-GST introduction in the country. All sorts of measures are being applied to shore up the dwindling revenue collections. The ongoing ‘disposal drive', ‘transitional credit scrutiny drive', ‘on-the-spot recovery during investigation/audit drive', ‘In pursuit of fruitless litigation drive' and a few other such measures have only one objective and that is, to fill up the empty coffers of the Central Government and the State Governments. Whatever may be the validity and justifiability of all such measures, the aforesaid Directions are certainly quite disturbing, to put it mildly, considering their serious and far-reaching implications. The freezing of the Disputed credit would mean that the taxpayers will be forced to shell out that much amount of tax in cash on their taxable supplies. This will only add to their existing woes. It is a matter of common knowledge that across the country, thousands of cases involving hundreds of crores of rupees as Disputed CENVAT Credit are pending before the Commissioner (Appeals) or Appellate Tribunal, not to speak of the High Courts and Supreme Court. A substantial portion of this Disputed credit has been carried forward by the large number of taxpayers as on 01.07.2017 as permissible in law. Such accumulated credit, in effect, represents the working capital for the taxpayers on which they are obliged to incur the interest burden. When such amount of credit is not permitted to be utilized, it will only worsen the situation and increase the financial burden of the taxpayers though it may certainly ease the working capital needs of the exchequer! Isn't this practice reminiscent of the days of the ruling by the predecessor FM when the Preventive/Anti Evasion/DGCEI Officers used to withdraw the CENVAT Credit Registers on one pretext or another generally during the last quarter of the financial year only with a view to stop the Assessees from utilizing the CENVAT Credit for the payment of Excise duty/Service Tax? Even the recovery proceedings, if initiated as per theDirections, in respect of Disputed credit/Blocked credit utilized would only mean initiating a completely useless round of fresh litigation across the country. Is this what one means by 'Ease of Doing Business in India'? One need not be clairvoyant to understand that the Directions are meant only to achieve the ‘impractical and imaginary revenue targets'. In the process, if the avowed objective of the grant of seamless and unhindered credit under GST regime is sacrificed then so what?

To sum-up, the Directions issued by the Board are apparently mischievous, invalid, without any authority of law, contrary to the settled principles of law as well as the Board's own instructions on the subject matter, discriminatory, irrational and unreasonable. The Directions display either the lack of knowledge and understanding about the basic statutory provisions as also the principles of law well settled by various judicial pronouncements or a ‘who gives a damn?' attitude! Either way, the Directions are extremely disturbing and will lead to completely avoidable litigation. It is doubtful whether these Directions will stand the scrutiny of law before the higher judicial fora. One can only fervently hope that wiser counsel will prevail and the Directions willeither be withdrawn or suitably modified in consonance with the statutory provisions and the established principles of law so as to avoid opening up the floodgate of litigation!

"A King who impoverishes his own people or angers them by unjust exactions will lose their loyalty." (Kautilya)

(The views expressed are strictly personal.)