MAY 25, 2020

By Ruchir Bhatia, Advocate & CS (Dr.) Monika Goel

TRANSITIONAL Credit from pre-GST regime to GST regime has been a controversial subject since the inception of GST. The retrospective amendment recently notified has widely raised the concerns of the tax professionals and the assessees.

The Article is in five parts. The first part discusses as to whether tax credit is a right or a concession. The second part discusses the gist of juridical pronouncements on transitional credit. The third part details the retrospective amendment in Section 140 of the CGST Act by the Finance Act, 2020. The fourth part analyses whether the present amendment affects/nullifies the judgments already delivered by the Hon'ble High Courts and the fifth part, the impact of retrospective amendment on transitional credit.

A. Concept of Input Tax Credit/CENVAT Credit:-

The first and foremost issue is whether "tax credit" (be it "input tax credit" under erstwhile VAT laws or "CENVAT Credit" under the Central Excise/Service Tax) is a right or a concession granted by the Legislature. In order to find an answer to this query, it would be apposite to refer to the three judge Bench judgment of the Hon'ble Supreme Court in the case of Eicher Motors v. UOI - 2002-TIOL-149-SC-CX-LB. In the said case, by virtue of insertion of Rule 57F(4A) credit which was lying unutilised on 16th March, 1995 with the manufacturers, stood lapsed except in respect of inputs lying in stock or contained in finished products lying in stock on the 16th day of March, 1995. The said Rule was challenged on the ground that MODVAT credit lying in balance with the assessee as on 16.3.95 represents a vested right accrued or acquired by the assessee under the existing law and such right is sought to be taken away by the impugned Rule 57F(4A). The case of the Department was that the impugned Rule 57F(4A) is only a part of a scheme providing for giving concessions under the taxation enactment. The scheme need not be continued for all time to come and could be put to an end at any time and thus all that has happened is that the scheme which was available earlier is no longer available and, therefore, it is not open to contend that the scheme affects any vested right; and, that under the scheme it is only a mode of adjustment of taxes which were provided and there is no vested right accrued to the assessees. The Hon'ble Bench after going through the Scheme of the provisions held:-

"the assessees became entitled to take the credit of the input instantaneously once the input is received in the factory on the basis of the existing scheme. Now by application of Rule 57F(4A) credit attributable to inputs already used in the manufacture of the final products and the final products which have already been cleared from the factory alone is sought to be lapsed, that is, the amount that is sought to be lapsed relates to the inputs already used in the manufacture of the final products but the final products have already been cleared from the factory before 16.3.95, Thus the right to the credit has become absolute at any rate when the input is used in the manufacture of the final product. The basic postulate, that the scheme is merely being altered and, therefore, does not have any retrospective or retro-active effect, submitted on behalf of the State, does not appeal to us. As pointed out by us that when on the strength of the rules available certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that right, which had accrued to a party such as availability of a scheme, is affected and, in particular, it loses sight of the fact that provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the assessees concerned. Therefore, the scheme sought to be introduced cannot be made applicable to the goods which had already come into existence in respect of which the earlier scheme was applied under which the assessees had availed of the credit facility for payment of taxes. It is on the basis of the earlier scheme necessarily the taxes have to be adjusted and payment made complete. Any manner or mode of application of the said rule would result in affecting the rights of the assessees.

……

…..If on the inputs the assessee had already paid the taxes on the basis that when the goods are utilised 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. "

Thus, the duty/tax paid on inputs/input services which was available as input credit was a right which accrued to assessees in erstwhile law wherein no limitation period of lapsing of credit was provided either under the Central Excise/Service Tax or VAT Acts of different States. The limitation of lapsing of credit was completely alien to the Statutes.

On the other hand so far as the Department is concerned, the best in its favour is the judgment of the Hon'ble Supreme Court in Jayam & Co. v. Assistant Commissioner - 2016-TIOL-128-SC-VAT wherein the Apex Court upheld the vires of Section 19(20) of the Tamil Nadu VAT Act which provided for restriction of credit where the sale price was lower than the purchase price. The heavy reliance which the Department has placed on the said judgment to counter the case of the assessees for claim of transitional credit is misplaced for the following reasons:-

a. In the said case, the issue was entirely different and dealt with very entitlement of credit on the purchase value of goods vis-à-vis sale price (in other words "transaction value") and not at all with regard to limitation to carry forward credit.

b. Though the Supreme Court holds that "ITC is a form of concession provided by the Legislature. It is not admissible to all kinds of sales and certain specified sales are specifically excluded." However, the Three Bench judgment of Eicher was not cited before the Court wherein it was held that a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs.

c. As a silver lining, in Jayam & Co. itself, the Apex Court in its concluding paragraph though upheld the vires of section 19(20) of the Tamil Nadu VAT Act but struck down the retrospectivity of the amendment. It was held "Such a provision, therefore, cannot have retrospective effect, more so, when vested right had accrued in favour of these dealers in respect of purchases and sales made between January 01, 2007 to August 19, 2010."

Another case which the Department has relied in support of its case is ALD Automotive Pvt. Ltd. vs. Commercial Tax Officer -  2018-TIOL-385-SC-VAT, which is a two Judge Bench judgment of the Apex Court. In the said case, it has been held -"The input credit is in nature of benefit/concession extended to dealer under the statutory scheme. The concession can be received by the beneficiary only as per the scheme of the Statute."

Unfortunately, judgment in Eicher again was not cited. Secondly, in the above case assessee had not availed/taken the credit while in the present cases, credit stands claimed in the returns filed in the erstwhile laws. The right, therefore, stands vested in the assessee.

B. What the Hon'ble High Courts in respect of Transitional Credit have held.

The most talked about judgment is the judgment of the Delhi High Court in Brand Equity Treaties Ltd. v. UOI - 2020-TIOL-900-HC-DEL-GST wherein the case of the Department was transitional credit cannot be allowed to the assessees as the delay in filing Form TRAN-1 is attributable to the assesseees and in the absence of technical difficulty being faced by assessees no relief be allowed to assessees. The Hon'ble High Court after discussing the legal position has granted relief to the assessees for the following reasons:-

1. This credit in every sense stood accumulated, acquired and vested on the appointed date as it was reflected in the said CENVAT credit register in the previous regime.

2. The manner and procedure to carry forward the said CENVAT credit under Sub-section (1) of Section 140 was to be 'prescribed'. The word 'prescribed' has also been defined under Section 2(87) to mean "prescribed by Rules made under this act on the recommendation of the council". This brings to Rule 117 of CGST Rules, the relevant provision prescribing the manner in which the CENVAT credit has to be transitioned. Initially, the time limit prescribed under Rule 117 for transitioning was 90 days, as explained above, was extended from time to time. Evidently, there is no other provision in the Act prescribing time limit for the transition of the CENVAT credit, and the same has been introduced only by way of Rule 117. This provision also contains a proviso, which vests power with the Commissioner to extend the period on the recommendations of the Council.

3. In fact, as noticed above, under Sub-Rule (1A) of Rule 117, for a specific class of persons, the time limit has gone way beyond the period originally envisaged, and has still not expired. Thus, there is nothing sacrosanct about the time limit so provided. It is not as if the Act completely restricts the transition of CENVAT credit in the GST regime by a particular date, and there is no rationale for curtailing the said period, except under the law of limitation. The period of 90 days has no rationale and extensions have been granted by the Government from time to time, largely on account of its inefficient network.

4. The arbitrary classification, introduced by way of sub rule (1A), restricting the benefit only to taxpayers whose cases are covered by "technical difficulties on common portal" subject to recommendations of the GST Council, is arbitrary, vague and unreasonable.

5. It is very unfair on the part of the respondents, in these circumstances, to expect that the taxpayers should have been fully geared to deal with the new system on day-one, when they themselves were completely ill-prepared, which led to creation of a complete mess. The respondents cannot adopt different standards - one for themselves, and another for the taxpayers.

6. The purpose for which Sub-Rule (1A) to Rule 117 has been introduced has to be understood in the right perspective by focusing on the purpose which it is intended to serve. The purpose was to save and protect the rights of taxpayers to avail of the CENVAT credit lying in their account. That objective should also serve other taxpayers, such as the petitioners. The approach of the Government should be fair and reasonable. It cannot be arbitrary or discriminatory, if it has to pass the muster of Article 14 of the Constitution. The government cannot turn a blind eye, as if there were no errors on the GSTN portal. It cannot adopt different yardsticks while evaluating the conduct of the taxpayers, and its own conduct, acts and omissions.

7. 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.

8. In the instant cases, the input tax credit had been claimed in the erstwhile regime and was being reflected in the CENVAT credit ledger. This credit, under the Section 140(1), has to be carried forward and in that sense, the vested right of the property of the petitioner stood accrued and the same cannot be taken away by the respondents by way of Rules.

9. 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. 

10. Section 140 (1) is categorical. It states that the registered person "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….". Only the manner i.e. the procedure of carrying forward was left to be provided by use of the words "in such manner as may be prescribed". The limitation on the right to carry forward the CENVAT credit is substantively provided by the proviso to the said section. Those are the only limitations on the said statutory right. Under the garb of framing Rules - which are subordinate legislation, the width of those limitations could not have been expanded as is sought to be done by introduction of Rule (1A). In absence of any consequence being provided under Section 140, to the delayed filing of TRAN-1 Form, Rule 117 has to be read and understood as directory and not mandatory. 

11. 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. This however, does not mean that the availing of CENVAT credit can be in perpetuity. Therefore, the Court held that the limitation of 3 years under the Limitation Act would apply.

The Gujarat High Court in Siddarth Enterprises v. Nodal Officer 2019-TIOL-2068-HC-AHM-GST, had also granted relief for the following reasons:-

1. The entitlement of credit of eligible duties on the purchases made in the pre-GST regime as per the then existing Cenvat credit rules is a vested right and, therefore, it cannot be taken away by virtue of Rule 117 of the Central GST Rules, 2017, with retrospective effect for failure to file the form GST Tran-1 within the due date, i.e. 27.12.2017. The provision for facility of credit is as good as the tax paid till the tax is adjusted and, therefore, the right to the credit had become absolute under the  Central Excise Act  and, therefore, the credit is indefeasible and the same cannot be taken away.

2. It is legitimate for a going concern to expect that it will be allowed to carry forward and utilise the CENVAT credit after satisfying all the conditions as mentioned in the Central Excise Law and, therefore, disallowing such vested right is offensive against  Article 14  of the Constitution as it goes against the essence of doctrine of legitimate expectation.

3. Article 300A  provides that no person shall be deprived of property saved by authority of law. While right to the property is no longer a fundamental right but it is still a constitutional right. CENVAT credit earned under the erstwhile Central Excise Law is the property of the writ-applicants and it cannot be appropriated for merely failing to file a declaration in the absence of Law in  this respect. It could have been appropriated by the government by providing for the same in the CGST Act but it cannot be taken away by virtue of merely framing Rules in this regard.

4. The right to carry forward credit is a right or privilege, acquired and accrued under the repealed  Central Excise Act, 1944 (1 of 1944) and it has been saved under Section 174(2)(c) of the CGST Act, 2017 and, therefore, it cannot be allowed to lapse under Rule 117 of the CGST, 2017, for failure to file declaration form GST Tran-1 within the due date, i.e. 27.12.2017.

C. What is the amendment to Section 140 of the CGST Act by the Finance Act, 2020.

By the Finance Act 2020 a retrospective amendment has been brought in section 140 (1) and 140(3) of the CGST Act, 2017 whereby the words "within such time" have been inserted in the said sub-sections. The relevant part of amended Section 140(1) of the CGST Act reads as under:-

"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:"

D. Whether amendment affects the ratio of the judgment in Brand Equity or Siddarth Enterprises?

A plain reading of the retrospective amendment in section 140(1) shows that the Legislature has inserted the words "within such time" in section 140(1) and section 140(3) of the CGST Act with retrospective effect from 1st July 2017. This means and implies that the legislature has provided that time within which credit of eligible duties carried forward in the return relating to the period ending with the day immediately preceding the appointed day has been left open for the Central Government to prescribe. Does this mean that earlier, the Central Government had no power and authority to provide for the time limit within which the credit was to be taken. In our opinion that was never the position. In fact, in none of the judgments where the Hon'ble High Courts have granted relief to the assessees, the Hon'ble High Court has held so. In Willow Wood Chemicals P. Ltd. v. UOI - 2018-TIOL-2873-HC-AHM-GST - which is a judgment against the assessee, this argument was taken by the assessee but stood repelled by the Court. This amendment, thus, only clarifies that the Central Government in exercise of powers conferred by section 140 of the CGST Act can prescribe time within which the amount of credit carried forward in the return ending with the day immediately preceding the appointed day is to be taken.

The Hon'ble Delhi High Court in Brand Equity ( supra ) has not doubted the existence of such power even under the unamended Section 140. Likewise, the Gujarat High Court in Siddartha Enterprises ( supra) as well as the Punjab and Haryana High Court in Adfret Technologies P. Ltd. v. UOI - 2019-TIOL-2519-HC-P&H-GST have also not gone by the fact that Section 140 as it stood did not confer power on the Central Government to provide for time limit. However, what prevailed with the various High Courts is that the credit stood availed and vested in the assessees in the previous regime. It is an undisputed fact that there was no smooth transition. The transition was inefficient and rough. The approach of the Government should be fair and reasonable. It cannot be arbitrary or discriminatory, if it has to pass the muster of Article 14 of the Constitution. The right to carry forward credit is a right or privilege, acquired and accrued under the repealed  Central Excise Act, 1944 (1 of 1944) and it has been saved under Section 174(2)(c) of the CGST Act, 2017 and, therefore, it cannot be allowed to lapse under Rule 117 of the CGST, 2017, for failure to file declaration form GST Tran-1 within the due date, i.e. 27.12.2017.

In view of the aforesaid, it is clear that the present amendment in no manner whatsoever affects or whittles down the ratio of the various judgments of the Hon'ble High Courts.

E. What is the position with regard to retrospective amendment in the light of the present issue?

1. Retrospective amendment in Section 140(1) confers power on the Central Government to frame rule prescribing time limit for taking transitional credit. This amendment presupposes that earlier there was no such power. Therefore, the Central Government could not have prescribed time limit under Rule 117 earlier. The time limit so prescribed was without the authority of law. The power has now been conferred retrospectively.

2. By this amendment, indirectly Rule 117 has been given effect to retrospectively. On this aspect, the law is clear that the Legislature can always legislate retrospectively, unless there is any prohibition under the Constitution which has created it. But the same rule cannot obviously be applied to the Central Government exercising delegated legislative power, for the scope of their power is not co-extensive with that of the Parliament. This position in law has been held in (See Subba Rao J., in Dr. Indramani Pyarelal Gupta v. W.R. Nathu [1963] 1 SCR 721 the majority not having expressed any different opinion on the point; Modi Food Products Ltd. v. Commr. of Sales Tax, U.P. AIR 1956 All 35; India Sugar Refineries Ltd. v. State of Mysore AIR 1960 Mys 326 and General S. Shivdev Singh v. State of Punjab (1959) 61 Pun LR 514 : AIR 1959 Punj 453.

Also lucidly explained in Income Tax Officer, Alleppey v. M.C. Ponnoose and Ors. - 2002-TIOL-1842-SC-IT-LB, wherein the issue was of validity of a notification issued by the Government of Kerala in August 1963 empowering certain revenue officials including the Taluka Tahsildar to exercise the powers of a Tax Recovery Officer under the Income-tax Act, 1961. The notification was expressly stated to be effective from 1st April, 1962-a date prior to the date of the notification. The Court held that "It may next be considered whether by saying that the new definition of 'Tax Recovery Officer" substituted by Section 4, of the Finance Act 1983 "shall be and shall be deemed always to have been substituted" it could be said that by necessary implication or intendment the State Government had been authorised to invest the officers mentioned in the notification with the powers of a Tax Recovery Officer with retrospective effect. The only effect of the substitution made by the Finance Act was to make the new definition a part of the Act from the date it was enacted. The legal fiction could not be extended beyond its legitimate field and the aforesaid words occurring in Section 4 of the Finance Act 1963 could not be construed to embody conferment of a power for a retrospective authorisation by the State in the absence of any express provision in Section 2(44) of the Act itself.

3. In Jayam & Co. (supra) itself, the Apex Court has held that a provision which affects vested rights cannot be given retrospective effect.

4. It is a trite law that in fiscal statues retrospective amendments are permissible. However, at the same time, where the legislation is introduced to overcome a judicial decision, the power cannot be used to subvert the decision without removing the statutory basis of the decision. In the present case, the basis of the judgment are the facts - which remain uncontroverted and undisputed- inefficiency in the GST network. To quote "The fractures in the system, after its launch, became visible as taxpayers started logging in closer to the deadline." Can an amendment in law overcome this factual position to deny a tax payer a claim over his hard earned money paid out of his own coffers at the time of making purchase.

Had there been a smooth and seamless transition, different consequences would have followed. As is usually said, good facts make good law and bad facts make a bad law. This time a not so smooth transition prevailed upon the Courts to deliver judgments which would be cited and relied upon by the assessees in varied number of cases to be argued in future. Now, GST is here to stay in both pre and post Covid-19 world. The battle on Transitional credit is not over yet as all litigation is about money. To conclude, stay of the judgment of the High Court by the Hon'ble Supreme Court merely on submission that retrospective amendment has not been considered by the Hon'ble High Court is quite a probability.

Would an assessee take and save the screen shot of his desktop/laptop while un-successfully attempting to file TRAN-1 on a premonition that in future the Central Government would frame a sub-Rule (1A) for the assessee to get through its claim of transitional credit. The Hon'ble High Courts have saved all assessees and granted a chance to claim the transitional credit. The wait is what finally the Hon'ble Supreme Court holds!

[The views expressed are strictly personal.]