AUGUST 06, 2019

By Dr G Gokul Kishore

GST is stated as designed to be less prone to divergent interpretation and disputes. The number of writ petitions filed in various High Courts point to the contrary. An important judgment is discussed in this 49th part to draw the attention of all concerned so that taxpayers are motivated to comply than confront the tax administration in courts.

ITC not utilized - Section 73 not invocable for recovery

Tax administration exhibits certain rigidity when history is deliberately ignored at the time of drafting of law. The consequences are obvious. In a recent judgment, the Patna High Court held that mere reflection of transitional credit in electronic credit ledger is not an act of availment for initiating proceedings under Section 73 of CGST Act and it is only if such availment is for reducing tax liability, such recovery action can be initiated. According to the High Court, 'a reflection in the electronic credit ledger cannot be treated as an availment'. It further noted that the adjudicating authority got confused in treating transitional credit claimed by the dealer as availment of such credit when availment of credit is a positive act and unless carried out for reducing any tax liability by its reflection in the return, it cannot be a case of either availment or utilization [Commercial Steel Engineering Corporation v. State of Bihar, Judgment dated 27-6-2019] - 2019-TIOL-1585-HC-PATNA-GST.

This judgment seeks to reiterate that mere entry in electronic credit ledger does not call for any recovery or penal proceedings. It is only when such credit amount is set off against tax liability as per returns, proceedings can commence. Section 73 uses the words 'where input tax credit has been wrongly availed or utilized'. 'Availing' is generally understood as taking while 'utilizing' refers to debiting the credit ledger for payment of tax. However, the High Court in this case has interpreted the word 'availed' as a positive act which will reduce tax liability and thus appears to have read 'availed' and 'utilized' more or less synonymously.

In this case, the petitioner had certain amounts of VAT ITC lying in balance as on 30th June, 2017. Though they sought refund of the same earlier, it was rejected. Such ITC balance was carried forward through TRAN-1 form to the GST regime. The department initiated proceedings under Section 73 seeking to recover the transitional credit as 'wrongly availed credit' on the ground that the claim was not substantiated by returns. The High Court specifically held that at best the claim could have been rejected but the same did not give jurisdiction to the authority to create tax liability when no outstanding liability existed and credit was not put to use. The petitioner had the amount transitioned in credit ledger as balance always though certain amounts utilized in between were paid back.

History repeats

In the pre-GST regime, Rule 14 of Cenvat Credit Rules (CCR) provided for recovery of Cenvat credit taken or utilized wrongly along with interest. The question whether interest would be payable when credit was merely taken but not utilized for setting off liability was answered by the Supreme Court. In the case of UOI v. Ind-Swift Laboratories - 2011-TIOL-21-SC-CX, the Apex Court held that the word 'or' cannot be read as 'and' and credit would be recoverable with interest even if credit was taken but not utilized. It set aside the impugned judgment of the High Court in which it was held that Rule 14 should be read down and 'or' should be read as 'and' which meant that credit was recoverable with interest only if the same was taken and utilized. The Court did not agree with application of the rule of reading down in this case as the same was to be used only to make a statute workable and to save the same from being declared unconstitutional.

In a subsequent judgment in the case of CCE v. Bill Forge Pvt. Ltd. - 2011-TIOL-799-HC-KAR-CX, the Karnataka High Court distinguished the above judgment of Supreme Court when it held that when credit entry was reversed immediately realizing mistake and no benefit was taken out of such wrong entry, there was no liability to pay any interest.The High Court relied on landmark judgments of Supreme Court in arriving at such conclusion and in particular, the dictum 'reversal of credit amount before utilization amounts to not taking the credit'. In the year 2012, Rule 14 was amended whereby 'or' was substituted with 'and' and, therefore, interest became not payable on credit wrongly taken unless the same was utilized.

Unfortunately, Section 73 dealing with input tax credit wrongly availed, uses 'or' between 'availed' and 'utilized'. The difference between Rule 14 of CCR and Section 73 of CGST Act is that in the former the word 'wrongly' has been used after 'taken' and 'utilized' while in the latter, 'wrongly' has been used before 'availed' and 'utilized'. Notwithstanding such syntax, the semantics do not change. If ITC under GST is either wrongly availed or utilized, Section 73 can be invoked for recovery. An entry in the ledger should not disturb the tax administration as it does not prejudicially affect government revenue. As held in Bill Forge case, when the taxpayer has not taken undue advantage or benefit out of an entry in the credit ledger and so long as the amount remains without being put to use for setting off tax liability, interest liability does not arise. In fact, there is no cause of action at the time of entry in credit ledger as neither any tax due payable becomes short paid at that point of time nor can such entry per se be construed as an infraction warranting recovery proceedings. Section 73 requires amendment so that 'or' is substituted with 'and'. It may be worth mentioning that this issue was flagged at the time of drafting of law but the same was not taken into account. The ambiguity being allowed to continue over use of terms like 'taking', 'availing' and 'utilizing' should be put to rest.

Section 50 amended but…

As per Finance (No. 2) Act, 2019 (Budget), Section 50 of CGST Act has been amended to the effect that interest will be payable only on the tax amount paid through electronic cash ledger when return is filed after delay and consequently, tax is paid belatedly. This effectively means that as long as sufficient balance is available in credit ledger, in case of delayed payment of tax, interest is not payable to the extent of such credit amount available. But this amendment uses the words ' except where such return is furnished after commencement of any proceedings under Section 73 or Section 74' . Therefore, this facility is not available if returns are filed after initiation of proceedings under the above provisions by the department. It is not clear whether delayed payment of tax at the time of filing returns alone is covered under this exclusion or any short payment made good at a later point of time will also be covered. But what is obvious is this amendment per se does not cover the issue of recovery of credit merely taken albeit wrongly with interest as provided for in Section 73.

Our usual prayer for appropriate amendment or change in policy has been made in the previous section. We hope GST Council and CBIC take note and action is initiated instead of filing appeal and staging the drama as witnessed in pre-GST regime all over again.

…To be continued

[The author is an Advocate. Views expressed are strictly personal]