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GST - Capital goods in transit - Section 140(5) of the CGST Act does not violate Article 14 or 19(1)(g) of the Constitution - It cannot be seen as taking away an existing right: HC

Published: Oct 25, 2018

By TIOL News Service

AHMEDABAD, OCT 25, 2018: PETITIONER has prayed for a declaration that the action of the respondents in not allowing the credit of excise duty paid on capital goods which were in transit as on 01.07.2017 is violative of Article 14 and 19(1)(g) of the Constitution of India.

The petitioner's consequential prayer is that the respondents be directed to allow such credit to the petitioner.

The High Court noted that under the CGST Act, there are transitional provisions (section 140) to enable the assessee to avail the credit of duty paid on inputs which were in transit as on 01.07.2017. However, when it came to the question of taking credit of the duty paid on the capital goods in transit and received on or after 01.07.2017, no facility is provided to enable the assessee to claim credit of the excise duty paid on such capital goods.

The petitioner inter alia submitted that once the duty was paid by the assessee upon purchase of capital goods, the same could be utilized for discharging assessee's liability of tax and this right,being a vested right cannot be taken away by the legislation.

The counsel for the Revenue submitted that the Court cannot strike down a statutory provision merely on the opinion that the same is unreasonable or harsh.

After tracing the history of legislations granting the facility of taking credit on capital goods in terms of rule 57Q of the CER, 1944; rule 3 of the CCR, 2004 [both of which restricted credit to a maximum of 50% in the financial year in which the capital goods were received in the factory and the balance 50% in any subsequent financial year], the High Court adverted to the provisions of s.2(19) of the CGST Act, 2017 and sections 16, 17, rule 43 of the CGST Rules and after reproducing section 140 of the CGST Act, 2017, observed thus -

+ Sub-section (1) of section 140 enables a registered person, other than a person who has opted for payment of tax on composition basis, to carry forward CENVAT credit of eligible duties in relation to the period ending with the day immediately preceding the appointed day under the existing law in such manner as may be prescribed.

+ Sub-section (2) of section 140 provides that the registered person other than one opting to pay tax on composition basis shall be entitled to take in his electronic credit ledger, credit of unavailed CENVAT credit in respect of capital goods not carried forward in return furnished under the existing law as may be prescribed.

+ Sub-section (5) of section 140 allows a registered person, credit of eligible duties and tax in respect of inputs or input services which were received on or after the appointed day but on which the tax was paid earlier.

+ In absence of any matching provisions pertaining to capital goods, in a situation where the duty had been paid on purchase of goods prior to the appointed day but the goods were received on or after the appointed day, there would be no possibility of availing credit on such tax under the GST regime.

Is this demarcation unlawful?

++ The legislature, …, made a clear and conscious demarcation between capital goods and inputs when it comes to availing credit of the duties paid on the goods which are in transit.

++ This section (140 of CGST Act, 2017) consciously does not provide any such facility in relation to the capital goods in transit. This demarcation itself would not be artificial, arbitrary or in any manner, discriminatory.

++ The capital goods and inputs used in manufacturing process have always been treated differently and distinct treatment have been given under the earlier statutes.

++ If the legislature, therefore, was of the opinion that in relation to capital goods in transit, duty paid before the appointed date cannot be claimed as a credit in the GST regime, we do not find that the distinction is in any manner artificial or arbitrary.

++ To bring in the element of discrimination in terms of Article 14 of the Constitution, the onus would be on the petitioner to establish that the persons or things treated differently form a homogeneous class.

++ In the present case, the source of the petitioner's grievance or dissatisfaction is that the inputs and capital goods are treated differently. When we find that the inputs and capital goods form different and distinct classes, the question of sub-classification or artificial demarcation would not arise.

++ To us it appears that, the suggestion of the respondents is that unlike inputs, the capital goods which can be in the nature of plant and machinery including highly sophisticated specially designed and manufactured machines, may take much longer time for delivery and installation after the orders are placed by the manufacturers and, the legislature was not inclined to keep the issues of migration of tax credits and pending claims open for indefinite period of time.

Following decisions of the apex court were also relied upon by the High Court -

++ R.K.Garg - 2002-TIOL-1706-SC-IT-CB - held that every legislation particularly in economic matters is essentially empiric and it is based on experimentation.

++ Jayam & Company - 2016-TIOL-128-SC-VAT - held that it is not the right of the "dealers" to get the benefit of ITC but its a concession granted by virtue of section 19.

++ Godrej & Boyce Mfg. Company Pvt. Limited - [1992] 3 SCC 624 - Supreme Court had upheld a rule which restricted availment of MODVAT Credit to six months from the date of the documents specified in the proviso. The contention that such amendment would take away an existing right was rejected.

++ Reliance Industries Limited - 2017-TIOL-360-SC-VAT - Held and observed that how much tax credit should be given and under what circumstances, is a domain of a legislature.

++ ALD Automative Pvt. Ltd. - 2018-TIOL-385-SC-VAT -Held that the conditions under which the concessions and the benefits is given is always to be strictly construed.

Conclusion: Statute (s.140) in any manner does not violate Article 14 or 19(1)(g) of the Constitution. It can also not be seen as taking away an existing right to claim CENVAT Credit of the duty paid on capital goods. Even in the earlier statute right to claim credit of duty paid would arise or accrue only upon receipt of such capital goods at the place of manufacturer.

The petition is dismissed.

(See 2018-TIOL-146-HC-AHM-GST)