NOVEMBER 20, 2021

By Deepak Suneja, Partner & Sourabh, Managing Associate, NITYA Tax Associates

TRANSITIONAL provisions in a statute essentially regulates a process that starts before an amendment or enactment of a statute, till it comes into force. The objective is to ensure that the shift is smooth, hassle free and minimizes loss to the stakeholders. While the intent behind placing transition provisions under GST Law was also similar, these provisions are flooded with jurisprudence staggered in all directions; with no end in sight even after four years of GST implementation. So much so that the narrative of transitional credit mystifies each time a judgment is pronounced in a Court of law.

The latest turn around in the narrative is the recent judgment of Bombay High Court in the case of Godrej & Boyce Mfg. Co. Limited v. UOI, - 2021-TIOL-2112-HC-MUM-GST, rendered in context of transition of various Cesses lying unutilized before enactment of GST law. This, along with decision of Madras High Court in the case of CCGST v. Sutherland Global Services Private Limited, - 2020-TIOL-1739-HC-MAD-GST, has left taxpayers searching for answers.

This article attempts to analyze the correctness of the Bombay High Court ruling and to evaluate whether the same will form a precedent in times to come, insofar as Show Cause Notices (SCNs) for recovery of transitioned Cesses is concerned.

Legal Provisions and Madras High Court ruling

Prior to advent of GST, there were various Cesses viz. Education Cess, Senior and Higher Education Cess, Krishi Kalyan Cess etc. which were lying unutilized in their last return as on June 30, 2017. While some Cesses were abolished prior to implementation of GST, others subsumed into GST. Notably, the unutilized Credit thereon never lapsed for want of a lapsing provision under the then Cenvat Credit Rules, 2004 ('Credit Rules').

Upon advent of GST law, Section 140 of the Central Goods & Services Tax Act, 2017 ('CGST Act') formed the machinery provision which permitted carry forward of Cenvat Credit. As enacted, Section 140 allowed transition of all Cenvat Credit lying unutilized on a taxpayer's last return. Notably all the Cesses (currently under dispute) formed part of Cenvat Credit under Rule 3 of the Credit Rules. Thus, upon a first glance of unamended Section 140, it was clear that it allowed Cenvat Credit including Cesses.

Many a taxpayer had Credit of Cesses and they carried it forward under GST regime. Given the volume of Cesses involved and the disputes arising therefrom, Section 140(1) was amended via the Central Goods & Services Tax (Amendment) Act, 2018 ('Amendment Act'). The amended provision stated that Cenvat Credit of 'eligible duties' will only be allowed to taxpayers. Consequent amendments were also made in Explanation 1 and 2 to Section 140. Explanation 3 was also inserted, which specifically excluded all Cesses not covered in Explanation 1 and 2 from scope of expression 'eligible duties and taxes'.

The issue was agitated before the Madras High Court, and the division bench in the case of Sutherland Global Services (supra), held that Education Cess and Senior and Higher Education Cess were abolished before implementation of GST and there is no vested right vis-à-vis such Cesses. The Court also held that the exclusion of Cesses for the purpose of carry forward and set off under Section 140 is specifically provided in Explanation 3 (irrespective of piecemeal enforcement of Explanations 1 and 2 by the Legislature), which is clearly applicable to gather the legislative intent. To this extent, the decision of Madras High Court and Bombay High Court are completely opposite.

In a nutshell, the Madras High Court not only disallowed carry forward of Credit of Cesses in terms of amendment made under GST law, but also held that the position that Cesses cannot be carried forward does not change even if the amendment was not made.

Analysis of judgment in Godrej and Boyce (Supra)

In this case, the High Court quashed a SCN issued to recover credit of Cesses transitioned under GST law. The SCN was issued in terms retrospective amendment brought in Explanation 1 and 2, which in revenue's view curtailed carry forward of credit of such Cesses. As these provisions are not notified yet, the High Court quashed the SCN for having jurisdictional error .

The Court also gave a cursory finding that the expression 'eligible duties and taxes' used in Explanation 3 to exclude Cesses, does not apply to Section 140(1), as it does not use any such expression. To this extent, the decision of Madras High Court and Bombay High Court are completely opposite.

While the Court quashed the SCN, it held that the revenue was open to issue a SCN if it has reasons to believe that the same is recoverable, for reasons other than retrospective amendment.

The road that lies ahead

On a careful reading of Bombay High Court's judgment, it is clear that the decision has been rendered on a limited premise. As the SCN did not substantiate the claim of recovery of Cesses lest retrospective amendment, the same was marred by non-application of mind. Even today, it is open for revenue to issue a SCN basis on other grounds, specifically relying on the decision in the case of Sutherland Global (supra), which held that even without amendment, carry forward of Cesses was not allowed as it was not a vested right of the taxpayer.

There are several positives to take away from this decision. One is the finding that Explanation 3 cannot be relied to deny carry forward of credit of Cesses, since expression used therein and under Section 140(1) is different. Further, Explanation 1 and 2 have not been notified yet. This view is correct and will help taxpayers distinguish the decision of Madras High Court as well as reason given by CBIC in its Circular No. 87/06/2019-GST dated January 2, 2019. This, along with several decisions of Supreme Court and High Courts holding that Cenvat credit is a vested right might just be enough support the taxpayers needed. What needs to be seen is how other judicial proceedings take cognizance of these points.

Further, the decision in Sutherland Global (supra) is pending before the Supreme Court in an appeal filed by the taxpayer. This issue too is expected to attain finality before the Supreme Court in due course, and it will be interesting to see the fate of intermediate SCNs issued by revenue.

(The views expressed are strictly personal.)