MAY 21, 2020

By K Srinivasan

IN an unprecedented decision, the Delhi High Court in the case of  Brand Equity Treaties Limited v Union of India and Anr - 2020-TIOL-900-HC-DEL-GST has held as follows:

DECISION's SUMMARY

1. That the credit of taxes paid on inputs to be a vested right. The GST Act enabled all taxpayers registered thereunder to transition legitimate CENVAT credit. The vested right of the taxpayers which was constitutionally protected could not be curtailed by a delegated legislation i.e., CGST Rules, without any overarching provision in the parent statute.

2. That the time limit prescribed under Rule 117 of Central Goods and Services Tax Rules, 2017 (CGST Rules) is directory and not mandatory.

3. That the time limit of 3 years under the residuary provisions of the Limitation Act 1963 (Limitation Act) was had recourse to, by reading down the provision of rule 117 of the CGST Rules, while specific statutory limitation under the Central Goods and Service Tax Act 2017 (CGST Act) is very much in place.

4. That the transition of tax credits to GST regime was by way of filing the TRAN-1 declaration electronically and for which the prescribed date was extended for technical glitches by way of several notifications.

Several taxpayers were unable to file the form due to deficiencies in the GSTN portal which was beyond the control of the government and the taxpayers. The government therefore sought to condone the delay in filing TRAN-1 by letting those taxpayers that faced  technical glitches to file the same belatedly.

5. That the CENVAT credit which stood accrued and vested was the property of the taxpayer and was constitutionally protected under Article 300A of the Constitution.

6. That the benefit of this judgment should not be limited only to the petitioners but extend to all taxpayers who were unable to file the TRAN-1.

The impact of the retrospective amendment by Finance Act, 2020 on the Delhi HC decision

While the above judgment of the Delhi HC, may not be final in view of divergent views of various High Courts in other variant or similar circumstances, with the Government committed to and bound by the retrospective amendment to Sec 140(1), effective from 1/7/2017, CBIC may not be in a position to implement the above judgment as such and it has to revisit the decision to make appropriate submissions to the Court in this regard.

Let's now turn to some contrarian views of various other courts in similar matters and the finer distinctions made by them in this regard, which will compel the Government to counter the recent decision of the Delhi HC, despite the fructification of the amendment of Sec 140 by the Finance Act, 2020 with retrospective effect from 1st July 2017, providing that transition credit taken after due date was not to be disallowed.

To facilitate this, the term "within such time" as may be prescribed has been inserted among various provisions of Section 140 of the CGST Act, 2017, vide Notification No.43/2020/CT dated 16/5/2020, to get over the said judgment.

In fact, this amendment has been brought in with retrospective effect so as to nullify the effect of even certain other judgments of various High Courts including one in Brand Equity Treaties Ltd Vs, The Union of India & Others passed by the Hon'ble High Court of Delhi, in this matter.

A LONG LEGAL HISTORY THAT CAN'T BE FLIPPED WITHOUT TAKING OUT SOME LEAVES FROM IT

In NELCO Ltd Vs Union of India (Bombay High Court) Appeal Number. W.P. No. 6998 of 2018 Dated 20/03/2020 - 2020-TIOL-641-HC-MUM-GST, the court held as follows;

Rights and privileges accrued during the existing law have been specifically saved under Section 174 of the CGST Act, 2017. If what are saved are the rights and privileges of the nature noted above, then it cannot be said de hors the conditions or de hors the restriction on availment or enjoyment of that right they have been saved by the CGST Act.

In other words, if rights are conferred with conditions under the existing law, then, they are saved by the CGST Act with such conditions and not otherwise.

There must be clear provision to grant it otherwise than in terms of the existing Law or in other words, the restrictions or conditions on availment of that right are removed totally.

No such provision has been brought to our notice. It is clear that if right to availment of CENVAT credit itself is conditional and not restricted or absolute, then, the right to pass on that credit cannot be claimed in absolute terms. It is argued that it is a vested right accruing to the petitioner.

The HC distinguished Eicher Motors case - 2002-TIOL-149-SC-CX-LB, which was cited in the Nelco case, as below;

We are not confronted with a situation of the lapsing of the credit though the petitioners may equate the position before us with that of Eicher Motors. We are dealing with the validity and legality of a condition, imposed in the transitional arrangement.

While moving from one legislation to another comprehensive Legislation, in the latter legislation the Legislature deemed it fit and proper to continue the earlier or erstwhile arrangement by terming it as a transition or transitional one.

That continuation was with conditions and one of the conditions which is questioned here is consistent with the conditions imposed under the existing law. Such a situation was not dealt with in Elcher Motors. Thus, the decision is clearly distinguishable.

Thus, a right accrued to the assessee on the date when they paid the 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.

Thus, this is a case where the Rule, as introduced, provided for total lapsing of that credit which was lying unutilized with the manufacturer on 16/3/1995. That was held to be impermissible within the scheme of the law. We are not considering here such a situation, was the final shot.

While hearing the NELCO CASE, Revenue called to its rescue the decisions of Willowood - 2018-TIOL-2873-HC-AHM-GST and JCB India - 2018-TIOL-23-HC-MUM-GST. The Petitioners sought to distinguish the decisions, contending that the Division Bench was not considering Section 140(1) and the right under different subsections of section 140 are different and operate in different fields and what is relevant for one class cannot be made applicable to another class.

The HC stepped aside the distinction made by the Petitioner as below;

It is submitted that the decisions in JCB India Ltd. and Willowood have considered section 140(3) of the Act. We do not think these decisions can be distinguished in this manner. The decisions in JCB India Ltd. and Willowood have laid down a general principle of law. The question of credit in a transitional provision being a concession or a right that was argued and has been considered.

We have not been shown any decision of this Court to the contrary. As a matter of judicial discipline, we will have to follow the dicta laid down by the Division Bench of this Court in JCB India Ltd.

Further, when the decision of the Supreme Court in the case of Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd. - 2002-TIOL-79-SC-CX-LB was cited by the Petitioner, the HC pointed out as follows;

That the decision in Dai Ichi Karkaria referred to MODVAT credit and in deciding a correlation of the raw material and final product

The HC further drew attention of the Petitioners to the Apex Court ruling of that case that it is not as if the credit can be taken only on the final product manufactured out of a particular raw material in which the credit is related.

It was thus concluded by the HC on the lines held by the Apex court that the credit may be taken on a final product on the very day it has become available. It is in this context, the nature of MODVAT credit was held to be indefeasible.

Further a distinction was said to have been made by Revenue in that the decision in the Dai Ichi Karkaria case did not consider the contingency of time limit on availment of credit, and also not in a transitory provision. Under the impugned Rule, the input credit has been denied per se, but a time limit has been placed on its availment.

The HC thus went on to draw the following inference to connect with the existing challenge before in the transitional law prescribing a time limit through a rule to limit the credit beyond a stipulated time;

The CENVAT Credit Rules prescribe conditions for availment of that credit. The rights and privileges accrued during the existing law have been saved under Section 174 of the Act.

If what is saved from the earlier regime was conditional, then it cannot be converted to something without conditions in the new regime during the period of transition.

If, before and after the GST regime, the availment of input credit is conditional, it cannot be that it is without any limit in the transitional period.

With the advent of an entirely new tax regime, the earlier credit could have lapsed, but as and by way of concession it is permitted to be carried forward for a limited time.

Thus, going by the scheme of the Act, under Section 140(1), the reference to Input Tax Credit is not by way of a right, but as a concession.

Lastly, the HC said that the scheme of the Act is that there is self-declaration which has to be confirmed later and, therefore, there is no prejudice to the Respondents if credit is given now .

It was contended that the submission of return under section 140 is subject to confirmation under the provisions governing Assessment. This submission is incorrect.

Acceptance of Assessment is not subject to confirmation but being based on the principle of self-assessment, is open for verification; which is a different aspect.

It is contended that claim of the input tax credit is in the Returns to be filed and Form is not important, and once this procedure is laid down, a time limit cannot be provided.

Once it is held that the rulemaking power exists and the placing of time limit on the concession is not ultra vires, then the further tinkering with the statutory scheme on hyper technical and academic arguments is neither desirable nor necessary.

The input tax credit in the transitional provision is a concession to be utilised in a time-bound manner, and further extension is given if the GST Council finds that there was a technical difficulty at its end.

Rule 117(1A) has been inserted with effect from 10 September 2018.

Rule 117(1A) reads as under:

Rule 117: Tax or Duty Credit Carried Forward under any Existing Law or on Goods held in Stock on the Appointed Day (Chapter-XIV: Transitional Provisions refers)

(1) * * *

(1A) Notwithstanding anything contained in sub-rule (1), the Commissioner may, on the recommendations of the Council, extend the date for submitting the declaration electronically in FORM GST TRAN-1 by a further period not beyond 31st March, 2019, in respect of registered persons who could not submit the said declaration by the due date on account of technical difficulties on the common portal and in respect of whom the Council has made a recommendation for such extension. If there is no technical difficulty on the common portal for the registered user, this additional concession is not extended.

Whether to grant further concession as Rule 117(1A) will be determined from examination of the system logs from the portal.

Exercise of equity jurisdiction in some cases and not in other cases would cause an anomalous situation, particularly when a time limit has been placed in a taxing statute for achieving certainty and finality.

The IT Grievance Redressal Cell is set up by the GST Council to examine the existence of technical difficulties on the common portal. Sufficient guidance is provided in the definition of technical difficulty in Rule 117(1A).

Examining the system log to ascertain the existence of technical difficulties on the common portal for registered persons, are not arbitrary, nor does it lead to a fettering of discretion by the authorities.

Those registered persons who could not submit the declaration by the due date because of technical difficulties on the common portal as can be evidenced from the system logs, are given an extension on the recommendation of the Council, is the relief provided therein.

Where no such evidence is forthcoming, no recommendation is made as in the Petitioner's case, no such proof emerged and, therefore, no direction as sought for can be issued by the Court.

For CENVAT Scheme to be smooth and proper, a restriction has been placed on the availment of CENVAT credit during the transitional period and by making the above statutory prescription.

Revenue would submit that it is entirely for the Legislature to make such a provision and its power in that behalf is not questioned.

If there is no challenge to the impugned condition on the ground of competence of the Legislature, then, the competent Legislature could have made a restrictive provision and which is precisely the intent.

The transition from the old regime to the new one should be smooth and expedient. Hence, a reasonable period of twelve months has been provided.

Why it is only twelve months and why it does not date back to the stage, the petitioners in these petitions would deem it fit and proper, is not the test which can be evolved and applied for considering the constitutionality of the legislation.

Ultimately, it ended it by saying categorically that it is the Legislature which is the best Judge and in its wisdom, insofar as fiscal policies are concerned, it has imposed this condition .

While replying to the point raised by the Petitioners on the contention of the Petitioner that the time limit-imposed u/r 117 is arbitrary and is in violation of Article 14 and 19(1)(g) of the Constitution, the Hon'ble HC held as under:

Calculations of the tax liability dictated by subjective conditions can lead to uncertainty and such uncertainty makes it difficult to budget and ensure that funds are allocated where they are most required - the time limit for availing of input tax credit in the transitional provisions is rooted in larger public interest of having certainty in allocation and planning, the time limit u/r 117 is thus not irrelevant - upholding only the right to carry forward the credit and ignoring the time limit would make the transitional provision unworkable.

If relief is to be granted to the individual petitioner overriding the time limit on equity, the perception of what is equitable will differ from authority to authority and would lead to uncertainty and the operation of the complicated tax system will become unworkable.

In the circumstances, it is not possible to agree that imposition of the condition vide Clause (iv) of the Rule is arbitrary, unreasonable and violative of Articles 14 and 19(1)(g) of the Constitution of India.

That is, therefore, reasonable and is explained in the affidavit in reply. On all counts, therefore, the challenge is devoid of merits according to Revenue and it deserves to be repelled.

Therefore, the issue as to the input credit contemplated under transitional provision being a concession or right was squarely put forth for consideration.

The Division Bench analyzed the decisions on the subject of the Supreme Court in Jayram and Company v/s. Assistant Commissioner & Anr. 2016 (15) SCC 125, Eicher Motors Ltd. v/s. Union of India - 2002-TIOL-149-SC-CX-LB, Osram Surya (P) Ltd. v/s. Commissioner of Central Excise, Indore - 2002-TIOL-64-SC-CX, Samtel India Ltd. v/s. Commissioner of Central Excise, Jaipur - 2003-TIOL-40-SC-CX and concluded by observing thus:-

The HC even in its introductory remarks relying upon the rationale of the above cited judgments, remarked that the Revenue is right in its contention that CENVAT credit is a mere concession and it cannot be claimed as a matter of right.

The HC added further the following;

+ CENVAT Credit Rules under the existing legislation themselves stipulate and provide for conditions for availment of that credit, then, that credit on inputs under the existing law itself is not an absolute but a restricted or a conditional right. It is subject to fulfillment or satisfaction of certain requirements and conditions that the right can be availed of.

+ It is in these circumstances that we are unable to agree with the Counsel appearing for the petitioners that the impugned condition defeats any accrued or vested right. It was never vesting in them in such absolute terms, as is argued before us

+ If the existing law itself imposes condition for its enjoyment or availment, then, it is not possible to agree that such rights under the existing law could have been enjoyed and availed of without any regard to either any period of time provided therein. The period or the outer time limit is prescribed in the existing law and the Rules of CENVAT credit enacted thereunder.

+ Further, when it was argued by the Petitioner that credit is in the nature of property and is protected by Article 300A of the Constitution, the HC turned to the case Law Siddharth Enterprises v. The Nodal Officer - 2019-TIOL-2068-HC-AHM-GST relied upon where the Gujarat High Court held that Article 300A states that no person shall be deprived of his property save by authority of law.

The HC said therefore, even if input tax credit is termed as property, it can be taken away by law. This was also said by the HC to mean that a lapsing provision expressly provided for extinguishing of credit or prescribing a time limit within which it must be enjoyed or availed. Accordingly, credit not claimed within a time-limit prescribed therefor, can only be considered as taken away by the same law referred thereto, on limitation of time.

Author's Comment

The word 'Law' in Article 300A means an Act of Parliament or of a state legislature, a rule, or a statutory order, having the force of Law. [Bishambhar Dayal Mohan vs. State of UP (1982) 1 SC 39. Refers]

Conclusion:

The six takeaways -

1. Whether the imposition of the time limit could or could not be referred to the general rule-making power of the parent Act, which is Sec 164(2) of the Act?

Yes. The time limit in rule 117(1) is traceable to the rule making power conferred in s. 164(2) and the credit envisaged under section 140(1) being a concession, it can be regulated by placing a time limit, therefore, time limit under rule 117(1) is not ultra vires the Act.

2. Whether the input tax credit in the transitional provision 140(1) is a concession to be utilised in a time-bound manner and further extendable if only the GST Council found a technical difficulty at its end while allowing it, despite the application for claiming the credit been made within the prescribed time limit.

Yes. It is a concession granted in Sec 140 through relevant sub-sections to be utilised in a time-bound manner, as contemplated therein. Further, there should be evidence of filing and technical difficulty faced, to claim extended time.

3. Is it true that credit is unconditionally a vested right and that it has been holding the field of credit from time immemorial? And are all the Judgments in its favor, affirming it as a vested right or there are other judgments against it as well?

No. It is not an unconditional vested right. It has certain restrictions imposed as deemed fit by the subordinate legislation, namely the Rules.

There are a number of judgments in favour of Revenue including the NELCO Ltd Vs. Union of India (Bombay High Court) Dated 20/03/2020 - 2020-TIOL-641-HC-MUM-GST.

4. Is the imposition of the condition of time limit vide rule 117 is arbitrary, unreasonable and violates Articles 14 and 19(1)(g) of the Constitution of India.

NO. It does not appear to violate the fundamental right or discriminate against the taxpayer's freedom to carry on any business or trade, in this context.

It is made known before hand to the the taxpayer that the credit has to be claimed within a time, to count it in accordingly, so as to reasonably leave the Government with adequate inputs and time to arrive at the budget on the one hand and let the Trade and Industry to reach appropriate business decisions on the Other.

Hence cannot be regarded as violative fundamental rights under Articles 14 and 19(1)(g) of the Constitution.

5. Can credit facility or its entitlement be held at par with right to property as conceived under Article 300A of the Constitution?

No. The implications or consequences of terming credit as a right and in turn as property as conceived under Article 300A has overarching implications and calls for a judicial scrutiny .

6. Does the Delhi HC decision bind the Government in allowing TRAN-1 credit to Petitioners even if they have no records to prove that they faced Technical glitches and as also allow similarly placed applicants the credit across the country, in rem?

NO. Those registered persons who could not submit the declaration by the due date because of technical difficulties on the common portal as could be evidenced from the system logs, are given an extension on the recommendation of the Council.

Where no such evidence is forthcoming and no recommendation is made by the GSTC, as in the Petitioner's case, or in any other's case, in the absence of any such proof, no relief is extendable to either the Petitioner or similarly placed taxpayers in rem.

(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.)