NOVEMBER 27, 2019

By Puneet Bansal, Managing Partner & Sneha Ghosh, Associate, NITYA Tax Associates

We legislate first, and think afterwards…In the event, complicity is heaped upon complexity and confusion becomes worse confounded.

-Nani Palkhiwala

INTRODUCTION

THE transitional provisions under Goods and Services Tax ('GST') regime have been the quintessential problem child since inception, perplexing taxpayers, government and Courts alike. The government compounded the problems by issuing multiple FAQs and Circulars, and even amending the provisions. Au contraire, the Courts exercised little patience and have exhibited a pro-assessee trend till date.

The Madras High Court also followed this trend in its recent decision in the case of Sutherland Global Services Private Limited v. UOI, - 2019-TIOL-2516-HC-MAD-GST ('Sutherland') and allowed transition of Cenvat credit of erstwhile cesses, viz. Education Cess ('E Cess'), Secondary & Higher Education Cess ('SHE Cess') and Krishi Kalyan Cess ('KKC') (collectively 'Cesses') in the GST regime.

BACKGROUND

The Government introduced E Cess and SHE Cess in the years 2004 and 2007, respectively, as additional levies on excise duty, service tax etc. This was followed by levy of KKC on services in 2016. Prior to GST, Cenvat credit of these Cesses could be used to discharge the liabilities of respective Cesses on output stage. E Cess and SHE Cess were abolished in 2015 whereas KKC was abolished in 2017.

The repeal of erstwhile tax statutes would have imperilled the accumulated Cenvat credit of taxpayers. To avoid this, Section 140 of the Central Goods and Services Tax Act, 2017 ('CGST Act') allowed transition of such Cenvat credit as Input Tax Credit ('ITC') in the GST regime. While Sub-section (1) allowed transition of credit carried forward in the returns by a registered taxpayer, Sub-section (8) allowed transition of credit to taxpayers who were centrally registered earlier. These provisions as enacted, legally interpreted, allowed transition of credit of Cesses as well. However, the CBIC issued FAQs clarifying to the contrary.

The Government also retrospectively amended Section 140 vide Central Goods and Services Tax (Amendment) Act, 2018 ('Amendment Act') to bring the provisions in sync with its intent. Section 140(1) now allowed transition of Cenvat credit of 'eligible duties'. Explanations 1 & 2 to Section 140 which defined the expressions 'eligible duties' and 'eligible duties and taxes' respectively, were amended to make them applicable to Section 140(1). The Amendment Act also inserted Explanation 3 as per which the expression 'eligible duties and taxes' excludes Cesses. Notable that while amendment in Section 140(1) and Explanation 3 were notified, the amendments to Explanation 1 & 2 have been kept in abeyance till date.

DECISION OF MADRAS HIGH COURT IN SUTHERLAND

In the case of Sutherland, the taxpayer was centrally registered and sought to transition credit of Cesses. This was denied by the Revenue. The Petitioner filed a writ petition before the Madras High Court against such denial. The High Court has now allowed transition of credit of Cesses on the following grounds:

- GST subsumed erstwhile duties and cesses and intended to provide seamless flow of credit. Mere abolition of Cesses did not result in lapse of their credit in the absence of any statutory provision;

- Section 140(1) and Section 140(8) do not restrict transition of credit of Cesses; and

- Even after the proposed amendment, the definition of 'eligible duties' do not cover Section 140(8) dealing with taxpayers centrally registered. Therefore, the Petitioner can transition the credit of Cesses even if the amendments are notified.

ANALYSIS

The first issue dealt by the High Court is the ability of the taxpayer to carry forward the credit of Cesses post their abolition. The High Court relied on earlier jurisprudence and held that lapse of credit of Cesses is not possible in the absence of any statutory provision, thus, transition of such credit must be allowed.

The inference allowing transition in the absence of specific lapsing provisions does not appeal to legal sensibilities At this juncture, it is relevant to consider Article 300A of the Constitution which guards right to property but allows deprivation of such right with the authority of law. If Section 140 of the CGST Act disallows transition of a class of credit, it will qualify as a reasonable law irrespective of absence of specific provision for lapsing of credit of Cesses under the erstwhile laws. Such law will particularly be reasonable because the Central Government collected Cesses for specified purposes and these constitute separate funds. Transition of credit of Cesses would lead to utilisation of such credit indiscriminately against output GST liabilities. The Court seemed to have ignored this overarching policy of the Government not to allow cross-utilisation of credit of Cesses in its judgment.

The second issue for consideration was the eligibility to transition credit of Cesses in light of the amendments in Section 140(1) read with Explanation 3 appended thereto. While Section 140(1) of the CGST Act allows transition of credit of eligible duties, Explanation 3 provides for exclusion of Cesses from the ambit of expression 'eligible duties and taxes'. The issue that comes to fore is whether Explanation 3 can be used to interpret the expression 'eligible duties' occurring in Section 140(1). Two divergent but equally interesting interpretations, arise on the above issue.

The fundamental rule of interpretation i.e. the literal rule provides that there is no room for intendment in a taxing statute. The expression 'eligible duties' is used in reference to all Sub-sections save Sub-section (5) of Section 140 which employs the expression 'eligible duties and taxes'. It is trite that when a provision uses two different expressions, then each expression needs to be construed distinctly. The Legislature in its wisdom, employed only 'eligible duties and taxes' in Explanation 3. Thus, the legislative language of 'eligible duties and taxes' cannot be read as 'eligible duties'. Consequently, Explanation 3 cannot restrict the credit otherwise allowed to be transitioned under Section 140(1).

In the same breath, we cannot ignore the principle of legislative intent i.e. effect must be given to the words of statute in a manner that it carries the intention of the drafters. The vulnerability of the rule of literal interpretation is exposed where the provision leads to anomalous results. In such cases, the Courts unearth the legislative intent and give effect to this intention. It is trite that intention of the Government to bring these retrospective amendments was always to bar the transition of credit of Cesses. A strict reading of the expression 'eligible duties and taxes' in Explanation 3 would render the expression 'eligible duties' used in Sub-section (1) otiose. Therefore, the Courts may find merit in reading 'eligible duties and taxes' as occurring in Explanation 3 as 'eligible duties' and 'eligible taxes' to restrict the transition of credit of Cesses under Section 140(1).

Surprisingly, the Court bypassed the duality arising from notified amendments. Another perplexing issue which was not brought to the Court's attention was the distinction created between taxpayers under Section 140(8) who were entitled to unrestricted transition of credit vis-à-vis those falling under Section 140(1). A prima facie unreasonable distinction was not tested on the anvil of Article 14 of the Constitution providing for equality.

CONCLUSION

With due respect to the High Court, this decision skirts some of the key issues. Thus, even though this decision seems to have championed the taxpayer's claims for transition of credit of Cesses, the Authors opine that it is incomplete. Having said this, the decision in Sutherland is correct in its own sense. One must not lose sight of the fact that the Court was required to only decide in respect of Section 140(8) of the CGST Act. In absence of any restriction on the expression credit used therein, the Court rightly allowed transition of credit of Cesses.

In 1991, Nani Palkhiwala expressed his anguish towards the 'change mania' that gripped the Government and the frenzy with which the Income Tax Act was mindlessly being amended. Two decades later, a similar trend is at play again if one sees the instant issue. The issue before the High Court is a stellar example of the lack of clarity and vision plaguing the Government. The decision exposes sizeable discord between legislative intent and legislative language. It is disheartening for a taxpayer that even after specific amendment of the provision, the intention fails to manifest in law. Albeit, there is no bar on the Legislature to retrospectively amend laws multiple times to correct an error or to give effect to its objective but when such retrospective amendments become chronic, the integrity of the underlying statute is lost.

(The views expressed are strictly personal)