There have been numerous judgements of various courts regarding the allowability of transitional credit even though TRAN-1 was filed belatedly. However, in all these judgements the taxpayer was required to prove that the delay accrued to technical errors on the GST portal and the taxpayer had done all within its power to file the same within the stipulated time. The delay, if accrued, due to negligence of the taxpayer or due to the fact that the taxpayer was not well versed with the GST provisions was not given any acknowledgement for allowing relief to the taxpayer.
However, the Delhi High Court (‘Delhi HC’) has passed a landmark judgement in the case of Brand Equity Treaties Ltd. v. Union Of India and Others  on 5 May 2020.The Delhi HC has held that time-limit for filing TRAN-1 form for transition of Cenvat credit from pre-GST laws to GST as provided in Rule 117 is directory and the time-limit will be three years as per Limitation Act. As per the judgement, the Delhi HC has even provided relief to those petitioners who were filing TRAN-1 for the very first time for the carry forward of Cenvat credit from the erstwhile indirect tax regime to the GST regime. The Judgement is also landmark and a welcome one for all taxpayers because the Delhi HC has directed the government to give publicity to the judgement so that benefit can be availed by those taxpayers who have not come to the court seeking relief. The Judgement has been summarized in the below paragraphs:
1. Facts of the Case
Brand Equity Treaties Ltd and Others (‘Petitioners’) seek relief from the Delhi HC directing the Government of India (‘Respondents’) to allow the petitioners to carry forward the Cenvat credit in the erstwhile regime to GST regime by filing the TRAN-1 now, which is beyond the time limit as per Rule 117 of the CGST Rules. The Petitioners assail Rule 117 of the CGST Rules on the ground that it is arbitrary, unconstitutional and violative of Article 14 to the Constitution. It was argued that the time limit specified in Rule 117 of the Rules was only procedural in nature. The Respondents, on the other hand, have argued that the present case was different from the numerous petitions in which the Court had allowed relief. In the present case, the delay in filing TRAN-1 did not accrue to technical glitches on the GST portal but the delay was due to follies of the Petitioners and some of them attempted to file TRAN-1 for the first time after the due date.
The Delhi HC held the following:
2.1 Acknowledgement of glitches on the GST portal
- In the light of several petitions filed before the Delhi HC, the Hon’ble High Court acknowledged that several taxpayers however could not meet the deadline of filing TRAN-1. This was on account of several factors – predominantly being inadequacies in the network of the Respondents, which failed to meet the expectations and serve the needs of taxpayers.
- This fact has also been acknowledged by the government as the government inserted Sub-rule (1A) to Rule 117, whereby, on the recommendation of the Council, it was permissible for the Commissioner to extend the date for submitting the declaration electronically in Form GST TRAN-1, by a further period in respect of registered persons who could not submit the said declaration by the due date on account of technical difficulties on the common portal and in respect of whom the Council has made a recommendation for such extension.It was held that the fact that such an amendment was made provided enough testimony to the fact that it is well within the knowledge of the government that certain inadequacies were present in the GST system.
- Further, in a writ petition before the Hon’ble Delhi HC filed by the Sales Tax Bar Association [W.P (c) No. 9575/2017], the Hon’ble Delhi HC held a special hearing inviting the senior officials from the GSTN network as well as officers of the Council and policy makers. In the deliberations held it was informed to the Hon’ble Delhi HC that the GST redressal mechanism had been revamped then to address the problems at the grass root level. Thus, the Hon’ble Delhi HC concluded that the system was riddled with shortcomings and inadequacies.
2.2 The Legal provisions under Section 140
- At this juncture it becomes relevant to quote the provisions of Section 140 under the Act, as applicable at the time of examination by the Delhi HC
“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 [of eligible duties] 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 in such manner as may be prescribed”
- On the basis of the aforesaid provisions, the Hon’ble Delhi HC held that the provisions of Section 140 presuppose that the amount of CENVAT credit of eligible duties has accrued and is existing. Thus, on the appointed date, the credits which existed under the previous regime were required to be transitioned to the new regime. This credit in every sense stood accumulated, acquired and vested on the appointed date.
- The relevant provisions prescribing the manner in which the CENVAT credit has to be transitioned are mentioned under Rule 117 of the CGST Rules. Initially, the time limit prescribed under Rule 117 for transitioning was 90 days, which was extended numerous times, the last extension being 29 December 2017. Further, as an amendment Rule 117(1A) was inserted to extend the time limit beyond 29 December 2017 in respect of certain class of persons who were not able to file TRAN-1 within the prescribed time limit due to technical errors on the GST portal. Basis the extensions given; the Hon’ble Delhi HC concluded that the time limits prescribed under the Act were not sacrosanct.The period of 90 days has no rationale and as noted above, extensions have been granted by the Government from time to time, largely on account of its inefficient network.
- The Delhi HC then further examined the provisions of Rule 117(1A) and held thatthe arbitrary classification, introduced by way of sub Rule 117(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. The Delhi HC did not agree with the restrictive meaning given to technical difficulty by the government to cover only technical glitches on the GST portal. It was further held that technical difficulty would include within its purview any such technical difficulties faced by the taxpayers as well,which could also be a result of the Respondent’s follies.
- Further, under GST regime, a completely new system of accounting; reporting of turnover; claiming credit of prepaid taxes; and, payment of taxes was introduced. A basket of Central and State taxes were merged into a single tax. New forms were introduced and, as aforesaid, all of them were not even operationalized. In these circumstances, it was very unfair on the part of the Respondents, 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.Thus, it was held that 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.
2.3 Rules 117 is only procedural in nature
- The Delhi HC held that Section 140 very categorically states that ‘ A registered person shall …….. in such manner as may be prescribed”. Only the manner i.e. the procedure of carrying forward was left to be provided by the use of the words “ in such manner as may be prescribed”. Under the garb of framing Rules- which are subordinate legislation, new limitations which are not mentioned in the Act cannot be imposed.
- Thus, it was held that in the absence of any consequence being provided in Section 140, to the delayed filing of TRAN-1, Rule 117 has to be read and understood as directory and not mandatory.
2.4 Conclusion of the Delhi HC
- In the light of the above, the Delhi HC read down the provisions of Rule 117 in reading down the said provision as being directory in nature, insofar as it prescribes the time-limitfor 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. However, this did not mean that the availing of CENVAT credit can be in perpetuity.In absence of any specific provisions under the Act, the Delhi HC held that residuary provisions of the Limitation Act, which prescribe a period of three years should be the guiding principle and thus a period of three years from the appointed date would be the maximum period for availing of such credit.
- The Delhi HC further directed the government to either open the online portal so as to enable the Petitioners to file declaration TRAN-1 electronically, or to accept the same manually.
- The Delhi HC was also of the opinion that other taxpayers who are similarly situated should also be entitled to avail the benefit of this judgment.Therefore, the government was directed to publicize this judgment widely including by way of publishing the same on their website so that others who may not have been able to file TRAN-1 till date are permitted to do so on or before 30.06.2020.
(The author is a practicing Chartered Accountant based in Delhi and can be reached firstname.lastname@example.org 9811933762).
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