AUGUST 01, 2020

By Debasis Nayak and Aman Goyal, Chartered Accountants

WITH the implementation of the GST regime, the Government allowed transition of eligible input tax credit of erstwhile laws to the new GST regime. Section 140 of Central Goods and Services Tax Act, 2017 ("CGST Act") read with Rule 117 of Central Goods and Services Tax Rules, 2017 ("CGST Rules") required taxpayers to file declarations of such credit in Form TRAN-1 within 90 days from the appointed day i.e. by 28th September 2017. This date was further extended to 27th December 2017.

Delay in filing TRAN - 1 due to Technical glitches

Despite the extension of deadlines, a good number of taxpayers were unable to file Form TRAN-1, either due to technical glitches or other reasons. Given the loss of credit, writ petitions were filed across High Courts on the ground that CENVAT Credit being a vested and substantial right can't be denied by imposition of procedural time limit. Based on these writs, the Courts have allowed manual filing of Form TRAN-1 in certain cases.

Given the large number of such court orders, the Government inserted Sub-Rule (1A) in Rule 117, which opened the window for the taxpayers to file the Form TRAN-1 till March 31, 2019. The amendment allowed cases where the TRAN -1 could not be filed due to technical glitches. Government also appointed various nodal officers to verify the claim of the taxpayers and allow filing or revising the Form TRAN-1 from the backend facility in the GSTN portal. This deadline of filing TRAN 1, where the delay can linked to technical glitches has also been extended time to time and now can be filed by August 30, 2020.

However, there is no recourse if the delay cannot be linked to the technical glitches after the deadline i.e. 27th December 2017.

Delay in filing TRAN -1 for other than technical glitches

In the absence of any recourse in the law to transition Cenvat credit for reasons other than technical glitches, the taxpayers again knocked the doors of the High Court under writ jurisdiction. The taxpayers argued that provisions of Rule 117 / 120A of CGST Rules is ultra vires to the CGST Act. The claim was made as section 140 of the CGST Act does not contemplate any time limit and, therefore, the rules have transgressed the power given under section 140.

It is pertinent to note that during this time the Central Government vide Section 128 of Finance Act, 2020, has brought a retrospective amendment in Section 140 of CGST Act to prescribe the time limit for enjoying the benefit of transitional credit. Such amendment was made effective retrospectively from July 01, 2017. The amendment created the effect that Section 140 of CGST Act always provided for prescribing a time limit for filing Form TRAN-1.

We have enumerated few key rulings that were pronounced before the retrospective amendment of Section 140 of CGST Act.

High Court Judgments pronounced before amendment in Section 140 of CGST Act

1. Advert Technologies Pvt. Ltd. And 101 other parties vs. Union of India & Ors - 2019-TIOL-2519-HC-P&H-GST,

The Hon'ble Punjab and Haryana High Court has allowed filing of TRAN-1 irrespective of time limit provided under Rule 117 and Rule 117A and directed department to permit the petitioners to file or revise TRAN-1 either electronically or manually on or before 30th November 2019. The Court had also given the liberty of the tax departments to verify genuineness of claim of petitioners. Further, the court held that nobody shall be denied to carry forward legitimate claim of CENVAT/ITC on the ground of non-filing of TRAN-I by 27th December 2017.

On appeal by the Revenue, the Supreme Court dismissed the SLP - 2020-TIOL-64-SC-GST at the admission stage.

2. Nelco Ltd. vs. Union of India & Ors., - 2020-TIOL-641-HC-MUM-GST

Hon'ble High Court of Bombay in this case has traced the rule making power for prescribing the deadline under Rule 117 to Section 164 of the CGST Act and held that:

"47. Thus, the time limit in Rule 117(1) is traceable to the rule-making power conferred in Section 164(2). The credit envisaged under Section 140(1) being a concession, it can be regulated by placing a time limit. Therefore, the time limit under Rule 117(1) is not ultra-vires of the Act."

Hence, the Court concluded that Rule 117 of the CGST Rules is intra vires section 140 of the CGST Act and imposes a reasonable time limit for availing ITC. It was also held that ITC is a concession that is required to be availed within the prescribed time limit, failing which it would lapse.

A similar view was taken in Willowood Chemicals Pvt. Ltd. vs. Union of India &Ors.,- 2018-TIOL-2873-HC-AHM-GST.

3. M/s Brand Equity Treaties Limited And 3 Others vs UOI., - 2020-TIOL-900-HC-DEL-GST

In this recent judgement dated May 5, 2020, the Hon'ble Delhi Court held that period of 90 days for claiming input tax credit in TRAN-1 is directory and, therefore, period of limitation of 3 years under the Limitation Act would apply. The Court had directed the Department to allow all assessee to claim input tax credit in TRAN-1 by June 30, 2020. The Court further said that the direction would apply to all those who could not file TRAN-1 and claim input tax credit. The Court further directed that the respondents should publicize this judgment widely including by way of publishing the same on their website so that that all taxpayers who have not been able to file TRAN-1 can do so by June 30, 2020.

Reliance was placed by the Hon'ble Delhi High Court on its judgment in the case of AB Pal Electricals Pvt. Ltd. vs. Union of India - 2019-TIOL-2930-HC-DEL-GST

It is to be noted that the Revenue has filed a SLP against the said order before Hon'ble Supreme Court and Hon'ble Supreme Court vide order dated June 19, 2020 stayed the operation of the Delhi High Court judgement. - 2020-TIOL-115-SC-GST-LB

High Court Judgment after amendment in Section 140 of CGST Act

The judgment in the case of M/s. Brand Equity (Supra) created a lot of buzz among the taxpayers. Many taxpayers have approached their jurisdiction to transition the Cenvat credit which was missed earlier. The notification retrospectively amending section 140 of the CGST Act prescribing time limit came two weeks after the Delhi High Court judgment in case of M/s. Brand Equity (Supra).

After the said amendment in CGST Act, there are two judgements pronounced and outcome of both of them are contrary to each other. We have enlisted them below -

1. SKH Sheet Metals Components Vs Union of India & Ors., - 2020-TIOL-1031-HC-DEL-GST

With regard to the validity of M/s. Brand Equity Case (Supra), the court held that the amendment to Section 140 came into force after the date of the decision in M/s. Brand Equity (Supra) and there is no challenge with regard to amendment. Hence the court does not want to venture into legality of the said provision vis-à-vis the judgment of M/s. Brand Equity (Supra).

Further, the Court also acknowledges that -

"20. Nevertheless, all things considered, in spite of the amendment, the said decision is not entirely resting on the fact that statute [CGST Act] did not prescribe for any time limit for availing the transition of the input tax credit. There are several other grounds and reasons enumerated in the said decision and discussed hereinafter, that continue to apply with full rigour even today, regardless of amendment to Section 140 of the CGST Act."

Accordingly, the Hon'ble Delhi High Court held that the amendment answers the question regarding the power to frame rules fixing the time limit for filing the declaration but does not fix a time limit for transitioning credit.

2. M/s. P.R. Mani Electronics vs. UOI & Ors., - 2020-TIOL-1198-HC-MAD-GST

The Hon'ble Madras High Court held that the power to frame Rules with retrospective effect has been conferred by section 164 of the CGST Act subject to the limitation that it should not pre-date the date on which the entry under the CGST Act came into force. Accordingly, Rule 117 of the CGST Rules was framed, whereby, a time limit was fixed for submitting Form GST TRAN-1 on the common portal. Thereafter, the words "within such time" were introduced in section 140 of the CGST Act, with retrospective effect from 1 July 2017, thereby, conferring express power to prescribe time limits under section 140 of the CGST Act, without relying entirely on the generic rule-making power under section 164 of the CGST Act. Basis this, the High Court concluded that Rule 117 of the CGST Rules is intra vires section 140 of the CGST Act.

With regard to decision in SKH Sheet Metal Component (Supra) the court observed that it is not a logical corollary that time limits for availing Transitional ITC are inimical to the object and purpose of the statute. The Court also referred to Section 16(4) of CGST Act and 19(3)(d) of TNVAT Act which specifically prescribes time limit for availment of ITC and held that disregarding the time limit and permitting a party to avail Transitional ITC, in perpetuity, would render the provision unworkable.

The Hon'ble Court has placed reliance in case of decision of Apex Court Jayam and Company v. Assistant Commissioner & Anr. - 2016-TIOL-128-SC-VAT wherein it has been held that ITC has to be construed as a concession and not a vested right.

GST Policy Wing Update on time limit for transitional credit

With the activities in the Court regarding the transition of the ITC, the GST Policy wing of the board have also issued a detailed internal guidelines/instruction no. F.N0. CBEC- 20/10/11/2019/1001 - GST dated June 22, 2020 explaining the department position on time limit of filing of transitional form. The key conclusions on transitional credit are as below:

- The Government cannot be held responsible for negligence and dereliction of duty by a responsible taxpayer. Thus, Rule 117 and Rule 120 A of CGST Rules, 2017, prescribing time limit, are well within the ambit of Section 140 of the CGST Act, 2017 and nowhere goes beyond the Act.

- If the contention of the petitioner were to accepted by providing the facility of filing / revision of TRAN - 1, it would jeopardize Government revenue on account of similar demands from other taxpayers who could not file / revise in time due to negligence and it would be difficult for the Government to verify bona fides of such claims.

- Further, if the same ratio is accepted then any time limit provided in fiscal statutes like filing of statutory appeals, claim for refunds, issue of demand notices etc. would be necessarily challenged thereby setting a chaos in the system.

- Reliance in placed in various judicial precedent of the erstwhile regime wherein it is being held that time limit prescribed under statue is rational and mandatory.

Conclusion

The various Court orders and frequent amendments of the transitional provisions has already created enough chaos and left the taxpayer confused. Given the contrary judgements, varied approach of taxpayers may emerge and add to the chaos already created. While the retrospective amendment by the Government clearly reflects the intention of the Government in this regard, it is now up to the Apex Court to bring some closure to the too many open issues. The discussion on whether the right to avail transitional credit is a vested right or a concession and time limit prescribed under law is mandatory or directory is yet to attain finality. It remains to be seen how this issue transpires before the Supreme Court. Till such time, the transition will not happen.

[The views expressed are strictly personal.]