NOVEMBER 15, 2019

By G Natarajan, Advocate, Swamy Associates

THE decision of the High Court of Madras in the case of Sutherland Global Services Pvt Ltd. - 2019-TIOL-2516-HC-MAD-GST was the talk of the town for quite few days.

A short recap.

Education Cess (EC) and Secondary and Higher Education Cess (SHEC) leviable on Excise duty were exempted from 01.03.2015 vide Notifications 14/2015 CE and 15/2015 CE both dated 01.03.2015. Similarly Education Cess and Secondary and Higher Education Cess leviable on Service Tax Cease to have effect from 01.06.2015 as the relevant sections of the Finance Act, 2004 and Finance Act, 2007 levying EC and SHEC respectively on taxable services, ceases to have effect from this date. Simultaneously the rate of Service Tax which was 12.36 (including EC and SHEC) was revised to 14 % and it was stated that the revised rate subsumes the EC/SHEC which was hitherto leviable separately.

Both EC and SHEC were entitled for cenvat credit, with a restriction that credit of such EC & SHEC can be used only for payment of similar EC & SHEC respectively, payable on final products/output services. Many manufacturers and service providers had balance of Cenvat credit of EC and SHEC in their returns, as on 28.02.2015 and 31.05.2015 respectively. This credit balance could not be used as no more EC/SHEC were payable by them on their final products/output services. A question arose as to whether such balance of Cenvat Credit of EC and SHEC can be used to pay Excise duty/Service Tax. The issue was discussed in the conference of the Chief Commissioners held in October 2015 and to quote from the minutes ,

B.21 - Hyderabad, Coimbatore, Vadodara, Vishakhapatnam, Delhi Zone - Cenvat Credit - Balance of Education Cess and Secondary & Higher Education Cess lying in the CENVAT Credit Account :

Issue:

Exemption from levy of Education Cess and Secondary & Higher Education Cess has been provided w.e.f. 1-3-2015 vide notification no. 14/2015-C.E. & 15/2015-C.E. both dated 1-3-2015, Sub-rule 7(b) of Rule 3 of CENVAT Credit Rules, 2004, specifies that CENVAT credit of specified duties shall be utilized for payment of those specified duties only. CENVAT Credit of Education Cess and Secondary & Higher Education Cess can be utilized only for payment of Education Cess and Secondary & Higher Education Cess, respectively. Consequent upon grant of exemption there is issue of utilization of the accumulated credit of the past. It is suggested that an amendment to sub-rule 7(b) of Rule 3 of CENVAT Credit Rules, 2004 may be made to allow the utilization of balance CENVAT Credit of Education Cess and Secondary & Higher Education Cess towards payment of either duty of excise or Service Tax.

Discussion & Decision

The conference after discussion and briefing from the officers from the Board noted that it was Government's conscious policy decision to withdraw the Education Cess and Secondary & Higher Education Cess. It is a policy decision to not allow utilization of accumulated credit of education cess and secondary and higher education cess after these Cesses have been phased out. As these Cesses have been phased out and no new liability to pay such Cess arises, no vested right can be said to exist in relation to the accumulated credit of the past. The rule and notifications as they exist need to be followed and do not need any amendment.

It is also relevant to note that vide Notification 12/2015 CE NT Dt. 30.04.2015, such EC and SHEC has been allowed to be utilised for payment of Excise duty, to a very limited extent, by introducing the following provisos in Rule 3 (7) (b) of the Cenvat Credit Rules, 2004.

"Provided also that the credit of Education Cess and Secondary and Higher Education Cess paid on inputs or capital goods received in the factory of manufacture of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise leviable under the First Schedule to the Excise Tariff Act :

Provided also that the credit of balance fifty per cent. Education Cess and Secondary and Higher Education Cess paid on capital goods received in the factory of manufacture of final product in the financial year 2014-15 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act :

Provided also that the credit of Education Cess and Secondary and Higher Education Cess paid on input services received by the manufacturer of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act."

Similarly, for Service providers also this limited facility has been extended vide Notification 22/2015 CE-NT Dt. 29.10.2015, where similar provisos have been added under Rule 3 (7) (b). By virtue of these amendments, EC and SHEC paid on inputs received on or after 01.03.2015 (for manufacturers)/01.06.2015 (for service providers); balance 50 % of EC and SHEC credit in respect of capital goods received during 2014-15; EC and SHEC paid on input services received on or after 01.03.2015 (for manufacturers)/01.06.2015 (for service providers) were allowed to be utilised towards payment of excise duty/service tax. But nothing has been provided for in respect of the closing balance of EC/SHEC as on 28.02.2015/31.05.2015.

Cellular Operators Association of India have filed a Writ Petition before the High Court of Delhi in this regard, wherein the claim to utilise the balance of credit of EC and SHEC towards payment of Excise duty/Service Tax was not entertained.

Krishi Kalyan Cess (KKC) was introduced from 01.06.2016 @ 0.5 % on the value of taxable services. The said KKC is also cenvatable, with a restriction as to utilisation of such credit only against payment of KKC on the output service. At the time of introduction of GST from 01.07.2017 many service providers had unutilised balance of cenvat credit of KKC as on 30.06.2017

GST scenario.

When GST was introduced from 01.07.2017 a question arose whether the balance of credit of EC, SHEC and KKC as on 30.06.2017 could be carried forwarded into GST regime, as transitional credit of CGST under Section 140 of the CGST Act, 2017 and utilised for payment of GST. Sub section (1) of Section 140 stood as below, originally.

140 (1) A registered person, other than a person opting to pay tax under section 10, shall be entitled to take, in his electronic credit ledger, the amount of CENVAT credit carried forward in the return relating to the period ending with the day immediately preceding the appointed day, furnished by him under the existing law in such manner as may be prescribed :

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

(ii) where he has not furnished all the returns required under the existing law for the period of six months immediately preceding the appointed date; or

(iii) where the said amount of credit relates to goods manufactured and cleared under such exemption notifications as are notified by the Government.

It may be observed that the "Cenvat Credit" balance as on 30.06.2017 as per the last return filed under the erstwhile law could be carried forwarded as transitional credit. Hence, the balance of Cenvat credit on account of EC/SHEC/KKC could also be validly carried forward, in the absence of any restriction in this regard.

It may be noted that the term "eligible duties" is used in sub sections (3), (4), (5) and (6) of Section 140 which deals with different situations and for this purpose the term "eligible duties" is also defined by way of Explanation 1 and 2 under the said section 140. The said Explanation of the term "eligible duties" did not cover EC/SHEC/KKC. But the term "eligible duties" is not used in sub section (1) of Section 140.

Hence, it is plain and clear that there was no restriction to claim the balance of credit of EC/SHEC and KKC as transitional credit into GST regime. But the Government was never willing to concede this. To quote from CBIC's D.O.F. No. 267/8/2018 Dt. 14.03.2018,

4. Checks for Table 5(a) :

4.1.1 Check 1 : Verify that the credit has been taken against closing balance of CENVAT credit in ER-1/2/3 or ST-3. Credit can be taken only where the last return was filed and credit taken in Table 5(a) should not be more than closing balance of credit in ER-1/2/3 or ST-3 minus the education/secondary education Cess/KKC/SBC.

4.2 : Check 2 : Credit of taxes not covered in the definition of eligible duties in section 140 cannot be availed. Example : Krishi Kalyan Cess, Education Cess, etc. Instances have also come to notice where credit of VAT and PLA balance has been availed as transitional credit. This is not allowed in law.

The Government has realised that the existing provisions of Section 140 did not prohibit availment of transitional credit of EC/SHEC/KKC and hence decided to bring in certain retrospective amendments, with effect from 01.07.2017 vide Section 28 of the CGST (Amendment) Act, 2018. The following amendments were proposed.

An Explanation 3 was added under Section 140, which read as below.

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 (51 of 1975).

Further, under sub section (1) the term "of eligible duties" has also been added in Section 140 (1) of the Act after the word "Cenvat credit" and hence the amended Section 140 (1) would read,

(1) A registered person, other than a person opting to pay tax under section 10, shall be entitled to take, in his electronic credit ledger, the amount of CENVAT credit [of eligible duties] carried forward in the return relating to the period ending with the day immediately preceding the appointed day, furnished by him under the existing law in such manner as may be prescribed :

All these amendment shave come into effect with retrospective effect from 01.07.2017, once they are notified vide Notification 2/2019 Central Taxes Dt. 29.01.2019.

Further in Explanation 1, which defined the term "eligible duties" for the purposes of sub section (3), (4) and (6) of Section 140 and in Explanation 2, which defined the term "eligible duties" for the purposes of sub section (5) of Section 140, sub section (1) has also been added. It may be noted that sub sections (3), (4), (5) and (6) of Section 140 allows transitional credit in various situations, in respect of the stock of inputs held on 30.06.2017. Hence, the definition of "eligible duties" under Explanations 1 and 2 also would refer to various duties mentioned therein, paid in respect of the stock of goods lying on 30.06.2017. But, it may be observed transitional credit under sub section (1) of Section 140 is to carry forward the balance of credit as per the last return under the erstwhile law and the stock of goods lying as on 30.06.2017 is not at all relevant to claim transitional credit under Section 140 (1). But, since sub section (1) of Section 140 is also added in the definition of "eligible duties" under Explanation 1 and 2, the consequence would be that the entire balance of credit as per the last return could not be transitioned, but it shall be limited to the quantum attributable to the stock of goods lying on 30.06.2017. This was not at all the intention. This faux paus was cleverly overcome, by not notifying this amendment alone!

This has also been clarified so in CBIC's Circular No. 87/6/2019 Dt. 02.01.2019, as below.

3.2 Thus, expression "eligible duties" in section 140(1) which are allowed to be transitioned would 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.

3.3 The expression "eligible duties" under section 140(1) does not in any way refer to the condition regarding goods in stock as referred to in Explanation 1 to section 140 or to the condition regarding inputs and input services in transit, as referred to in Explanation 2 to section 140.

4. Further, it has been decided 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). This would ensure that the 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 shall be governed by para 3.2 above.

Madras High Court decision.

The inability to carry forward the balance of Cenvat Credit of EC/SHEC/KKC was challenged before the High Court of Madras in the case of Sutherland Global Services Pvt. Ltd. It was argued before the High Court that credit once availed is indefeasible by relying upon various decisions. It was also argued that as per Section 140 (8) of the Act, in case of a service provider who had centralised registration under Service Tax, can carry forward the balance of "Cenvat Credit" as per the last return under erstwhile law and hence the entire balance of cenvat credit including EC/SHEC/KKC can also be transitioned. The order of the Court was uploaded in the website of the Court. The High Court has unequivocally held that in the absence of any provision to lapse the balance of cenvat credit of EC/SHEC/KKC, not allowing them to be transitioned is not proper. The High Court has also held that as per Section 140 (8) of the Act also the entire balance of Cenvat Credit can be transitioned in as much as all conditions prescribed under the said section are satisfied in this case. With regard to the various amendments proposed to Section 140 of the Act, the High Court has made an observation that these amendments were not yet notified, which was not correct, as the amendments were already notified with effect from 01.02.2019, except to the extent noted above. May be after the above mistake was pointed out before the Court, the order was recalled and a fresh order has been uploaded/released. Para 49 of the judgement is reproduced below.

49. Significantly, the amendment proposed, to insert the phrase 'eligible duties' after the phrase 'cenvat credit' is restricted only to sub-section (1) of Section 140. Moreover, Explanation (1) defining 'eligible duties' that was originally made applicable only to sub-sections (3) and (4) of Section 140 was extended to cover sub-section (1) as well. However, sub-section (8) of Section 140 remains untouched. As a result, Section 140(8) continues, as on date, to read that where a registered person having a centralised registration under the existing law has obtained a registration under this Act, such person shall be allowed to take, in his electronic credit ledger, credit of the amount of cenvat credit carried forward in areturn furnished under the existing law by him, in respect of the period ending with the day immediately preceding the appointed day in such manner as may be prescribed. Thus, even if one were to assume that EC, SHEC and KKC are not liable to be transitioned, since they are not 'eligible', though the provisions of subsections(1), (3) (4) and (6) may contain a limitation to this effect, sub-section (8)contains no such limitation and any credit carried forward, without restriction of eligibility or otherwise, can be transitioned. I make it clear that this conclusion is over and above my conclusion on the larger issue of eligibility under Section140(1), which I have held in favour of the assessee.

The following factors emerge from the judgement.

-  In the absence of any lapsing provision balance of EC/SHEC/KKC as on 30.06.2017 also eligible to be carried forwarded as transitional credit.

-  The addition of Explanation 3 to Section 140 cannot have the effect of denying such transitioning of EC/SHEC/KKC balance.

-  In case of service providers having centralised registration, additionally under Section 140 (8) also such EC/SHEC/KKC balance can be carried forwarded.

But the moot question is whether the Government, which is so determined from the beginning, not to allow transitional credit of EC/SHEC/KKC would abide by the judgement or bring in a lapsing provision with retrospective effect?

(The views expressed are strictly personal.)