MAY 21, 2020

By Shailesh Sheth, Advocate Founder, M/s. SPS LEGAL

ON May 16. 2020, the Central Government issued Notification No. 43/2020-CT, effective from May 18, 2020, notifying '18th May, 2020' as the date on which S. 128 of the Finance Act, 2020 ("the FA, 2020") shall come into force. By S. 128, the various clauses of S.140 of the CGST Act, 2017 ("the CGST Act") have been amended retrospectively with effect from July 1, 2017. Not. No. 43/20-CT issued silently and unobtrusively, will have an earthquake-like effect, the reverberations of which will probably continue to be felt for a long time!

Genesis of S.128 of FA, 2020 and its implications:

The provisions relating to "transitional arrangement for input tax credit" are contained in S.140 of the CGST Act wherein different situations are visualized and dealt with. Sub-section (1) of S.140, as originally enacted, entitled a registered person (other than 'composition taxpayers') to claim the CENVAT credit reflected in the erstwhile ER-1/ST-3 Returns filed by him for the month/quarter ended on June 30, 2017, in such manner as may be prescribed. The procedure to be followed for claiming 'transitional credit' in terms of S.140(1) of the CGST Act is prescribed under Rule 117 of the CGST Rules. Rule 117, inter alia, required the claimant taxpayer to file FORM GST TRAN-1 within '90 days' from July 1, 2017 i.e. the appointed day. However, this time limit of '90 days' stood extended several times for various but mainly due to the technical glitches faced by the taxpayers in filing FORM GST TRAN-1 which were solely attributable to the inadequacies of the GSTN Portal.

The inability of the taxpayers to file FORM GSTR TRAN-1 within the prescribed time limit for no fault of theirs and consequential loss of claim to the transitional credit prompted several aggrieved taxpayers to approach jurisdictional High Courts seeking the Courts' intervention and redressal of their grievances. In a few cases, the vires of Rule 117 and the validity of the limitation period provided therein were also challenged by the Petitioners on the ground that in terms of sub-section (1) of S.140, only 'the manner' and, not 'the time limit', could have been prescribed by the Central Government for claiming transitional credit thereunder. In other words, this absence of enabling power under S. 140(1) whereby the Central Government could have 'prescribed the time limit for claiming the transitional credit' became a serious bone of contention between the aggrieved Petitioners and the Department.

However, in the following, amongst others, notable cases, the respective High Court rejected the above contention of the Petitioners and the challenge to the maintainability of Rule 117 as being ultra vires the CGST Act was also dismissed:

1. Willowood Chemicals (P) Ltd. UoI

- 2018-TIOL-2873-HC-AHM-GST [Date of Decision: 12/19.09.2018]

2. NELCO Ltd. Vs. UOI

- 2020-TIOL-641-HC-MUM-GST [Date of Decision: 20.03.2020]

It may be pointed out here that though the Gujarat High Court ruled in favour of the Revenue on the issue of the validity of Rule 117 and the time limit prescribed therein for filing of FORM GST TRAN-1, similar challenges had been mounted by other Petitioners in their Petitions filed before their respective High Courts including Gujarat High Court. [More on this in the ensuing paragraphs.]

The CBIC ('the Board') ultimately woke up to the challenge posed by the above contentious issue and decided to 'play safe' by suitably amending S. 140 of the CGST Act retrospectively, so as to supply the 'deficiency' in the said parent provision. This has been accomplished through S. 128 of the FA, 2020 by which various clauses, including sub-section (1) of S.140 of the CGST Act, have been suitably amended retrospectively w.e.f. July 1, 2017. The amendments are mainly by way of the insertion of the words "within such time" in various clauses of S.140 of the Act. For the ease of reference, sub-section (1) of S.140, as amended is reproduced below:

"S.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   "within such time and"   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".

[The highlighted words are inserted by S.128 of the Finance Act, 2020.]

While the reason for the insertion of the words "within such time and" is not far to seek, what is however, intriguing is the fact that even though the Finance Bill, 2020 was enacted on March 27, 2020, S. 128 was not effectuated immediately through notification as required in terms of S.1(2) of the FA, 2020. Instead, it was allowed to remain a dormant piece of legislation! This is despite the fact that there were 'live' challenges to the maintainability of Rule 117 and the time limit prescribed therein which were being heard by the different High Courts across the country!

However, the recent judgement of the Delhi High Court in the case of Brand Equity Treaties Ltd. & Ors. Vs. UoI - 2020-TIOL-900-HC-DEL-GST (delivered on May 5, 2020) must have come as a rude shock to the Board as the Court, inter alia, held as under:

"21. … … … Rule 117, whereby the mechanism for availing the credits has been prescribed, is procedural and directory, and cannot affect the substantive right of the registered taxpayer to avail of the existing / accrued and vested CENVAT credit. The procedure could not run contrary to the substantive right vested under sub Section (1) of Section 140."

"22. We, therefore, have no hesitation in reading down the said provision [Rule 117] as being directory in nature, insofar as it prescribes the time-limit for transitioning of credit and therefore, the same would not result in the forfeiture of the rights, in case the credit is not availed within the period prescribed."

Needless to say, the judgement cannot go unchallenged by the Revenue before the Supreme Court. However, since the retrospective amendment made to S.140 of the CGST Act by S.128 of the FA, 2020 as above was not considered by the Delhi High Court as it was not brought to the notice of the Court by either side, S. 128 of the FA, 2020 needed to be brought to life. This would pave way for the Revenue to press the same into service and present the same as a substantial contention before the Apex Court while countering the judgement of the Delhi High Court and the similar contentions of the Petitioners on the issue which may be raised in other cases including Willowood's case (supra) and NELCO's case (supra) before the Supreme Court.

The urgency in issuing Not. No. 43/20-CT notifying 'May 18, 2020' as the date on which S.128 shall come into force, is, thus, more by way of compulsion than anything else! Be that as it may, with S. 128 becoming 'alive and kicking' w.e.f. May 18, 2020, the retrospective amendments made to S. 140 of the CGST Act have also become or deemed to have become effective from 'July 1, 2017'.

It is obvious that a stage is now set for a 'do or die' battle between the taxpayers and the Revenue on this highly contentious issue and all eyes are now set on the Apex Court where this 'battle royal' will take place! Having said so, the following pertinent questions arise in the context of the retrospective amendments made by the Legislature to S.140 of the Act viz. -

- Will it be permissible for the Revenue to raise a ground on the basis of the retrospective amendment which was never raised before the High Court?

- Is the 'retrospective amendment' valid and maintainable in law?

- Does the 'retrospective amendment', if considered to be valid, negate or nullify the judgment in Brand Equity's case (supra) and other judgements and the ratio decidendi thereof?

Let us examine each of the above three issues in the next part.

[To be continued…]

[The views expressed are strictly personal.]