1. This is the case of an institutional loot. Institution is the Government. Can a Government issue a Notification in total disregard to the provisions of the Act under which such Notification is issued as well as ignore all the judicial precedents in this regard ?? Normally we think that they shouldn’t or couldn’t issue such Notification. But that is what they have done.
2. Notification No. 20/2018-Central Tax (Rate) dated 26.07.2018 fits the description given above. Said Notification seeks to allow the refund of accumulated input tax credit (“ITC”) on account of inverted rate structure in case of fabrics but only in respect of supplies received on or after 1st August, 2018. The balance of Input Tax Credit (ITC) lying in the credit ledger, after payment of tax for and upto the month of July, 2018, shall “lapse”. It may be noted that substantial ITC will pertain to the inputs corresponding to the finished goods already supplied with payment of tax before 1st August, 2018.
3. Let us now see the reasons why in our opinion balance ITC on Fabric should not “lapse”. We find seven reasons which are as under:
a. Said Notification has been issued in exercise of the powers conferred by clause (ii) of the proviso to sub-section (3) of section 54 of the CGST Act, 2017. Allow me to reproduce the said provision:
“54. Refund of tax. —
(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:
(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council”
Above provision thus only permits the Government to notify the supplies of goods or services in respect of which refund shall not be permitted. It does not empower the Government to eat away the ITC duly claimed. Hence we submit that the Notification under question, as far as lapsing of ITC is concerned, has been issued by wrongly exercising the powers given u/s 54(3)(ii) and hence is not ultra vires.
Even though there are number of precedents on the above conclusion it is worthwhile to refer to the judgment in the case of State of Gujarat v. Arvind Mills (2003) 1 SCC 529 (SC). Apex Court held that when Act provided that land revenue shall be levied and assessed with respect to land use only, no rule could be framed to levy land revenue for the non-use of land. The delegated power must be exercised within the strict limits of the authority conferred by the Act. In the present case, delegated power by issuance of the Notification under question has been exercised outside the limits conferred by the Act.
b. Apex Court in the case of Eicher Motors LTD v. UOI 1999 (106) ELT 3 (SC) was called upon to decide the validity of Rule 57F of the Central Excise Rules, 1944 which provided that the credit which was lying unutilised on 16th March, 1995 with certain manufacturers shall lapse. Court held as under:
“Since the excess credit could not have been utilised for payment of the excise duty on any other product, the unutilised credit was getting accumulated. The stand of the assessees is that they have utilised the facility of paying excise duty on the inputs and carried the credit towards excise duty payable on the finished products. For the purpose of utilisation of the credit all vestitive facts or necessary incidents thereto have taken place prior to 16-3-1995 or utilisation of the finished products prior to 16-3-1995. Thus the assessees became entitled to take the credit of the input instantaneously once the input is received in the factory on the basis of the existing scheme. Now by application of Rule 57F(4A) credit attributable to inputs already used in the manufacture of the final products and the final products which have already been cleared from the factory alone is sought to be lapsed, that is, the amount that is sought to be lapsed relates to the inputs already used in the manufacture of the final products but the final products have already been cleared from the factory before 16-3-1995. Thus the right to the credit has become absolute at any rate when the input is used in the manufacture of the final product. The basic postulate, that the scheme is merely being altered and, therefore, does not have any retrospective or retro-active effect, submitted on behalf of the State, does not appeal to us. As pointed out by us that when on the strength of the rules available certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that right, which had accrued to a party such as availability of a scheme, is affected and, in particular, it loses sight of the fact that provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the assessees concerned. Therefore, the scheme sought to be introduced cannot be made applicable to the goods which had already come into existence in respect of which the earlier scheme was applied under which the assessees had availed of the credit facility for payment of taxes. It is on the basis of the earlier scheme necessarily the taxes have to be adjusted and payment made complete. Any manner or mode of application of the said rule would result in affecting the rights of the assessees.
We may look at the matter from another angle. If on the inputs the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. Therefore, it becomes clear that Section 37 of the Act does not enable the authorities concerned to make a rule which is impugned herein and, therefore, we may have no hesitation to hold that the rule cannot be applied to the goods manufactured prior to 16-3-1995 on which duty had been paid and credit facility thereto has been availed of for the purpose of manufacture of further goods.”
Applying the above ratio we submit that when ITC was claimed, all the conditions stipulated u/s 16(1) read with Sec. 16(2) have been fulfilled. Even the finished goods have been supplied on payment of tax. Hence a vested right has been created in respect of such ITC and said right cannot be taken away by the Government. One may also refer to another decision of Apex Court in the case of Samtel India Ltd. v. Commissioner of C.E. 2003 (155) ELT 14 (SC) wherein the same ratio has been upheld.
c. We also submit that the decision of Apex Court in the case of Osram Surya (P) Ltd. Versus Commissioner of Central Excise, Indore, 2002 (142) ELT 5 (SC)wherein decision of Eicher Motors Limited (supra) was distinguished shall not apply to the present issue. This is because the issue involved in case of Osram (supra) was with respect to the introduction of time limit for claiming MODVAT credit benefit. It is in this context that the Apex Court held that the right to credit itself was not taken away but only the manner and the time within which the said credit was to be taken or utilized alone was stipulated. In the present case what is sought to be done is that the vested right itself is being taken away and hence the said decision shall not apply.
d. Sec. 17 of the CGST Act, 2017 contains provisions for blocking the credit which is otherwise admissible under Sec. 16. It may be noted that said provisions does not enable the Government to block any credit by way of a Notification. We place reliance on the judgment in the case of Ahmedabad Urban Development Authoity v. Sharad Kumar Jayanti Kumar Pasawalla (1992 AIR 2038)wherein Apex Court observed that as under:
“In a fiscal measure it will not be proper to hold that even in absence of express provision, a delegated authority can impose tax or fee. In our view, such power of imposition of tax and/or fee by delegated authority must be very specific and there is no scope of implied authority for imposition of such tax or fee.”
Present Notification providing for lapsing of ITC is issued without any specific power contained in the Act and hence even on this ground it is ultra vires.
e. The said Notification is also discriminatory in nature. Cases where such credit balance is utilized are not affected. Only cases where such balance remains, it provides that such balance shall lapse. Such discriminatory and arbitrary Notification cannot stand the test of Article 14 of the Constitution of India.
f. Lapsing of Input Tax Credit on Fabrics is an indirect way of increasing the tax on the finished goods already supplied in respect of which such credit is accumulated. Sec. 9(1) of the CGST Act, 2017 permits imposition of tax only as per the rates notified. Hence such Notification also violates provisions of Sec. 9(1).
g. There is even no machinery provision to give effect to the said Notification as far as lapsing of ITC is concerned. This is because the Notification says that only ITC remaining after payment of tax “for and upto the month of July, 2018” shall lapse. What if certain tax is found payable after filing the return for July, 2018 which relates to period upto the month of July 2018. If credit is reversed in the return for July, how will the registered person be able to use the same for payment of such tax detected later ?? Hence even on the ground of absence of machinery provisions, the said Notification providing for lapsing of ITC is bad in law.
4. We thus conclude by saying that the Notification in question providing for Input Tax Credit on Fabrics is nothing but an institutional theft. Such Notifications shall set a very bad precedent by permitting such arbitrary restrictions in future.