MAY 27, 2020

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

IN Part I, the genesis of Notification No. 43/2020-CT dt. 16/05/2020 effectuating S.128 of the FA, 2020 from 18/05/2020 retrospectively amending S.140 of the CGST Act, was traced. It was explained that the roots of this exercise lie in the challenge to the vires of Rule 117 of the CGST Rules and the maintainability of the limitation period provided therein for filing TRAN-1 and the conflicting judgements of the High Courts on the issue. In this part, certain issues arising from the retrospective amendment to S.140 are analysed. - Author

Issue 1:

This issue can be advantageously discussed in the context of the following three notable judgements, viz.

1. Judgment of Gujarat High Court in Willowood's case - 2018-TIOL-2873-HC-AHM-GST;

2. Judgment of Bombay High Court in NELCO's case - 2020-TIOL-641-HC-MUM-GST;

3. Judgment of Delhi High Court in Brand Equity's case - 2020-TIOL-900-HC-DEL-GST.

In all the above three cases (there are many other judgements, but have not been referred to here for ease of understanding and due to space constraints), Section 140(1) of the CGST Act vis-à-vis Rule 117 of the CGST Rules came up for scrutiny before the above High Courts in the context of the time limit prescribed under the said Rule 117 for filing of FORM GST TRAN-1. Having said that, the judgements in Willowood's case (supra) and NELCO's case (supra) are in stark contrast to the judgement in Brand Equity's case (supra). In the former two cases, the Petitioners therein had, inter alia, mounted a spirited challenge to the vires of Rule 117 of the CGST Rules and contended that the Rule was ultra vires S.140 of the CGST Act to the extent that it prescribed a time limit for filing of FORM GST TRAN-1. On the other hand, the Petitioners in Brand Equity's case (supra), although they had challenged the vires of Rule 117 of the CGST Rules, had unanimously stated before the Court that if the Court were to give directions to the Respondents to permit them to file the statutory FORM GST TRAN-1 to avail the input tax credit, they would be satisfied and would not press for the relief of challenging the vires of the provisions.

Ultimately, the Gujarat High Court and the Bombay High Court in Willowood's case (supra) and NELCO's case (supra) dismissed the challenge inter alia, to the vires of Rule 117 of the CGST Rules. The Delhi High Court, on the other hand, in Brand Equity's case (supra) read down the said provision i.e. Rule 117 as being directory in nature, insofar as it prescribed the time limit for transitioning of the credit. [Readers may keep in mind this significant distinction between these two streams of judgements as the same is intended to be connected later in the discussion.]

It is, thus, evident that in all the above-mentioned three cases, if and when they come up before the Supreme Court, the Revenue, either as a Respondent or as a Petitioner, is likely to raise a contention based upon the 'retrospective amendment to S.140' of the CGST Act, though in none of these cases, could the respective High Courts have any occasion or opportunity to consider this aspect.

In author's view, the Revenue as a Respondent before the Supreme Court in Willowood's case (supra) and NELCO's case (supra), will not find it too difficult to raise the above fresh ground while countering the challenge, if any, of the Petitioners to the vires of Rule 117 of the CGST Rules as the absence of the enabling power in S. 140(1) of the CGST Act so as to empower the Central Government to 'prescribe' a time limit by the Rules for claiming the transitional credit in terms of S.140(1) itself had been one of the substantial contentions raised before the respective High Court while challenging the vires of the Rule 117. Moreover, the contention based upon the 'retrospective amendment' to S.140 of the CGST Act, albeit, a fresh contention, obviously involves a pure 'question of law' and hence, it is unlikely that the Supreme Court will decline to entertain this new plea by the Revenue.

For the same reason, the Revenue should not face too serious a hurdle in pressing the aforesaid fresh contention, as a Petitioner in Brand Equity's case before the Supreme Court. (As anticipated, the Revenue has already filed the SLP before the Supreme Court in this case).

In Yeswant Deorao Deshmukh vs. Walchand Ramchand Kothari -(1950) SCR 852, the Supreme Court allowed a question of law to be raised at the hearing of the appeal even though no reference to it had been made in the Courts below or in the grounds of appeal.

In its judgement, the Supreme Court also quoted with approval, the following observations of Lord Watson in Connecticut Fire Insurance Co. vs. Kavanagh- (1892)A.C. 473:

"When a question of law is raised for the first time in a court of last resort upon the construction of a document or upon facts either admitted or proved beyond controversy, it is not only competent but expedient in the interests of justice to entertain the plea. The expediency of adopting that course may be doubted when the plea cannot be disposed of without deciding nice questions of fact in considering which the court of ultimate review is placed in a much less advantageous position than the courts below."

The Finance Bill, 2020, inter alia, proposing the retrospective amendment to S.140 of the CGST Act by clause 128 of the Bill was introduced by the FM on February 1, 2020. It is understood that while the arguments in NELCO's case stood concluded before February 1, 2020 with the Court reserving judgement, the Brand Equity's case was yet to come on the board which was finally heard on March 02, 2020 but again, judgement was reserved. One may, therefore, feel perplexed as to why, on behalf of the Revenue, in Brand Equity's case, the twin facts of conclusion of hearing in NELCO's case before the Bombay High Court and the retrospective amendment to S.140 of the CGST Act proposed by the Finance Bill, 2020 (and enacted on March 27, 2020) were not brought to the notice of the Court?

In fine, while the Revenue might have a few hiccups in the process, it probably will not be denied from raising a fresh contention based upon the retrospective amendment to S. 140 of the CGST Act before the Supreme Court in these or other similar matters. So after a brief lull, the 'roller coaster ride' may begin once again but for whom?

Issue 2:

The above discussion now brings us to this all-important issue and that is, the constitutional validity of the retrospective amendment to S.140 of the CGST Act.

It is not uncommon for taxation measures to be enacted with retrospective operation. The power of the Parliament to make retrospective legislation including fiscal legislation is well settled.

See,

1. M/s. Krishnamurthy & Co. vs. State of Madras

- (1993) 31 STC 190 (SC)

2. Misrilal Jain vs. State of Orissa

- AIR 1977 SC 1686

3. Empire Industries Ltd. & Anr. Vs. UOI - 2002-TIOL-27-SC-CX-LB

4. J. K. Spg. & Wvg. Mills Ltd. vs. UoI - 2002-TIOL-559-SC-CX-LB

Every statute has a temporal effect on the relationship between the parties, whether between private citizens or between citizens and the State, the transactions between them, and the rights and obligations arising therefrom. This phenomenon of 'temporal effect of a statute' is explained by Ben Juratowitch in his Book titled "Retroactivity and the Common Law" [Hart Publications; 2008 Ed.] in the following words:

"The potential complexity of the relationship between time and human activity can make difficult the accurate representation in language of particular intertemporal effects.

Statutes can have at least three types of temporal effect. The first applies only to events occurring after the entry into force of the statute. The second operates only after the entry into force of the statute but in doing so affects settled expectations that arose, or vested rights that accrued, prior to the entry into force of the statute It does not deem the law at the time that the expectation arose or the vested right accrued to have been otherwise than it actually was, but only affects the existing expectation or right from the entry into force of the statute. In this way it differs from the third type of effect, which arises when a statute deems the law at the time of a past event to have been as provided in the subsequent statute, where the law at the time of the event was actually something different".

In Principles of Statutory Interpretation" (9th Edition), G. P. Singh says:

"It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation."

To quote these oft-quoted observations of LOPES, L.J. in Re Pulborough Parish School Board Election, Bourke v. Nutt, (1874) 1 QB 725;p. 737 :

"Every Statute, it has been said which takes away or impairs vested rights acquired under existing law, or creates a new obligation or imposes a new duty, or attaches a new disability in respect of transactions already past, must be presumed to be intended not to have a retrospective effect". Every Statute, it has been said which takes away or impairs vested rights acquired under existing law, or creates a new obligation or imposes a new duty, or attaches a new disability in respect of transactions already past, must be presumed to be intended not to have a retrospective effect".

Generally, statutes are divided on the basis of whether a particular statute is dealing with procedure or with substantive right. In contrast to statutes dealing with substantive rights, statutes dealing with merely matters of procedure are presumed to be retrospective unless such a construction is textually inadmissible. [Gardner v. Lucas (1878) 3 AC 582]

Maxwell on Interpretation of Statutes (11th Ed.) explains "No person has a vested right in any course of procedure. He has only the right to prosecution or defence in the manner prescribed for the time being by or for the court in which the case is pending, and if, by an Act of Parliament the mode of prosecution is altered, he has no other right than to proceed according to the altered mode.... the general principle however, seems to be that alteration in procedure is retrospective, unless there be some good reason against it."

In an elaborate elocution, it is stated in Francis Bennion's Interpretation (2 nd Ed.) as under:

"The essential idea of legal system is that current law should govern current activities. Elsewhere in this work a particular Act is likened to a floodlight switched on or off, and the general body of law to the circumambient air. Clumsy though these images are, they show the inappropriateness of retrospective laws. If we do something today, we feel that the law applying to it should be the law in force today, not tomorrow's backward adjustment of it. Such, we believe, is the nature of law. Dislike of ex-post facto law is enshrined in the United States Constitution and in the Constitution of many American States, which forbid it. The true principle is that   lexprospicit non respicit (law looks forward not back).   As Willes, J. said, retrospective legislation is "contrary to the general principle that legislation by which the conduct of mankind is to be regulated ought, when introduced for the first time, to deal with future acts, and ought not to change the character of past transaction carried on upon the faith of the then existing law." 

LORD DENNING in Blythe v. Blythe - (1961)1 ALL EK. 524, p.535 (HL) observed: "The rule that an Act of Parliament is not to be given retrospective effect applies only to statutes which affect vested rights. It does not apply to statutes which only alter the form of procedure or the admissibility of evidence, or the effect which the courts give evidence."

The issues as to whether a particular enactment is retrospective or prospective in its operation and effect or not, as well as the validity of the retrospective operation of an enactment have always been a contentious one, and notwithstanding certain guiding judicial principles that have evolved over the years and elaborated above, the issue continues to surface and confront the Courts every now and then.

In the matter of Hitendra Vishnu Thakur v. State of Maharashtra [(1994) 4 SCC 602; AIR 1994 SC 2623],  the Hon'ble Supreme Court laid down the ambit and scope of an amending Act and its retrospective operation as follows:

"(i) A statute which affects substantive rights is presumed to be prospective in operation unless made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such a construction is textually impossible, is presumed to be retrospective in its application, should not be given an extended meaning and should be strictly confined to its clearly defined limits.

(ii) Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal even though remedial is substantive in nature.

(iii) Every litigant has a vested right in substantive law but no such right exists in procedural law.

(iv) A procedural statute should not generally speaking be applied retrospectively where the result would be to create new disabilities or obligations or to impose new duties in respect of transactions already accomplished:

(v) A statute which not only changes the procedure but also creates new rights and liabilities shall be construed to be prospective in operation unless otherwise provided, either expressly or by necessary implication."

In Empire Industries' case (supra), the Supreme Court quoted with approval this significant passage from the 73rd Volume of Harvard Law Review (p.692 at p.795):

"It is necessary that the legislature should be able to cure inadvertent defects in statutes or their administration by making what has been aptly called 'small repairs'. Moreover, the individual who claims that a vested right has arisen from the defect is seeking a windfall since had the legislature's or administrator's action had the effect it was intended to and could have had, no such right would have arisen. Thus, the interest in the retroactive curing of such a defect in the administration of government outweighs the individual's interest in benefiting from the defect….. The Court has been extremely reluctant to override the legislative judgment as to the necessity for retrospective taxation, not only because of the paramount governmental interest in obtaining adequate revenues, but also because taxes are not in the nature of a penalty or a contractual obligation but rather a means of apportioning the costs of government amount (to) those who benefit from it."

Based on the above brief exposition of law on the subject issue, certain important principles can be derived which are relevant for examining the issue posed above. They are -

a. A statute affecting substantive rights is presumed to be prospective in operation unless it is expressly or by necessary implication made to have retrospective operation.

b. A statute which affects procedure, unless such construction is textually impossible, is presumed to be retrospective in operation.

c. Law relating to forum and limitation is procedural in nature.

d. Every litigant has a vested right in substantive law but no such right in exists in procedural law.

e. A procedural statute should not generally speaking be applied retrospectively where the result would be to create new liabilities or obligations.

f. A legislature has powers to cure inadvertent defects in statutes or their administration by making small repairs.

Let us now examine the validity of the present retrospective amendment to S.140 of the CGST Act on the touchstone of the above principles of law.

The nature of the retrospective amendment, at first glance, appears to be quite simple and dealing with a procedural aspect. These simple words "within such time and" are only inserted in various clauses of S.140 retrospectively w.e.f. July 1, 2017. This is obviously with an intention to remove the lacunae in S. 140 with regard to the absence of the enabling power in the Central Government to prescribe the time limit for filing the FORM GST TRAN-1 that had become a serious bone of contention between the Petitioners and the Revenue in the Courts in the judgments cited supra. One can even say that the amendment relates to 'procedural aspect' and has been expressly made effective retrospectively. The amendment may also be considered as making small repairs - that is curing an inadvertent defect in S.140 and its administration.

To the above extent, one may possibly say that the retrospective legislation is not arbitrary or harsh.

However, having said so, the moot question that arises is whether the subject retrospective amendment, though dealing with a procedural aspect, affects prejudicially a substantive vested right of a taxpayer? This question necessarily raises another fundamental issue and that is, whether the right to claim the transition of the CENVAT Credit lying in balance as on June 30, 2017 as per the erstwhile ER-1/ST-3 Return is a vested right? Let us examine these issues in the context of various judicial pronouncements and the ratio decidendi thereof.

There are clearly two conflicting streams of judgements on this issue.

In the following notable cases, the contention that 'right to carry forward such CENVAT Credit in GST regime is a vested right' has been rejected by the High Courts:

1. JCB India Ld. Vs. UoI

- 2018-TIOL-2766-HC-MUM-GST [Date of Decision: 19/20.03.2018]

[This judgement is delivered in the context of S.140(3)(iv) of the CGST Act.]

2. Willowood Chemicals (P) Ltd. vs. UoI (supra)

3. NELCO Ltd. vs. UoI (supra)

On the other hand, in the following cases, the respective High Courts have, inter alia, held that 'the right to CENVAT credit and to carry forward the same in the GST regime is a vested right:

1. Filco Trade Centre vs. UoI

- 2018-TIOL-2861-HC-AHM-GST [Date of Decision:05.09.2018]

[In the context of S.140(3)(iv) of the CGST Act]

2. Siddharth Enterprises vs. The Nodal Officer

- 2019-TIOL-2068-HC-AHM-GST [Date of Decision: 06.09.2018]

3. Adfert Technologies Pvt. Ltd. vs. UoI

- 2019-TIOL-2519-HC-P&H-GST [Date of Decision: 04.11.2019]

In most other judgements, the respective Courts have recognized, if not explicitly, then impliedly, that such right is a 'vested right'.

In the humble opinion of the author, the right to claim the CENVAT Credit lying in balance as on June 30, 2017 as reflected in the erstwhile ER-1/ST-3 Return and its transition to GST regime is a 'vested right' inasmuch as while the right to CENVAT Credit may be conditional or restricted in terms of the provisions of the erstwhile CENVAT Credit Rules, 2004, the occasion to apply this principle will arise only at the 'entry gate' i.e. when the taxpayers stakes his claim for the first time. Once he clears all the hurdles including the one relating to the time limit, if any, prescribed in the said Rules for claiming CENVAT Credit, his right to the CENVAT Credit stands crystallized, monetized and becomes an absolute, vested right. Such right then becomes 'indefeasible' applying the ratio of the judgement of the Supreme Court in C.CEx. vs. Dai Ichi Karkaria Ltd. - 2002-TIOL-79-SC-CX-LB.

Once it is established that the right to CENVAT Credit is an absolute, vested right as explained above, the following crucial observations and findings of the Gujarat High Court in Siddharth Enterprises' case (supra) come into sharp focus:

- The right to carry forward credit is a right or privilege acquired and accrued under the repealed CEA, 1944 and is saved under S. 174(2)(c) and cannot be allowed to lapse under Rule 117 for failure to file TRAN-1 within the due date.

- The right to carry forward CENVAT credit if denied, for not being able to file FORM GST TRAN-1 would offend the objective of GST to remove the cascading effect of tax as mentioned in the Statement of Objects and Reasons of the Constitution (122 nd Amendment) Bill, 2014 later enacted as 'Constitution (101 st Amendment) Act, 2016.

- It is arbitrary, irrational and unreasonable to discriminate in terms of the time limit to allow the credit with respect to the purchases of goods and services made in the pre-GST regime and post-GST regime and the same will be violative of Article 14 of the Constitution.

- Disallowing such vested right is offensive against Article 14 of the Constitution as it goes against the essence of doctrine of legitimate expectation.

- Denial to carry forward the CENVAT Credit for not being able to file the FORM GST TRAN-1 within the due date may adversely affect the working capital of the Petitioners and may diminish their ability to continue with the business which would be violative of Article 19(1)(g) of the Constitution.

- The liability to pay GST on sale of stock carried forward without corresponding input tax credit would lead to double taxation on the same subject matter and therefore, it is arbitrary and irrational.

- While the right to property is no longer a fundamental right but it is still a constitutional right and cannot be taken away by virtue of merely framing Rules in this regard.

- The filing of FORM GST TRAN-1 for claiming the transition of the CENVAT Credit lying in balance as on June 30, 2017 to GST regime is merely a procedural formality including the one pertaining to time limit as prescribed under Rule 117 of the CGST Rules, and cannot nor can be allowed to defeat this vested right.

The retrospective amendment to S.140(1) may not also stand the scrutiny of law on the ground of being 'discriminatory' or resulting into discrimination. The amendment, in effect, seeks, not only to remove a lacuna in this parent provision as explained above, but also seeks to extend sacrosanct-ness to the time limit prescribed under Rule 117 of the CGST Rules which stood extended to December 27, 2017. In other words, those taxpayers who have not been able to file the TRAN-1 before 'December 27, 2017' in terms of Rule 117(1) or in cases covered by sub-rule (1A) of the Rule, by March 31, 2020, may be denied the transitional credit by the Department by relying upon the retrospective amendment. However, in a large number of cases, various High Courts have, without going into the constitutional issues, directed the Department and GSTN Portal to allow the Petitioners before the Court to file FORM GST TRAN-1 even after the expiry of time limit on 'December 27, 2017' in terms of Rule 117 of the CGST Rules. The Revenue has apparently not challenged such directions in each and every case decided by the respective High Court.

The case of Adfert Technologies is a glaring example here. In this case, a total of 102 Petitioners were involved. The High Court, while following the judgements of the Gujarat High Court in the Siddharth Enterprise's case (supra) and the Delhi High Court in Krish Automobiles Pvt. Ltd. vs. UoI - 2019-TIOL-2153-HC-DEL, directed the Department to permit the Petitioners therein to file or to revise already filed incorrect TRAN-1, either electronically or manually on or before November 30, 2019. The High Court, while giving such directions, had not restricted itself to the pleadings of technical glitches made by the Petitioners but had also taken cognizance of various reasons cited before it for their inability to file or revise the TRAN-1. Readers may also take note of the fact that the SLP filed by the Revenue in the Adfert's case (supra) against the judgment of the High Court stands dismissed by the Supreme Court in 2020-TIOL-64-SC-GST. What is, however, interesting is that out of a total 102 Petitioners, the Revenue appears to have challenged the judgment only insofar as it pertained to 'Adfert Technologies Pvt. Ltd. '

Therefore, if the time limit as prescribed under sub-rule (1) and (1A) of Rule 117 of the CGST Rules which is sought to be made sacrosanct by the retrospective amendment is applied against the taxpayers who were not wise enough to not approach the High Court for a similar relief, for any reason, the amendment will clearly be 'discriminatory' and 'arbitrary'. The retrospective amendment then fails this 'litmus test' and can be challenged as constitutionally invalid if pressed into service by the Department.

In a nutshell, while the retrospective amendment may, at a first glance, appear to cure an inadvertent defect in S.140 and one dealing with a procedural aspect, the same remains susceptible to constitutional challenge for the following reasons -

a. that, if applied, it would create new disabilities or obligations;

b. that, it not only changes the procedure but also adversely affects a substantive right to CENVAT Credit;

c. that it is arbitrary and discriminatory.

Conclusion:

The author is, therefore, of the view that in case the retrospective amendment made to S.140 of the CGST Act by S. 128 of the FA, 2020 (read with 43/2020-CT) is applied by the Department to the detriment of the taxpayers, it can certainly be challenged as being not Constitutionally valid, being violative of the fundamental rights guaranteed under Article 14 and 19 (1)(g) of the Constitution of India as well as the constitutional right to property under Article 300A of the Constitution, and also being arbitrary, unreasonable and discriminatory in nature.

[To be concluded…]

[The views expressed are strictly personal.]