The Delhi High Court has passed a landmark judgment on 5th May, 2020 in the case of Brand Equity Treaties Ltd. v. Union of India and Others.
BRIEF FACTS OF THE CASE
Cases can be broadly covered under 3 categories such as non-filing, incomplete filing and tried but failed due to utter confusion and chaos. The gist of cases are as follows:
Owing to dependence at the group level in the context of tax compliances and multiple entities involved, the Petitioner was unable to file the declaration in Form TRAN-1 within the prescribed timelines.
Case 2- Micromax Informatics Ltd [W.P.(C) 196/2019& CM APPL. 965/2019]
The Petitioner received a letter from Assistant Commissioner GST seeking a response in relation to verification of input tax credit claimed in form TRAN-1. While collating documents in response to the said communication, the Petitioner realized that credit was mistakenly not carried forward. In response to the communication, the Petitioner also submitted the last service tax return [Form ST-03]. Due to no response from respondents writ petition is filed before this court of law.
Case 3- Developer Group India Private Limited [W.P.(C) 8496/2019]
Petitioner applied for service tax refund u/s 142(3) in response Assistant Commissioner said Petitioner is not eligible to refund. Eventually, Petitioner filed the writ and Respondent were directed by Honorable Court to obtain instruction and asked GST Council to consider such cases. Petitioner has now filed the petition as writ in the nature of certiorari under this Court.
Case 4- Reliance Elektrik Works [W.P.(C) 13203/2019]
Petitioner contends that error in the system of the respondent and utter confusion and chaos were reasons for failure in filing TRAN-1. Petitioner had also engaged in correspondence with the respondents, however there has been no effective resolution to its grievance.
GROUNDS OF PETITIONER
GST system at the relevant point of time, and even presently, is in a “trial and error” phase, therefore, Petitioners should not be made to suffer on account of inefficiency in the systems of the Respondents by denying them the credit of the accumulated CENVAT credit on the due date.
CENVAT credit accumulated in the erstwhile regime represents the property of the petitioner and a constitutionally protected right under Article 300A of the Constitution which cannot be taken away by framing Rules without there being any substantive provision in this regard under the Act.
It is urged that the time limit specified in Rule 117 of CGST Rules is procedural in nature, and not a mandatory provision, and thus period provided therein cannot be enforced so as deprive the petitioners from availing their vested right.
Case laws referred
GROUNDS OF RESPONDENTS
Petitioners’ failure to file the Form TRAN-1 within the due date is not attributable to any technical glitches while uploading the forms. It is admitted in the pleadings that some of the petitioners attempted to file TRAN-1 for the first time after the expiry of the last date for filing TRAN-1. In light of the above, they do not deserve any sympathy and leniency as the facts of each case exhibit a casual approach on their part. The delay is a result of their follies and does not warrant relief similar to what has been granted by this Court in several other cases.
Respondent defended Rule 117 of the CGST rules by arguing that under Sub-section (1) of Section 164 of the CGST Act, authorized Government to make rules for carrying out the provisions of the Act on the recommendation of the Council. Respondent submitted that the CGST Rules laid down by the Central Government, including the Rules impugned in the present petition, flow from the Act and align with the intention of the legislature. Emphasizes was given on the words “in such manner as may be prescribed” which are appearing in Sub-Section (1) of Section 140. Respondent submits that this provision empowers the Government to fix the time frame for availing the carry forward of the input tax credit by transitioning the CENVAT credit into the GST regime.
Respondent argues that the benefit of taking credit is not a vested right of an assessee and certainly cannot be claimed in perpetuity. The same is subject to certain conditions, safeguards, and limitations in such manner as may be prescribed. Respondent further argued that the input tax credit is in the nature of benefit/concession extended as per this statute. The rules, therefore, can be framed to limit the benefit while extending the concession.
Case laws referred
1. TRAN-1 the way to carry forward the erstwhile regime credit to GST:
The transition from the erstwhile regime to GST for the availment of the CENVAT credit was to be by way of a declaration to be submitted electronically in Form GST TRAN-1. The provisions of the Service Tax under Chapter V of the Finance Act stood repealed by virtue of the GST legislation as provided under Section 174 of the CGST Act. 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 as it was reflected in the said CENVAT credit register in the previous regime. On the enactment of the CGST Act, no mechanism was provided for the refund of the credit that existed on the said date. The only mechanism was for the utilization of such credit by migrating the same to the GST regime by way of filing declaration Form TRAN-1.
2. The legislature, or the executive not considered the period for filing the TRAN-1 as sacrosanct or mandatory:
The recommendations of the Grievance Redressal Committee were also brought to the notice of the GST Council after the scores of complaints were made on the portal and it was also brought to the notice of the government. Several cases got settled at the government level. The government also acknowledged that on account of technical difficulties, they extended the date prescribed for filing of Form GST TRAN-1 under Rule 117 (1A) of the CGST Rules. This also substantiates that the period for filing the TRAN-1 is not considered either by the legislature, or the executive as sacrosanct or mandatory.
3. The Court has given the benefit of the doubt to the taxpayers and states the GSTN network indeed is riddled with inadequacies:
The Honorable Court says some of the cases that came up, the petitioners cited difficulties in filing the TRAN-1 Form. In some cases, there were bonafide errors on the part of the taxpayer and in others, the difficulty arose on account of lack of understanding. However, the Honorable Court has declined to make differentiation and given the benefit of the doubt to the taxpayers, realizing that Respondent’s network and system, and the change, had posed multifarious problems that require a reasonable approach and states the GSTN network, indeed, is riddled with shortcomings and inadequacies.
4. The Honorable Court referred the following judgements,
a. AB Pal Electricals Pvt. Ltd. vs. Union of India in W.P.(C) 6537/2019 the Court held that it may be noted that as per Notification No.49/2019 dated 09.10.2019 issued by CBIC, the date prescribed for filing of Form GST TRAN-1 under Rule 117 (1A) of the CGST Rules has been extended to 31.12.2019. This itself demonstrates that the Respondents recognise the fact that the registered persons were not able to upload the Form GST TRAN- 1 due to the glitches in the system. It is not fair to expect that each person who may not have been able to upload the Form GST TRAN-1 should have preserved some evidence of it.
We may further add that the credit standing in favour of an assessee is “property” and the assessee could not be deprived of the said property save by authority of law in terms of Article 300 (A) of the Constitution of India. There is no law brought to our notice which extinguishes the said right to property of the assessee in the credit standing in their favour.
b. Bhargava Motors v. Union of India,decision dated 13th May, 2019 in WP (C) 1280/2018, where it was observed that the GST system is still in the ‘trial and error phase’ as far as its implementation is concerned.
c. Madurai Bench of the Madras High Court dated 10th September, 2018 in W.P. (MD) No. 18532/2018 (Tara Exports v. Union of India) after acknowledging the procedural difficulties in claiming the input tax credit in the TRAN-1 form, directed the respondents either to open the portal or accept the manually filed TRAN-1 and to allow the input credit claimed after processing the same, if it is otherwise eligible in law.
d. Kusum Enterprises Pvt. Ltd. v. Union of India, 2019-TIOL-1509-HC-DEL-GST, Where assessee was unable to file Form GST TRAN-1 on account of glitches in the online system of the department, GST Authorities were to be directed to either open Portal so as to enable the assessee to again file Form GST TRAN-1 electronically, failing which they would accept manually filed Form GST TRAN-1
e. M/s Blue Bird Pure Pvt. Ltd vs Union of India and Ors,2019 SCC OnLine 9250 where the Court is satisfied that, although the failure was on the part of the Petitioner to fill up the data concerning its stock in Column 7(d) of Form TRAN-instead of Column 7(a), the error was inadvertent. The Respondents ought to have provided in the system itself a facility for rectification of such errors which are clearly bonafide. It should be noted at this stage that although the system provided for revision of a return, the deadline for making the revision coincided with the last date for filing the return i.e. 27th December, 2017. Thus, such a facility was rendered impractical and meaningless.
5. The time limit prescribed on the basis of technical glitch is arbitrary, vague and unreasonable in nature:
The word ‘prescribed’ has also been defined under Section 2(87) to mean “prescribed by Rules made under this act on the recommendation of the council”. This brings us to Rule 117 of CGST Rules, the relevant provision prescribing the manner in which the CENVAT credit has to be transitioned. Initially, the time limit prescribed under Rule 117 for transitioning was 90 days, as explained above, was extended from time to time. This provision also contains a proviso, which vests power with the Commissioner to extend the period on the recommendations of the Council.
The time limit has gone way beyond the period originally envisaged and has still not expired. Thus, there is nothing sacrosanct about the time limit so provided. 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 classification introduced by way of sub Rule (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.
6. The term “technical difficulty on the common portal” is not restricted to the difficulty faced by or on the part of the respondent and in uploading the form:
There is no definition of this concept and the respondent seems to contend that it should be restricted only to “technical glitches on the common portal”. However, the Honorable Court does not concur with this understanding and accordingly the term “Technical difficulty” is too broad a term and cannot have a narrow interpretation, or application it cannot be restricted only to a difficulty faced by or on the part of the respondent. It would include within its purview any such technical difficulties faced by the taxpayers as well.
The introduction of Sub-rule (1A) in Rule 117 is a patchwork solution that does not recognise the entirety of the situation. It sneaks in an exception, without addressing situations taken note of by us. It is unfair to create this distinction and restrict it to technical snags alone. In our view, various different types of technical difficulties occur on the common portal which may not be solely on account of the failure to upload the form but it can be GST log-in record or the difficulties may also be offline.
7. The interplay of Article 14 and Article 300A of the Constitution with GST law:
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 extremely narrow interpretation that the respondents seek to advance, of the concept of “technical difficulties”, in order to avail the benefit of Sub Rule (1A), is contrary to the statutory mechanism built in the transitory provisions of the CGST Act.
The time limit prescribed for availing the input tax credit with respect to the purchase of goods and services made in the pre-GST regime, cannot be discriminatory and unreasonable. There has to be a rationale forthcoming and, in the absence thereof, it would be violative of Article 14 of the Constitution.
Further, we are also of the view that the CENVAT credit which stood accrued and vested is the property of the assessee, and is a constitutional right under Article 300A of the Constitution.
8. Examination of the case law relied upon by the Respondents:
a. ALD Automotive Pvt. Ltd. vs. Commercial Tax Officer where the appellant-Company claimed entitlement to an input tax credit of the amount paid on the purchases made from the registered dealer of a motor vehicle as per Section 19(2) of the Tamil Nadu VAT Act. However, the said input tax credit was not claimed and thus, in these circumstances, the Court concluded that the benefits envisaged in the taxing statute has to be extended as per the restrictions and conditions therein.
The response of Hournable Court:
In the instant cases, the input tax credit had been claimed in the erstwhile regime and was being reflected in the CENVAT credit ledger.
b. Willowood Chemicals Pvt. Ltd. vs. Union of India 2018, where the constitutional validity of the second proviso to Section 140(1) of the CGST Act and Rule 117 of the CGST Rules has been upheld.
The response of Hournable Court:
The above judgement is not relevant and moreover, the Punjab and Haryana High Court in Adfert Technologies Pvt. Ltd. vs. Union of India [CWP No. 30949/2018 (O&M) decided on 04.11.2019], took note of the decision in Willowood, and observed that the Gujarat High Court itself, as well as this Court in subsequent judgements, has taken a contrary view to that expressed in Willowood.
The mechanism for availing the credits has been prescribed is procedural and directory and cannot affect the substantive right. While interpreting Order VIII Rule 1 CPC, the Supreme Court has observed that the time limit for filing written statement is a directory in nature and not mandatory, and that “procedural law is not to be a tyrant but a servant, not an obstruction but an aid to justice” [Ref: Salem Advocates Bar Association v. Union of India AIR 2003 SC 189].
Further, even in ALD Automotive Pvt. Ltd. v Commercial Tax Officer(2019) 13 SCC 225, it was observed that “whether a particular provision is mandatory or directory has to be determined on the basis of the object of particular provision and design of the statute” and “such interpretation should not be put which may promote the public mischief and cause public inconvenience and defeat the main object of the statute”.
Rule 117 as being directory in nature, insofar as it prescribes the time-limit for 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. This however, does not mean that the availing of CENVAT credit can be in perpetuity. In absence of any specific provisions under the Act, we would have to hold that in terms of the residuary provisions of the Limitation Act, the 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.
Respondents are directed to publicise 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.
This landmark Judgement will enable many taxpayers to claim their transitional credit which was not claimed due to any reason by filing TRAN-1 till 30.06.2020. Further the Respondent is directed to publicise the order so that others who were not able to file TRAN-1 till date are permitted to do so on or before 30.06.2020.
However, the Honorable Court has not taken into consideration the following:
1) Section 164 of the CGST Act, 2017 which confers powers on the Central Government to make rules for carrying out the provisions of the proposed Act on recommendations of the Council.
2) The Judgement passed by the Bombay High Court in the case of NELCO Ltd. vs Union of India dated 20.03.2020 where the Court held that the time limit stipulated under Rule 117 is not ultra vires of GST Act.
3) Section 126 of the Finance Act 2020 (yet to be notified) which empowers the Government under section 140(1) of the CGST Act, to prescribe the time limit with retrospective effect from 1st July, 2017 by inserting the words “within such time and” after the words “existing law”.
Due attention needs to deploy here that after notifying section 126of the Finance Act2020 the hindrance faced by the Respondents on the grounds that the word “in such manner as may be prescribed” does not authorise to limitise the time limit will be removed. However, the above will be questioned on the yardstick of Article 300A “no person shall be deprived of his property save by authority of law” which may imply the CENVAT credit which stood accrued and vested is the property of the assessee and is a constitutional right.
We urged the Government to come out with circular revealing its mind on the further course of action it intends to take on this issue.
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CA Karan Goyal and Akash Bansal