MAY 22, 2020

By Ms Neethu James, Joint Partner & Ms Sudeshna Banerjee, Principal Associate with Lakshmikumaran & Sridharan Attorneys, Bangalore

EVEN as we near the third year of implementation of GST, the assesses are grappling with questions on availment of transition credit. Recent decision of the Delhi High Court in Brand Equity Treaties Ltd. ¹ offers a respite to assessee, albeit a seemingly conflicting judgement passed by Bombay High Court in the case of Nelco Ltd. ² To add to the confusion, the Government has notified Section 128 of the Finance Act, 2020 amending Section 140 of the CGST Act retrospectively to prescribe time limit for availing transitional credit ³.

Controversy

Section 140 of the CGST Act provides transition of the credit of the duties / taxes paid under the erstwhile regime. Rule 117 provides the mechanism for availing the transition credit by filing FORM-GST-TRAN-1 and prescribed a time limit of 180 days from the appointed day for filing of the said form. The last date for filing TRAN-1 was on 27.12.2017 ⁴. The intention of the Government and interpretation placed by several High Courts all along was to allow genuine credits to be carried forward as part of the transitional provisions.

In view of the technical difficulties encountered by assesses in filing TRAN-1 and in response to the directions issued by various High Courts, the time limit for filing FORM GST-TRAN-1 in cases of technical glitch was extended repeatedly which currently stands extended to 31.03.2020. The term "technical glitch" was construed and administered strictly by the GSTIN as per Circular No. 39/13/2018-GST, dated 3-4-2018. As a result, assesses who made inadvertent errors while filing TRAN-1, assesses who missed out taking of credit in TRAN-1 and those who did not file TRAN-1, were left with no recourse of availing transition credit after 27.12.2017.

Delhi High Court-Brand Equity

Some of the assesses who were unable to file their TRAN-1 owing to difficulties at their own end and not on account of any technical glitch on the portal challenged the validity of the time period of 180 days indicated under Rule 117 of the CGST Rules, 2017. The Hon'ble Delhi High Court in the case of Brand Equity Treaties Limited held as under:

(i) The credit standing in favour of the assessee is a vested property right under Article 300A of the Constitution and cannot be taken away by prescribing a time-limit for availing the same.

(ii) Rule 117 of the CGST Rules, 2017 insofar as it prescribes the time-limit for transitioning of credit has to be read down as being directory in nature as the same would not result in the forfeiture of the rights, in case the credit is not availed within the period prescribed.

(iii) Availing of Cenvat credit cannot be a right in perpetuity and the transitional provisions have to be given effect to.

(iv) In terms of the residuary provisions of the Limitation Act, the period of three years should be the guiding principle and thus a period of three years from the appointed date would be the maximum period for availing of such credit.

Thus, the Hon'ble High Court has permitted filing of TRAN-1 till 30.06.2020. Notably the High Court has directed the Departmental authorities to widely publicise the decision so that taxpayers who are similarly situated should also be entitled to avail the benefit of this judgment.

Bombay High Court-Nelco

Prior to the above decision, the Hon'ble Bombay High Court in the matter of Nelco Ltd. had upheld the constitutional validity of Rule 117 of the CGST Rules, 2017. The Bomaby High Court held that:

(1) Though Section 140 of the CGST Act dealing with transition credit does not prescribe a time limit for taking credit, the legislature may prescribe a time limit for taking such credit in terms of the general rule-making powers conferred by Section 164(2). The time limit in Rule 117(1) is traceable to the general rule-making power conferred in Section 164(2) and is therefore not an ultra vires legislation.

(2) The credit envisaged under Section 140(1) being a concession, it can be regulated by placing a time limit.  

(3) The credit under the transitional provision is not a right to be exercised in perpetuity. By the very nature of the transitional provision, it has to be for a limited period.

(4) The Bombay High Court has ordered for a strict reading of technical difficulties and adherence with the time lines provided for filing of TRAN-1 under Rule 117.

Conclusion

The Delhi High Court holds the transition credit standing in favour of the assessee as a vested property right and therefore an indefeasible right. Whereas the Bombay High Court holds that transition credit being a concession or exemption in light of the decisions in the case of Willowood ⁵ and JCB ⁶. While the decision in the Willowood is considered by the Delhi High court, the decision in the case of JCB dealing with the time limit for taking of credit not availed under the erstwhile regime stands on a different footing. A view that can possibly be taken is that Cenvat credit accrued under the erstwhile regime is a vested right which is indefeasible in the absence of any specific provision for lapsing of such credit.

Be that as it may, both the High Courts have upheld that the credit under the transitional provision is not a right to be exercised in perpetuity. The Delhi High Court has held the period of three years from the appointed date as the maximum period for availing of such credit. Could it be said that the Bombay High Court has upheld that validity of Rule 117 but not the validity of the six months time period prescribed therein?

If yes, then the clock is ticking to stake claim for the missed out credits prior to 30.06.2020. Assesses who made inadvertent errors while filing TRAN-1, assesses who missed out taking of credit in TRAN-1 and those who did not file TRAN-1 before 27.12.2017 now have a fresh window till 30.06.2020. However, what remains unanswered is whether the assessees who were unable to amend TRAN-1 or assesses whose application on grounds of technical glitch were rejected also entitled to avail this extension?

In this backdrop, the action of the government to notify Section 128 of the Finance Act, 2020 and thereby notifying Section 140 of the CGST Act, 2017 retrospectively only remedies the vacuum in law as pointed out by the Delhi High Court in Brand Equity. Considering the present economic situation, the effect of the retrospective amendment would come in the way of genuine claims of various assessees who were rightfully eligible to such transition credit.

With the vastness of litigation on this subject matter, what transpires is that the recommendation of the GST Council or the Committee may always not be fitting as it has time and again resulted in different treatment to similarly placed assessees based on the recommendations from different Commissionerate/field formations. The need of the hour is for the Government to intervene and provide final opportunity to all the assessees irrespective of the nature of glitch, TRAN-1 filed or not and settle the issue without getting into the loop of endless litigation.

[The views expressed are strictly personal.]

¹ 2020-TIOL-900-HC-DEL-GST

² 2020-TIOL-641-HC-MUM-GST

³Notification No. 43/2020-CT dated 16.05.2020

⁴ Order No. 9/2017-GST dated 15.11.2017

⁵ 2018-TIOL-2873-HC-AHM-GST

⁶ 2018-TIOL-2766-HC-MUM-GST