NOVEMBER 11, 2019

By K Srinivasan

PARLIAMENT Vide Finance Act 2004, introduced the levy of Education Cess and, vide Finance Act 2007, the levy of Secondary and Higher Education Cess.

The CENVAT Credit Rules 2004, enabled a manufacturer of final products or a provider of output services to avail CENVAT credit in respect of EC and SHEC against duty levied on excisable goods or taxable services in terms of Rules 3(1)(vi), (via), (x) and (x-a) thereof.

The Rules specifically provided that once availed, the utilization thereof shall be only as against payment of EC or SHEC respectively.

In the meanwhile, the levy of EC and SHEC on taxable services was abolished vide Finance Act 2015, with effect from 01.06.2017.

Notification No.14/2015-CE exempted all goods falling within the first schedule to the Central Excise Tariff Act, also from the levy of EC and SHEC.

In the light of the specific stipulation that EC and SHEC availed could be set off/utilised only against the payment of EC and SHEC respectively, the credit that had been accumulated on this account would have to justifiably lapse.

Vide Finance Act 2016, Krishi Kalyan Cess (in short 'KKC') was levied on taxable services by the Central Government with effect from 01.06.2016 with the avowed object of financing and promoting initiatives, including agriculture or related activities.

Notification No.28/2016-CE (NT) dated 26.05.2016 enabled a provider of output services to avail CENVAT credit and utilise the same against KKC.

The accumulated credit of EC, SHEC and KKC from the start of GST had become dead and gone for two reasons -

1) When the amending Acts introducing the said Cesses in question have been dropped as dead, the benefits under that can't be either claimed or allowed to flow in perpetuity;

2) CENVAT credit attributable to Cesses even other-wise had always remained in water tight compartments, barred from cross utilisation across the board towards discharge of general output tax liabilities except towards payment of same line or type of Cesses.

And there is nothing that the taxpayers could claim or do with such credit, having carried forward, since the same was ineligible ab initio , from being utilised against payment of all taxes but confined to its use only against those Cesses to which they belonged,was the broad understanding of Revenue.

This argument was rejected by the High Court - 2019-TIOL-2516-HC-MAD-GST on the ground that any accumulated credit cannot be said to have been wiped out unless there is a specific order under which it lapses and, therefore, it survives.

The Madras HC had held onto its attemptto ensure it asan attainable end to the petitioner, by its recent judgement on the transition of Cesses into GST, despite the futility of future means of its use being in question, sadly far from its mind, in doing so.

Though there may be embargos placed by the Statutes and Rules, such as the embargo against cross–utilisation placed by Rule 3(7)(b) of the CCR, the accumulated credit continue as a vested right in the books of the taxpayer till specifically wiped out, is one of the leading observations in the above case.

Circular bearing reference No. 87/06/2019-GST dated 02.01.2019 was since issued by the Government to clarify its stand.

Similar Instructions were issued in the past by the Central Board of Excise and Customs dated 07.12.2015, to reveal its mind and its policy decision, not to allow utilisation of accumulated credit of EC and SHEC.

The Board said that the cesses have been phased out and since there is no new liability to pay these cesses, no vested right can be said to exist in relation to the past accumulated credit in the light of Rule 3(7)(b) of the Cenvat Credit Rules, 2004 which stipulates that Cenvat Credit shall be utilised only as against payment of specified duties.

Here, the duties and taxes for which transition being allowed, is governed by the expression "eligible duties" in section 140(1) which alone are allowed to be transitioned and would not cover within its fold the Cesses, is the short view of the matter, in the opinion of Revenue.

While in a clear cut manner, the lapse of credit is required to be ordered as per the Court for the disallowance of Cesses beyond 01.07.2017 by the Department.

And that explanation 3 added, retrospectively in Section 140, to equate the term CENVAT Credit to Eligible duties, said to have been not notified, was another objection of the court, which in light of above circular, in some degree would appear to make up for it, as it rules out the usage of the expression "eligible duties and taxes" anywhere else in the Act.

The point in question is whether such an explicit order to lapse the said Cesses is a must, to treat the old Cesses to be treated as wiped out, in addition to the attendant provisions and the administrative instructions/Circulars, pointing at that already?

Whether absence of such express order will fail the larger scheme itself from its legal objective to bar the transition of the accumulated Cesses whichspecified duties under the CCR, and via Section 140 of the CGST Act/Rule 117 of the CGST Rules?

The Central Goods and Service Tax Act, 2017 has witnessed a number of amendments.

Section 28 of CGST (Central Goods and Service Tax) Amendment Act, 2018 is one that proposes the following amendment, which is reproduced below in its entirety.

In section 140 of the principal Act, with effect from the 1st day of July, 2017,––

(a) in sub-section (1), after the letters and word "CENVAT credit", the words "of eligible duties" shall be inserted and shall always be deemed to have been inserted;

(b) in the Explanation 1- (i) for the word, brackets and figures "sub-sections (3), (4)", the word, brackets and figures "sub-sections (1), (3), (4)" shall be substituted and shall always be deemed to have been substituted; (ii) clause (iv) shall be omitted and shall always be deemed to have been omitted;

(c) in the Explanation 2- (i) for the word, brackets and figure "sub-section (5)", the words, brackets and figures "sub-sections (1) and (5)" shall be substituted and shall always be deemed to have been substituted; (ii) clause (iv) shall be omitted and shall always be deemed to have been omitted;

(d) after Explanation 2 as so amended, the following Explanation shall be inserted and shall always be deemed to have been inserted, namely:-

Explanation 3.- For removal of doubts, it is hereby clarified that the expression "eligible duties and taxes" excludes any cess which has not been specified in Explanation 1 or Explanation 2 and any cess which is collected as additional duty of customs under sub-section (1) of section 3 of the Customs Tariff Act, 1975.

Importantly, Explanation (3) clarifies that the expression 'eligible duties and taxes' excludes retrospectively, any cess not specified in Explanation (1) or (2), and any cess which is collected as additional duty of customs under sub-section (1) of section 3 of the Customs Tariff Act, 1975,and hence reference to it in the Court order as not notified in that sense, would not appear to hurt the case on hand in any way, as held by the Court.

Explanation 3 is excerpted below for an easy reference of the readers;

Explanation 3.- For removal of doubts, it is hereby clarified that the expression "eligible duties and taxes" excludes any cess which has not been specified in Explanation 1 or Explanation 2 and any cess which is collected as additional duty of customs under sub-section (1) of section 3 of the Customs Tariff Act, 1975.'.

It has been decided only consciously not to notify the clause (i) of sub-section (b) of section 28 and clause (i) of sub-section (c) of section 28 of CGST (Amendment) Act, 2018 which link Explanation 1 and Explanation 2 of section 140 to section 140(1).

It was thought wise to ensure that credit allowed to be transitioned under section 140(1) is not linked to credit of goods in stock, as provided under Explanation 1, and credit of goods and services in transit, as provided under Explanation 2.

However, the duties and taxes for which transition is allowed would be well taken care by the expression "eligible duties" in section 140(1) read with Rule 117(1) which alone are allowed to be transitioned.

This would amply cover within its fold the duties which are listed as "eligible duties" at sl. no. (i) to (vii) of explanation 1, and "eligible duties and taxes" at sl. no. (i) to (viii) of explanation 2 to section 140, since the expression "eligible duties and taxes" has not been used elsewhere in the Act.

However, in the final view of the Court, it was held that the revenue had not made out any bar for the transitioning of EC, SHEC and KKC into the GST regime and the petitioner satisfied all conditions both under sub-section (1) and (8) of section 140.

The embargo placed by Rule 3(7)(b) is long gone with the introduction of GST. Certainly the powers-that-be are conscious of these factors in drafting the new legislation and the specific provision in question i.e., Section 140 is another leading observation of the HC.

The main reason attributed by the Court while deciding the matter was that while applying these propositions to the case on hand, the provisions of section 140(1) provided for the transfer of all credits and levies, barring those set out in the proviso, which is,

(i) where the said amount of credit is inadmissible as ITC

(ii) where an assessee has not furnished returns required under the existing law for six preceding months or

(iii) where the said credit relates to goods manufactured and cleared under exemption notifications.

These are the only three conditions/ embargos that bar the transfer of accumulated credit.

The language of section 140(1) and (8), both make it clear that an assessee is entitled to transition of 'the amount of cenvat credit carried forward in the return relating to the period ending with the date preceding the appointed date' and this in the present case includes accumulated credit of EC, SHEC and KKC, was the ultimate conclusion.

Finally, it has added that such credit accumulated has not been stated to have been lapsed. The impugned action of the assessing authority in rejecting the claim has, however, the consequence of insertion of a Rule/Regulation to this effect, which, in the view of the Court, is impermissible.

In the context of Article 13, "law" must be taken to mean rules or regulations, in the form of circulars made in exercise of ordinary legislative power vested under the Parent Act namely Section 168 of the CGST Act,2017 and not always amendments to the effect of explicit abolition of Cess as the Court would have wanted specifically and expressly, as in this context.

The declaration of GST having subsumed all taxes into GST and, therefore, except the accumulated credit of duties connoting the specified duties, of which Cesses were never one, were rightly not planned to be transitioned to the new tax regime.

The new tax regime had undergone as part of the policy measure drastic cuts and rationalization of rates in the last 2 ½ years since its introduction, that it's a conscious decision on the part of the Government not to provide for the offset of GST liability by means of Cesses.

These are never part of the Union duties under sharable revenue but towards a specific fund for the administration of it on the stated lines of policy, objectives and welfare measures supposed to surround the cause of such levy and the mandate provided for its utilisation in the Policy frame work of the Government.

Now that concurrent taxing jurisdictions have been created under Article 246A(1) vide the 101 st Constitutional Amendment Act,2016 and the methods of dispensation of revenues between the centre and the states have been well adumbrated, allowing of these Cesses to confluence with the GST pool of revenue, may lack the constitutional approval.

It would rather run counter to the constitutional mandate and as also the subject Cesses if grafted against the constitutional mandate it is sure to be rejected on that ground alone, as such admittance of any alien imposts won't go down with the provisions of the 101 st Constitutional Amendment Act,2016, is the considered view of the Author.

The term cess cannot be equated to a tax, as could be seen from the suggestion of the names of the cesses such as health cess, various welfare cesses that it is allocated to a particular cause/welfare while tax seems to stand on a different footing.

The element of tax appears to be based on a principle of compulsory exaction while the concept of a fee is based on a  quid pro quo  and cess on a principle of purpose/ welfare.

The fact that these cesses do not form part of the Consolidated Fund of India and is to be kept in a separate fund created for the avowed purpose goes to show that they are not a tax compatible to be used against setting off other general taxes under a tax Regime.

A sudden insistence of an express order of abolition of Cesses so as to stand the ground by the Government of its disallowance to transition the Cesses to the New regime of taxes, for their future tax set off, would both go against the implied tax benefits worked into the new regime by the Government but will also go against the doctrine of harmonious construction and the construct of the new tax arrangement under the 101 st Constitution Amendment Act, 2016.

In view of these facts and points of Law and the Circulars issued by the Government from time to time to disclose its mind on tax policy and implementation especially in light of the issue of Cesses, the order of the Madras HC in Sutherland Global Services Pvt. Ltd. - 2019-TIOL-2516-HC-MAD-GST , may have to be appealed against by the Government to the Top court to seek its views and as also its direction in the above matter, which has far reaching constitutional and revenue implications to the Government, at an all India level, and across the States.

(The Author is a Former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer GST, and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)