MAY 25, 2020

By Rushik Desai, B. Com (Hons.), M. Com, PGDTP, LL. B Principal - Linde Engineering India Private Limited.

IT is very well known in the tax structure existing prior to introduction of GST regime, that a manufacturer or producer of a specified product or a provider of output service was allowed to take Cenvat Credit of the excise duties and service tax paid by him under Rule 3 of Cenvat Credit Rules, 2004.

Goods and Service Tax (GST) regime was introduced w.e.f. 01st July 2017 and erstwhile Central Excise and Service Tax regime was subsumed under the GST. One of the key features of GST, as set out in the Constitutional 122 nd Amendment Bill, 2014, is the seamless flow of Input Tax Credit to avoid cascading effect of various taxes and to bring out a nationwide taxation system.

With the introduction of GST replacing several taxing statutes, it became necessary to make provisions for switching over from the old to the new regime, which in legal parlance, often times, is referred to as transitional provisions. Such transitional provisions are contained in Chapter XX vide Section 139 to 142 of the CGST Act, 2017.

Sub-section (1) of Section 140 of the said Act, permits transfer of Cenvat Credit of eligible duties carried forward in the return relating to the period ending with the day immediately preceding the appointed day.

Sub-section (5) of Section 140 of the said Act, permits to take credit of eligible duties and taxes in respect of inputs or input services received on or after the appointed day but the duty or tax in respect of which has been paid by the supplier under the existing law, subject to the condition that the invoice or any other duty or tax paying document of the same was recorded in the books of account within a period of thirty days from the appointed day.

In terms of Rule 117 of the CGST Rules, 2017, if a registered person intends to claim transitional credit, a declaration in Form GST TRAN-1 was required to be filed within 90 days of the appointed day i.e. by 28.09.2017. In terms of transitional provisions, closing balance of credit of taxes lying and shown in last return filed by the assessee prior to introduction of GST was to be carried forward as credit in Electronic Credit Ledger. Accordingly, all assessee filed TRAN-1 on or before the due dates or the date extended from time to time and transferred their balances of Cenvat Credit.

In the above background, t here could be some invoices under which input/input services were procured during the then existing law, but Cenvat Credit of duties remained to be carried forward in the return filed for the month of June 2017. However, the amount of such left out credit was directly claimed through TRAN-1 filed within the stipulated time. It is undisputed that the Cenvat Credit on such input/input services otherwise was eligible as per Cenvat Credit Rules, 2004.

Therefore, a question arises as to whether the right of availing Cenvat Credit, which was accrued to assessee in the PRE-GST regime gets extinguished merely because such credit was not reflected in the monthly return filed under PRE-GST regime for June, 2017?

As per the opinion of the author, the credit accrued or acquired in the pre-GST regime is a vested and substantive right. The right in respect of such credit became absolute at that point when the input/input services were used in the manufacturing of the final product. Therefore, right of availment of Cenvat Credit does not lapse merely because it was not declared in Return of June 2017 which is a procedural requirement.

In the above context, reference can be made to catena of decision including the most recent decision delivered by the Hon'ble High Court of Delhi in case of Brand Equity Treaties Limited vs. Union of India - 2020-TIOL-900-HC-DEL-GST, wherein it is held that t he time limit prescribed for availing the input tax credit with respect to the purchase of goods and services made in the pre-GST regime, cannot be discriminatory and unreasonable. There has to be a rationale forthcoming and, in absence thereof, it would be violative of Article 14 of the Constitution. The Hon'ble Court was of the view that the CENVAT credit which stood accrued and vested is the property of the assessee and is a constitutional right under Article 300A of the Constitution. The same cannot be taken away merely by way of delegated legislation by framing rules, without there being any overarching provision in the GST Act. Finally the Hon'ble Court held that as per their judgment in case of A.B. Pal Electricals vs. Union of India - 2019-TIOL-2930-HC-DEL-GST, 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.

In case of Willowood Chemicals Pvt Ltd vs. Union of India - 2018-TIOL-2873-HC-AHM-GST, it is held that the procedures law is not to be a tyrant but a servant, not an obstruction but an aid to justice. In the alternative, it was contended that such time limit should be construed as directory and not mandatory. A ny procedural provision which is framed for implementing the substantive provisions should ordinarily be directory in nature. By insisting on rigid time frame for making declaration, procedural provision is being given primary over substantive provision thereby a vested right is sought to be taken away merely because due to genuine reasons, declaration could not be made within time.

In view of above, technicalities shall not be bar against substantive justice. The author would like to take support from various decisions as referred below:

In case of State of Mysore & Ors. vs. Mallick Hashim & Co. - AIR 1972 SC 1449, the validity of the time limit for filing revision applications contained in Rule 18 framed under the Mysore Sales Tax Act, 1957 came up for consideration. The Court was of the opinion that such rule is an attempt to deny the dealers, the refund to which they are entitled under the law or at any rate to make the enforcement of such right unduly difficult.

In case of Sambhaji & Ors. vs. Gangabai & Ors - 2009-TIOL-79-SC-MISC by referring to a three-judge Bench decision of the Supreme Court in case of Salem Advocate Bar Association vs. Union of India , - AIR 2003 SC 189, held that time limit of ninety days provided in Rule 1 of Order VIII of CPC is directory in nature, by observing that the procedural law is not to be a tyrant but a servant, not an obstruction but an aid to justice.

In case of Mangalore Chemicals & Fertilizers Limited vs. Deputy Commissioner - 2002-TIOL-234-SC-CS, it was observed that while interpreting condition for exemption, a distinction had to be made between the procedural condition of a technical nature and a substantive condition. For the same purpose, reference was also made to the decision of the Supreme Court in case of Commissioner of Customs & Excise, Madras vs. Home Ashok Leyland Limited - 2007-TIOL-42-SC-CX. In this context, reliance was placed on a decision of Supreme Court in case of State of Himachal Pradesh & Ors. vs. Gujarat Ambuja Cement Limited & Anr. - 2005-TIOL-96-SC-CT-LB.

In case of Samtel India Ltd. vs. CCE, Jaipur - 2003-TIOL-40-SC-CX, it was held that the right to credit accrued to an assessee on the date the tax on inputs was paid. Once the inputs were used, the Rule imposing a period of limitation, could not be given retrospective effect.

In case of Filco Trade Centre Pvt. Ltd. vs. Union of India - 2018-TIOl-2861-HC-AHM-GST, the Hon'ble Gujarat High Court followed the dictum of the Supreme Court in Jayam & Co. vs. Assistant Commissioner - 2016(15) SCC 125 - 2016-TIOL-128-SC-VAT, and reiterated that the input tax credit could not be denied on the basis of an amendment, which is prospective. The question dealt with by the High Court was whether Section 140A(3)(iv) of the CGST Act, which declined the Cenvat Credit in relation to goods purchased prior to one year from the appointed date, could be given retrospective effect.

In case of  Eicher Motors Ltd. vs. Union of India - 2002-TIOL-149-SC-CX-LB,  for the proposition that 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. The Apex Court has observed and held as under: -

6. We may look at the matter from another angle. If on the inputs, the assessee had already paid the taxes on the basis that when the goods are utilized in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. 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.

In case of  Collector of Central Excise, Pune vs. Dai Ichi Karkaria, - 2002-TIOL-79-SC-CX-LC,  referring to the decision in case of Eicher Motors Limited vs Union of India - 2002-TIOL-149-SC-CX-LB, held that when credit has been validly taken, its benefit is available to the manufacturer without any limitation in time. The credit is indefeasible.

Rights or privileges acquired or accrued under the repealed Act are saved by the provisions of section 174 (2) (c) of the said Act. In other words, the provisions of Central Excise Act, 1944 are repealed but the previous operations are saved and supported by transitional provisions. It may also be noted that the provisions of Central Excise Act, 1944 are repealed from 01.07.2017, the date of commencement of the CGST Act, 2017, vide Section 174(1) of the CGST Act, 2017 but at the same time, certain rights or privileges acquired or accrued under the repealed Act are saved by the provisions of Section 174 (2) (c) of the CGST Act, 2017.

The abstract of the said Sections are reproduced below for ready reference.

174. Repeal and saving. -  (1) Save as otherwise provided in this Act, on and from the date of commencement of this Act, the Central Excise Act, 1944 (except as respects goods included in entry 84 of the Union List of the Seventh Schedule to the Constitution), the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, the Additional Duties of Excise (Goods of Special Importance) Act, 1957, the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978, and the Central Excise Tariff Act, 1985 (hereafter referred to as the repealed Acts) are hereby repealed. 

(2) The repeal of the said Acts and the amendment of the Finance Act, 1994 (hereafter referred to as "such amendment" or "amended Act", as the case may be) to the extent mentioned in the sub-section (1) or section 173 shall not- 

(a) ………

(b) ………

(c) affect any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts or orders under such repealed or amended Acts:

The function of a savings provision in the legislation is to preserve or ‘save' a law, a right, a privilege which already exists, or an obligation otherwise repealed or ceased to have an effect. In other words, a saving clause is a device that preserves accrued, acquired rights and incurred liabilities under a statute that no longer exists. A savings provision is frequently included in legislation to establish beyond doubt that the provisions of that legislation are to be construed as additional to and not in derogation of existing law. The possibility of repeal by implication is thus excluded and the operation of the common law is saved.

This has been confirmed in case of Sheen Golden Jewels India Pvt Ltd vs. The State Tax officer - 2019-TIOL-441-HC-KERALA-GST, wherein it was held as under:

100. A saving clause is used to preserve what already exists; it cannot create new rights or obligations. Such a provision has no application to transactions complete at the time the savings provision comes into force. A savings provision is frequently included in legislation to establish beyond doubt that the provisions of that legislation are to be construed as additional to and not in derogation of existing law. The possibility of repeal by implication is thus excluded. And the operation of the common law is saved.  

130. A saving, to me, is a device that preserves accrued, acquired rights and incurred liabilities under a statute that no longer exists. If the new statute that repeals an old one contains no saving clause, General Clauses Act steps in; Section 6 plays the role of a protector of the rights and liabilities under the repealed act.

Therefore, more often, when an Act is repealed, a clause is expressly engrafted in the repealing Act that “this repeal shall not affect any right or liability acquired, accrued, or incurred.'' Any right, monetary or otherwise, acquired or accrued under old laws would continue to be available to assessee, as held in following cases.

In case of Gajraj Singh etc. vs. the State Transport Appellate Tribunal and ors, etc. - (1997) 1 SCC 650, it was held that vehicle permit granted under old law for a period of 3 years would be valid even for the period covered by new law as the right had accrued.

In case of Isha Valimohamed vs. Haji Gulam Mohamad & Haji Dada Trust - AIR 1974 SC 2061, the right of a landlord to file a suit for eviction against a tenant on the ground that the tenant had sub-let the premises, a right conferred by old Act, was held to be an accrued right which survived the repeal of old Act. On appeal to the Hon'ble Supreme Court, while dismissing the appeal, the Apex Court upheld the judgement of the High Court.

In case of Md. Makibar Rahman vs. Islam Ali - AIR 1994 Gau 4 , it was held that the provisions of the new Act cannot infringe or relegate the right of appeal granted under the old Act.

In a recent decision in case of Industrial Trade and Agencies vs. State of Assam - 2018 (19) G.S.T.L. 613 (Gau.), the Hon'ble High Court observed as under:

14. From the above propositions of law as regards the savings of a provision of a repealed Act what is discernible is that

(i) when the repeal and saving provision in the later enactment specifically provides that all such proceedings shall continue as if the repealed enactment is still in force, in such event the proceedings so initiated under the repealed enactment would continue to survive and the same be brought to its logical end by following and subjecting it to all such procedures like appeal, revision, etc., as provided in the repealed enactment.

(ii) In the event, such repeal and saving provision in the later enactment is not provided, Section 6 of the General Clauses Act, 1897 would prevail and in respect of the State of Assam, the provisions of Section 26 of the Assam General Clauses Act, 1915 would also be applicable and all such rights and liabilities that may have accrued to either of the parties shall continue as if the repealed enactment is still in force and there is no such repeal by the later enactment.

(iii) Unless a different intention appears and there are sufficient indications, either express or implied, in the later enactment designed to completely obliterate the earlier state of the law, any legal proceeding can be instituted and continued in respect of any matter pending under the repealed Act as if that Act was in force at the time of the repeal. Any right which have accrued under the repealed Act are saved unless they are expressly taken away by the later enactment.

[Emphasis supplied] 

Apart from the above judgements, in a plethora of decisions it is held that a right accrued to the assessee on the date when it paid 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. The reason is as per Article 14 of the Constitution, the law declared by the Supreme Court is binding on all Courts within the territory of India. Therefore, the previous decisions are to be followed as precedents for the sake of attaining certainty, consistency, continuity and uniformity in law as is contemplated by Article 14 and 141 of the Constitution.

The object and purpose of the transitional arrangements made under Section 140 of the CGST Act, requires to be achieved to its logical end. The said section is a complete Code in itself and the substantive right conferred by the Act cannot be curtailed. The purpose of the law could not be taking away with one hand what the policy has given with the other.

Once the input/input services are availed by a manufacturer and consumed in the manufacture of the final product and if the manufacturer has valid duty paying documents then indefeasible and vested right is accrued in favor of assessee. Assessee' s right to claim input tax credit arises from Rule 3 of Cenvat Credit Rules, 2004 of the erstwhile tax regime. Merely because the Cenvat credit was not shown in the Returns filed under earlier regime is discriminatory to the extend providing for the lapsing of input tax credit. The input tax credit is as good as tax paid by the assessee and a valid claim of input tax credit under the GST creates an indefeasible right in favor of the taxable person. It is not legal to take away the vested right of the assessee without there being any justifiable reason.

Our legal system preserves its heritage in the form of precedent, and conventions so that it and its successors in their day to day functioning may take guidance from the past working of their predecessors and may not divert from the well-established practice resulting in discrimination, harassment and inconvenience to the citizen. Article 14 of the Constitution of India guarantees equal protection of law to the citizens. It contemplates the uniformity of law and tends towards maintenance of fixed legal system. The certainty of law is the safety of citizen and, therefore, the law should not differ from man to man, from time to time and from town to town in its application because of different interpretations put forth by different authorities. (AIR. 1974 SC 1069 refers)

In the above circumstances, it would be in the interest of all the assessees, if the Central Board of Indirect Taxes & Customs issues guidelines after considering all the other relevant factors and makes a honest positive attempt to facilitate the claim of missed out Cenvat Credit rather than curbing them by placing conditions and restrictions which does not seem legally tenable.

[The views expressed are strictly personal]