The Hon’ble HC (Division Bench), Madras in the case of Assistant Commissioner of Cost and Central Excise and Anr. vs. Sutherland Global Services Pvt. Ltd. & 2 Ors. [Writ Appeal No. 53/ 2020 dated October 16, 2020] set aside the order of Hon’ble Single Judge which allowed transition of Education Cess (‘EC’), Secondary and Higher Education Cess (‘SHEC’) and Krishi Kalyan Cess (‘KKC’) into GST regime through the TRAN-1 declaration.

Facts:

Sutherland Global Services Pvt. Ltd. (“the Respondent”) is engaged in providing Information Technology enabled services to customers worldwide. It has eight units registered under the Central Goods and Services Tax Act, 2017 (“CGST Act”), five units registered in Special Economic Zones (“SEZ”), two units in Software Technology Parks of India (“STPI”) and one unit in a Domestic Tariff Area (“DTA”).

The Responded filed the writ petition praying for a Writ of Certiorari quashing letter dated February 14, 2018 issued by the Assessing Officer. As a consequence, thereof, the Respondent would be entitled to avail and utilize accumulated credit pertaining to EC, SHEC and KKC.

The Hon’ble Single judge of HC, Madras allowed transition of EC, SHEC and KKC into GST regime. In the present case, appeal was filed by Revenue against the judgement of Hon’ble Single judge of HC, Madras [Writ Petition No.4773 of 2018 And WMP Nos.5916 & 13148 of 2018 dated September 5, 2019].

Issue:

Whether the Respondent is entitled to carry forward the accumulated unutilized amount of EC, SHEC and KKC to be utilized against the output GST tax liability?

Held:

The Hon’ble HC (Division Bench), Madras in the case of Writ Appeal No. 53/ 2020 dated October 16, 2020 held as under:

  • Explanation 1 of the Section 140 of the CGST Act refers to sub-sections (1), (3), (4) and (6), because these four sub-sections use and employ the term “Eligible Duties” and Explanation 1 confines “Eligible Duties” to seven specified duties under that Explanation 1 ibid.
  • Therefore, only the seven specified duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed date i.e. July 1, 2017 will be eligible to be carried forward and adjusted against GST Output Tax Liability. Apparently, EC, SHEC and KKC are absent from the seven categories in Explanation 1 of Section 140 of the CGST Act. Therefore, on a plain meaning, such three cesses in question cannot be inserted in Explanation 1 to cover them for being carried forward with reference to Explanation 1 which applies for specified four sub-sections of Section 140 of the CGST Act.
  • Similarly, Explanation 2 refers to Sub-sections (1) and (5) of Section 140 of the CGST Act and include eight categories out of which first seven are repeat of Explanation 1 “Duties” and the eighth one is Service Tax, eligible to be set off and carry forward under CGST Act.
  • The distinction between Explanation 1 and Explanation 2 of Section 140 of the CGST Act is that while Explanation 1 was intended to apply for the input ‘Eligible Duties’ in respect of stocks and inputs contained in semi-finished or finished goods held in stock as on July 1, 2017, the Explanation 2 specified 8 taxes and duties were applicable in respect of inputs and services received on or after July 1, 2017, the appointed day under GST Law. The addition of words “and Taxes” with “Eligible Duties” in Explanation 2 appears to be only on account of addition of “Service Tax” in Explanation 2 which specifies eight duties and taxes for set off.
  • Referred to sub-section (5) of Section 140 ibid, which uses the terms “Eligible Duties and Taxes” makes clear the purpose of inserting Explanation 2 in Section 140 ibid because sub-section (5) only permits such credit to be taken even after such input services are paid before the appointed date, but invoices in respect of them are received after the said appointed day for which a time period of 30 days is prescribed and the said period can still be extended by another 30 days for reasons to be recorded by the Commissioner.

Therefore, the Legislature has very carefully specified the duties and taxes in respect of stocks held as on June 30, 2017, for which requisite declaration in Form TRAN-1 is submitted and also the service tax in respect of services which are input services received before June 30, 2017 of which invoices may not have been received before that date and therefore, a relaxation of 30 days is provided for them. Therefore, by any intendment or implication, cess cannot be included in the terms of “Eligible Duties and Taxes” or “Eligible Duties” with reference to Explanation 1 and Explanation 2 to be carried forward and transitioned under Section 140 of the CGST Act.

  • The Legislature took further care by inserting Explanation 3 which is couched in negative terms and for removal of any doubt, it further clarified that such eligible duties and taxes will exclude Cess which has not been specified in Explanations 1 and 2 of Section 140 of the CGST Act.
  • Merely because the Respondent in the present case before us is a person having centralized registration has “taken” in his Electronic Credit Ledger the amount of such Cesses, does not entitle him to utilize it against the output GST Liability. The “taking” of the input credit in respect of EC and SHEC in the Electronic Ledger after 2015, after the levy of Cess itself ceased and stopped, does not even permit it to be called an input CENVAT Credit and therefore, mere such accounting entry will not give any vested right to the Respondent to claim such transition and set off against such output GST Liability.
  • On careful comparison of all the sub sections of Section 140 of the CGST Act, it can be seen that while all other sub-sections talk of “entitled to take credit”, sub-section (8) uses the word “allowed to take”. The utilisation of such credit, even if taken in Electronic Ledger and notified in Form TRAN-1, does not guarantee any such right of utilisation independent of other parts of Section 140 ibid specially ignoring Explanation 3. Sub- section (8), therefore, cannot be said to be an independent code of law for the dealers holding centralized registration, as canvassed.
  • Further, all three types of cess were not subsumed in the new GST Laws, either by the Parliament or by the States. Therefore, the question of transitioning them into the GST Regime and giving them credit under against output GST liability cannot arise. The plain scheme and object of GST Law cannot be defeated or interjected by allowing such input credits in respect of cess, whether collected as Tax or Duty under the then existing laws and therefore, such set off cannot be allowed.
  • Therefore, the Petitioner is not entitled to carry forward and set off of unutilised EC, SHEC and KKC against the GST Output Liability with reference to Section 140 of the CGST Act.

Our Comments:

GST Law subsumed 17 indirect taxes which were applicable prior to July 1, 2017. The transition of unutilised ITC could be allowed only in respect of taxes and duties which were subsumed in the new GST Law. Admittedly, the three types of Cess, namely Education Cess (EC), Secondary and Higher Education Cess (SHEC) and Krishi Kalyan Cess (KKC) were not subsumed in the new GST Laws, either by the Parliament or by the States. Credit of such EC and SHEC which could not be utilised against the output EC and SHEC liability, while the said impost was in force prior to Finance Act, 2015, became a dead claim in the year 2015 itself and therefore, there was no question of allowing a carry forward and set off after a gap of two years against the output GST Liability w.e.f. July 1, 2017 – This is the observation of the Hon’ble Madras HC (Division Bench) in Sutherland Global case discussed above, while setting-aside the judgment of Ld. Single Judge in Sutherland Global and thus, disallowing transition of cesses into GST.

Earlier, the decision of the Ld. Single Judge of Madras High Court was based on the principles of vested rights accruing to a taxpayer to avail credit and seamless flow of credit, as envisaged under GST, in the absence of specific provisions providing for lapse of credit. In addition, since the amendment to Section 140(1) of the CGST Act did not extend to Section 140(8) [i.e. centralised registration], an exception was drawn for service providers with a centralised registration. But now the Ld. Division Bench has reversed this view to held that CENVAT credit or ITC under the GST Regime is a concession and a facility and not a vested right by relying on SC judgment in Uttam Steel and Jayam & Co., also relies upon SC ruling in Unicorn Industries which has held earlier two judgments of the Supreme Court by two Judges Bench as per incuriam.

It  may also be noted that GST Policy Wing of CBIC has given its inputs/ comments on several policy matters in the writ petitions / PILS / appeals filed on issues pertaining to transitional credit vide F. No. CBEC-20/10/11/2019-GST/1001 dated 22.06.2020, to help jurisdictional tax offices to safeguard the interest of revenue. Amongst, other points, one of the comments states the Cenvat credits or input tax credits are not absolute/ vested rights over and above the statue and are subject to statutory provisions and rule under which they exist. It seems that the otherwise proclaimed universal concept of ‘vested right of ITC’ has now to be applied judicially.

Relevant Provision:

Section 140 of the CGST Act

“140. Transitional arrangements for input tax credit.

(1) 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 3[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:

Provided that the registered person shall not be allowed to take credit in the following circumstances, namely:—

(i) where the said amount of credit is not admissible as input tax credit under this Act; or

(ii) where he has not furnished all the returns required under the existing law for the period of six months immediately preceding the appointed date; or

(iii) where the said amount of credit relates to goods manufactured and cleared under such exemption notifications as are notified by the Government.

(2) A registered person, other than a person opting to pay tax under section 10, shall be entitled to take, in his electronic credit ledger, credit of the unavailed CENVAT credit in respect of capital goods, not carried forward in a return, furnished under the existing law by him, for the period ending with the day immediately preceding the appointed day in such manner as may be prescribed:

Provided that the registered person shall not be allowed to take credit unless the said credit was admissible as CENVAT credit under the existing law and is also admissible as input tax credit under this Act.

Explanation.––For the purposes of this sub-section, the expression “unavailed CENVAT credit” means the amount that remains after subtracting the amount of CENVAT credit already availed in respect of capital goods by the taxable person under the existing law from the aggregate amount of CENVAT credit to which the said person was entitled in respect of the said capital goods under the existing law.

(3) A registered person, who was not liable to be registered under the existing law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012— Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer, shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:––

(i) such inputs or goods are used or intended to be used for making taxable supplies under this Act;

(ii) the said registered person is eligible for input tax credit on such inputs under this Act;

(iii) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs;

(iv) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day; and

(v) the supplier of services is not eligible for any abatement under this Act:

Provided that where a registered person, other than a manufacturer or a supplier of services, is not in possession of an invoice or any other documents evidencing payment of duty in respect of inputs, then, such registered person shall, subject to such conditions, limitations and safeguards as may be prescribed, including that the said taxable person shall pass on the benefit of such credit by way of reduced prices to the recipient, be allowed to take credit at such rate and in such manner as may be prescribed.

(4) A registered person, who was engaged in the manufacture of taxable as well as exempted goods under the Central Excise Act, 1944 (1 of 1944) or provision of taxable as well as exempted services under Chapter V of the Finance Act, 1994 (32 of 1994), but which are liable to tax under this Act, shall be entitled to take, in his electronic credit ledger, —

(a) the amount of CENVAT credit carried forward in a return furnished under the existing law by him in accordance with the provisions of sub-section (1); and

(b) the amount of CENVAT credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day, relating to such exempted goods or services, in accordance with the provisions of sub-section (3).

(5) A registered person shall be entitled to take, in his electronic credit ledger, credit of eligible duties and taxes in respect of inputs or input services received on or after the appointed day but the duty or tax in respect of which has been paid by the supplier under the existing law, subject to the condition that the invoice or any other duty or tax paying document of the same was recorded in the books of account of such person within a period of thirty days from the appointed day:

Provided that the period of thirty days may, on sufficient cause being shown, be extended by the Commissioner for a further period not exceeding thirty days:

Provided further that said registered person shall furnish a statement, in such manner as may be prescribed, in respect of credit that has been taken under this sub-section.

(6) A registered person, who was either paying tax at a fixed rate or paying a fixed amount in lieu of the tax payable under the existing law shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:––

(i) such inputs or goods are used or intended to be used for making taxable supplies under this Act;

(ii) the said registered person is not paying tax under section 10;

(iii) the said registered person is eligible for input tax credit on such inputs under this Act;

(iv) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of inputs; and

(v) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day.

(7) Notwithstanding anything to the contrary contained in this Act, the input tax credit on account of any services received prior to the appointed day by an Input Service Distributor shall be eligible for distribution as credit under this Act even if the invoices relating to such services are received on or after the appointed day.

(8) Where a registered person having centralised registration under the existing law has obtained a registration under this Act, such person shall be allowed to take, in his electronic credit ledger, credit of the amount of CENVAT credit carried forward in a return, furnished under the existing law by him, in respect of the period ending with the day immediately preceding the appointed day in such manner as may be prescribed:

Provided that if the registered person furnishes his return for the period ending with the day immediately preceding the appointed day within three months of the appointed day, such credit shall be allowed subject to the condition that the said return is either an original return or a revised return where the credit has been reduced from that claimed earlier:

Provided further that the registered person shall not be allowed to take credit unless the said amount is admissible as input tax credit under this Act:

Provided also that such credit may be transferred to any of the registered persons having the same Permanent Account Number for which the centralised registration was obtained under the existing law.

(9) Where any CENVAT credit availed for the input services provided under the existing law has been reversed due to non-payment of the consideration within a period of three months, such credit can be reclaimed subject to the condition that the registered person has made the payment of the consideration for that supply of services within a period of three months from the appointed day.

(10) The amount of credit under sub-sections (3), (4) and (6) shall be calculated in such manner as may be prescribed.

Explanation 1.—For the purposes of sub-sections (1), (3), (4)] and (6), the expression “eligible duties” means––

(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957;

(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975;

(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975;

(iv) [….] (Omitted)

(v) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);

(vi) the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985; and

(vii) the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001 (14 of 2001) in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day.

Explanation 2.—For the purposes of sub-sections (1) and (5), the expression “eligible duties and taxes” means––

(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957;

(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975;

(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975;

(iv) […]

(v) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985;

(vi) the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985;

(vii) the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001; and

(viii) the service tax leviable under section 66B of the Finance Act, 1994, in respect of inputs and input services received on or after the appointed day.

Explanation 3 – For removal of doubts, it is hereby clarified that the expression “eligible duties and taxes” excludes any cess which has not been specified in Explanation 1 or Explanation 2 and any cess which is collected as additional duty of customs under sub-section (1) of section 3 of the Customs Tariff Act, 1975 (51 of 1975).”

*****

DISCLAIMER: The views expressed are strictly of the author and A2Z Taxcorp LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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