By TIOL News Service

AHMEDABAD, SEPT 15, 2018: SECTION 140 of the CGST Act, 2017 is titled Transitional arrangements for input tax credit.

Section 140(3) reads -

(3) A registered person, who was not liable to be registered under the existing law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012-Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer, shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:-

(i) such inputs or goods are used or intended to be used for making taxable supplies under this Act;

(ii) the said registered person is eligible for input tax credit on such inputs under this Act;

(iii) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs;

(iv) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day ; and

(v) the supplier of services is not eligible for any abatement under this Act:

As can be seen, Clause(iv) of sub-section(3) of section 140 of the CGST Act, 2017 imposes a condition that such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day.

It is this condition which has aggrieved the petitioners and the constitutional validity thereof is challenged before the Gujarat High Court.It is to be noted that under the earlier Central Excise regime the petitioner were registered as a first stage dealer.

Earlier, a first stage dealer or an importer could pass on the credit of tax paid on their purchases to the customers who could utilize such credit against their duty liability on product manufactured by them. According to the petitioner, Clause (iv) of sub-section (3) of section 140 of the CGST Act has now imposed a condition for availing of such a benefit which not only acts harshly and unjustly to the petitioners and other similarly situated first stage dealers but acts retrospectively; that it is also arbitrary and discriminatory.

Both sides strenuously argued their case replete with a plethora of case laws.

The High Court considered the submissions and after visiting the earlier CCR, 2004 provisions pertaining to a 'first stage dealer' viz. rule 2(ij), rule 3(1), rule 9(4), 9(8) inter alia observed thus -

+ With the introduction of GST replacing several taxing statutes, it became necessary to make provisions for switching over from the old to the new regime which, in legal parlance, often times, is referred to as transitional provisions. Such transitional provisions are contained in Chapter XX of CGST Act.

+ As per this provision (s.140), several classes of persons including a first stage dealer would be entitled to take in his credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to fulfillment of conditions specified therein.

+ The petitioners have no grievance about any of the conditions except condition No. (iv) which provides that such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day. This condition would limit the eligibility of a first stage dealer to claim credit of the eligible duties in respect of goods which were purchased from the manufacturers prior to twelve months of the appointed day.

+ It is well settled that as long as the legislation has necessary competence to frame a law and the law so framed is not violative of the fundamental rights enshrined in the constitution or any of the constitutional provision, the Court would not strike down the statute merely on the perception that the same is harsh or unjust.

+ It is equally well settled that wherever the Parliament has the power to frame a statute it also includes the power to make the law retrospective. In other words, the Parliament also has wide powers to frame the laws including taxing statutes with retrospective effect. However, the Courts have recognized certain inherent limitations in framing retrospective tax legislations.

+ As already recorded, the statutory provisions till enactment of goods and service tax statutes recognized the right of the petitioner to pass on credit of the duty on manufactured goods purchased from manufacturers.

+ The Supreme Court in Eicher Motors Ltd vs. Union of India - 2002-TIOL-149-SC-CX-LB held that a right accrued to the assessee on the date when the paid tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed.

+ This concept was further elaborated by the Supreme Court in case of Collector of Central Excise, Pune vs. Dai IchiKarkaria Ltd - 2002-TIOL-79-SC-CX-LB - The credit is therefore, indefeasible. The Supreme Court therefore, reiterated that a credit under the Modvat scheme is as good as tax paid.

+ These judgements would thus indicate that the right that the petitioner had to pass on the credit of excise duty paid on goods purchased at the time of sale of such goods was a vested right.

+ It was as good as the duty paid by the assessee to the Government revenue which could be utilised by the purchasers of such goods from the petitioner against future liabilities, of course, subject to fulfillment of conditions.

+ When the new regime was, therefore, introduced through goods and service tax statutes, through migration these existing rights were being adjusted in terms of provisions contained in sections 139 and 140 of the CGST Act.

+ The legislature also recognized such existing rights and largely protected the same by allowing migration thereof in the new regime.

+ In the process, however, a condition was imposed to enable the assessees in the nature of first stage dealer such as the present petitioner-company viz. that the invoices or other prescribed documents on the basis of which credit was claimed were issued not earlier than twelve months immediately preceding the appointed day. In effective terms, this condition restricted the enjoyment of existing credit in respect of goods purchased not prior to one year of the appointed day.

+ In relation to all goods purchased prior to such day, no credit would be available under the credit ledger to be maintained under the CGST Act. Such credit would be lost.

+ Undoubtedly, therefore, this condition has retrospective operation and takes away an existing right.

+ This by itself may not be sufficient to hold the provision as ultra vires or unconstitutional. However, in addition to these findings, we also find that no just, reasonable or plausible reason is shown for making such retrospective provision taking away the vested rights.

+ Had the statutory provision given a time limit from the appointed day for utilization of such credit, the issue would stand on an entirely different footing. Such a provision could be seen as a sunset clause permitting the dealers to manage their affairs for which reasonable time frame is provided.

+ The present condition, however, without any basis, limits the scope of a dealer to enjoy existing tax credits in relation to purchases made prior to one year from the appointed day. No such restriction existed in the prior regime.

+ Merely the stated grounds in the affidavit in reply that the provision is introduced since physical identification of goods is necessary so as to ensure that the first stage dealers do not take any undue advantage of such benefit and also to accommodate the administrative convenience would not be sufficient.

+ Firstly, as noted, there was no such restriction in the CENVAT Credit Rules or analogous provisions of similar rules in the past. Since decades, therefore, the credits would be available to a first stage dealer on all purchases towards the manufacturing duty.

+ No time frame of the past dealings was envisaged under such rules. The same grounds of physical identification of goods preventing undue advantage being taken and the administrative convenience would exist even then. Secondly, no limitation of time is prescribed in the proviso to sub-section (3) of section 140 where a dealer is not in possession of any invoice or any other document evidencing payment of duty in respect of inputs in which case credit at the prescribed rate would be granted.

+ We are unable to adopt the line chosen by the Bombay High Court in case of JCB India Limited and others v. Union of India and others - 2018-TIOL-23-HC-MUM-GST.

Conclusion:

++ We are of the opinion that the benefit of credit of eligible duties on the purchases made by the first stage dealer as per the then existing CENVAT credit rules was a vested right.

++ By virtue of clause (iv) of sub-section (3) of section 140A such right has been taken away with retrospective effect in relation to goods which were purchased prior to one year from the appointed day.

++ This retrospectivity given to the provision has no rational or reasonable basis for imposition of the condition. The reasons cited in limiting the exercise of rights have no co-relation with the advent of GST regime.

++ Same factors, parameters and considerations of "in order to co-relate the goods or administrative convenience" prevailed even under the Central Excise Act and the CENVAT Credit Rules when no such restriction was imposed on enjoyment of CENVAT credit in relation to goods purchased prior to one year.

++ Though the impugned provision does not make hostile discrimination between similarly situated persons, the same does impose a burden with retrospective effect without any justification.

++ Clause (iv) of sub- section (3) of section 140 is unconstitutional. We therefore strike down the same.

The Petitions were allowed.

Nonetheless, at the request of counsel for the Revenue the judgement was stayed upto 31.10.2018.

(See 2018-TIOL-2861-HC-AHM-GST)