Ever since they laid out the new indirect tax code, they’ve become stubborn towards the earlier taxes. Oh yes, we’re talking about the old humble stars, being swollen by a supermassive black hole, being GST. Luckily, the black hole allowed the poor old stars to burn its fuel before being swollen. The fuel burning provisions being articulated in this piece (1) Transitional Provisions – Chapter XX and (2) Repeal and Savings – Section 173 and 174.
Page Contents
- 1. A not so ideal transitioning
- 2. Repeal and Saved – Some transitioned, some not
- 3. Inter-play between Saving Clause and Transitional Provisions (TP)
- 4. Juxtaposing the principles of transition and savings under the Act
- 5. Examining the credibility of recent judgments on TP
- 6. Ratio from the recent judgments on Saving clause
- 7. Doctrine of Equality
1. A not so ideal transitioning
Central Goods and Services Tax Act, 2017 [1] (‘the Act’) undisputedly revamped the entire taxation code in India. The revamp was never supposed to completely displace the old taxes [Central Excise Duty, Service Tax, Central Sales Tax, State VAT], in one go. The old taxes had to go away in a phased manner;
- First, eradication at the self-assessment [e.g. grand-fathering old Input Tax Credit into new ones, migrating old registrations into new ones]
- Second, eradication at the adjudication level [e.g. permitting the application of older refunds in terms of old legislation, safe-guarding the audit power for the pre-GST period left un-audited]
- Third, eradication at the Appellate level [e.g. completing the proceedings dragged before the appellate forums]
Section 139-142 of the Act deals with various provisions, for transitioning the above aspects, however the way business are run in the modern times, the provisions fell far too short of an ideal transitioning. Following commonly faced scenarios may be referred, the said being not explicitly or impliedly taken care of in the transitional provisions, and are now subject to the red-tape;
- Excise Duty on charged by the suppliers on Capital Goods in-transit on 30th June 2017 (‘the transition date’)
- Services that were not provided/ cancelled, but the service tax on whose advances/ partial invoices were paid before the transition date
- Audits for the periods before the transition date that had not begun
- Industrial Policy incentives which were not grand-fathered
- Excise Duty on Capital Goods purchased before transitioning date for manufacturing final goods which were exempted before the transition date, but become subject to GST post such date (Textile sector)
- Input VAT on Raw Materials and Consumables that were already in the inventory of a developer, who was under the composition scheme under VAT
- Input Excise Duty on inputs procured for products which were amenable to concessional rate of Excise Duty @ 1%/ 2%
- Input Excise Duty on the inventories held longer than 1 year before the transition date by an erstwhile First/ Second Stage Excise Dealer
- Invoices on which 1 year limit of availing Cenvat Credit had not expired on the transition date
- Input Tax Credit of the GST paid on regularization of Advance Authorization post transition date
- Rejection of Cash Refund of Cenvat Credit – whose re-credit was permitted in pursuance of Notification No.27/2012-CE(NT), however refund rejected post GST
- Other Insufficiencies of Form GST TRAN-1
As soon as above three aspects highlighted above had been completely exhausted, the old taxes could’ve been said to have been abolished completely. The attempt of eradication, however, as seen from the anomalies not taken care above, appears to be half-hearted, casual and to very large extent rigid.
2. Repeal and Saved – Some transitioned, some not
On the face of it, rigid and draconian modalities were incorporated under the transitional provisions, huge quantum of the old credits were left to tangle on the collection of statutory declarations (Form C, F etc.), even huge amounts were cut down owing to the barge 1 year. The height of abuse was when definition of “eligible duties” was retrospectively amended to deny the credit of old cess. To what avail, one could ask? Is it that transitional provisions are some sort of concession to a taxpayer or is those are just piece of paper? Time to get to business, then;
In the Act, there are two sets of provisions which brings the older taxes into the new code. The first one is of course, transitional provisions from Section 139-142, and the next and most important ones are Repeal and Saving, Section 173 and 174.
3. Inter-play between Saving Clause and Transitional Provisions (TP)
A guide DP4: Drafting savings and transitional provisions, courteously summarizes the inter-play between TP and saving clause. Relevant extracts from the guide are phrased as below;
- A savings provision is “a provision the intention of which is to narrow the effect of the enactment to which it refers so as to preserve some existing legal rule or right from its operation”. See Halsbury’s Laws of England (LexisNexis 5th ed, 2012), vol 96 at [668].
- A transitional provision is a provision that “regulates the coming into operation of [an] enactment and (where necessary) modifies its effect during the period of transition”. See Halsbury’s Laws of England (LexisNexis 5th ed, 2012), vol 96 at [694].
[Emphasis Supplied]
There is clear distinction between the effects of both provisions while saving clause “preserves” earlier enactment, the TP regulates the new enactment. TP doesn’t affect the saving of earlier enactment. Although Thornton’s Legislative Drafting (Bloomsbury Professional, 5th ed, 2013) at [17.1], infers that there is no advantage in seeking watertight distinction between both, at the end, the drafters’ pen [sic] will identify the nature of the provision and those shall be treated as such in that case.
A fairly relevant judgment as to superiority of TP or saving clause stems from the Hon’ble Mumbai Tribunal in case of CCE vs Oil and Natural Gas Corporation Ltd.[2]. The assessee therein were entitled for MODVAT Credit on the basis of a certificate specified under Rule 57E of the erstwhile Central Excise Rules, 1944. During the cancellation, re-validation, appealed, upheld period, the Rules of 1944 were amended, replaced by Central Excise Rules, 2001, then finally replaced by Central Excise Rule, 2002.
The revenue alleged that, Cenvat Credit on the basis of Rule 57E didn’t had any transitional provisions in the Rules of 2002, when impugned Certificate was finally sustained, therefore Cenvat Credit doesn’t survive. The Hon’ble Tribunal however observed that Cenvat Credit was saved under saving provision contained in Section 38A of the Central Excise Act (pari materia to Section 174 ibid), and mere lack of transitional provisions wouldn’t disentitle the assessee from taking Cenvat Credit at the time of sustaining of the impugned Certificate. Relevant Extracts;
When Rule 57E was repealed, any provision recognizing certificate of Superintendent as a valid document for availment of MODVAT/CENVAT credit was not incorporated in the new rules. …….In the absence of a transitional provision enabling a manufacturer of final product, who obtained Rule 57E certificate prior to 1-4-2000, to use the certificate for taking MODVAT credit on his inputs after the said date, the principle of restitution embodied in Section 144 of the Code of Civil Procedure and applied by the Supreme Court in both customs and excise cases can, in our opinion, be invoked to dispense justice in the present case.
An apparent omission of the rulemaking authority to make such transitional provisions cannot be allowed to work irreparable injustice to the party. The principle of restitution is a tool which could be used to eliminate such injustice. …..
We have already held that the right which accrued to IPCL (RIL) under Rule 57 A for taking MOD VAT credit of the differential duty paid by ONGC, on the strength of Rule 57E certificates which were prescribed documents for availment of such credit, was protected by Section 38A of the Central Excise Act. The substantive right, so protected, could be enforced by quasi-judicial or judicial process for dispensing justice to the party, unfettered by the rigour of procedure……
On a perusal of the observations above, it can be safely conclude that saving clause is the main source of power when it comes to affecting the cross-over from an earlier enactment to new enactment. The TP on the hand are mere procedural guidelines, which (1) flows from the saving clause (2) and also doesn’t usurp the saving clause.
In Raymond Limited vs Commissioner of C. Ex & Cus.[3], the Appellant proposed one argument that, Cenvat Credit of Additional Excise (Textiles) could be cross-utilized against Additional Excise Duty (Goods of Special Importance) based on the transition provision encapsulated under Rule 57AG of the erstwhile Central Excise Rules, 1944. The Hon’ble Bombay High Court while rejecting the argument held that cross-utilization of Credit being de jure impermissible, TPs cannot be read otherwise. No right flows from the TP.
59.…….Once we have said that the credit lying as on 1st April, 2000 in AED (T&TA) account cannot be utilised towards payment of AED (GSI) on final products and which is clear from a plain reading of the Rules, then, the transitional provision cannot be read otherwise. It will have to be read in consonance with the earlier rules and so read, there is no right flowing therefrom to claim such entitlement or availment.
[Emphasis Supplied]
In CCE vs Chennai Petroleum Corporation Ltd.[4], the Larger Bench of Hon’ble Tribunal, acceded to the position that “specified status” to an assessee under the earlier Central Rules, 1944 when held to be not saved by the saving clause, then TP have no role to play.
Reliance may also be placed on the case of Tata Engineering and Locomotive Co. Ltd. vs Union of India[5], wherein the Hon’ble Bombay High Court relying on Eicher Motors vs UOI,[6] unequivocally held that where Credits are saved/ allowed as vested right, then mere the absence of exercising power being not specifically mentioned in procedural rules, would not mean that the Credits would lapse.
The under-laying principles apropos saving clause and TP therefore can be summarized as follows;
- While Saving clause “saves” earlier thing and TP “regulates” earlier thing into new enactment during a given period
- Saving clause is the main source of power, and TP only channels the source of power through one of the specified mode
- Where something is saved by saving clause, then even in the absence of TP, such thing can be exercised/ exhausted
- On the contrary something which is not saved by saving clause, then said saving cannot (may not) be channelled through TP
4. Juxtaposing the principles of transition and savings under the Act
At first, Section 173 and Section 174 (1) of the Act repeals the earlier laws. Subsequently, Section 174 (2) of the Act on the other hand saves the earlier laws to the extent specified therein. Clause (c) of Section 174 (2) as an illustration, extracted below;
(2) The repeal of the said Acts and the amendment of the Finance Act, 1994 (hereafter referred to as “such amendment” or “amended Act”, as the case may be) to the extent mentioned in the sub-section (1) or section 173 shall not—
(c) affect any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts or orders under such repealed or amended Acts:
Section 174 (2) (c) of the Act specifies that repeal of earlier laws shall not affect any right acquired under the existing law. Effectively what implies is, the Cenvat Credit on the inputs claimed by an excise registered manufacturer during the January 2017 (carried on as on 30th June 2017), being his right acquired under the earlier law shall not be affected. Meaning thereby the Cenvat Credit as on 30th June 2017 is saved by Section 174 (2) (c) ibid, it’s the manufacturer’s indefeasible right, not contracted by the Act. To conclude the Cenvat Credit flows Section 174 (2) (c) ibid.
Coming back to Section 140 (1) of the Act, which says that Cenvat Credit carried on the last ER-1 return (‘impugned credit’) shall be allowed transitioned as CGST-Input Tax Credit (ITC) to the excise manufacturer who has migrated as taxpayer under the Act. Meritoriously Section 140 (1) ibid merely facilitates the right saved under Section 174 (2) (c) ibid, rather than fettering the said right. Section 140 (1) ibid has no authority over the impugned credit, it just paves the way for it, in defined way. A little more emphasis on the language of Section 140 (1) ibid would also bring out extent of authority possessed by it;
- (1) A registered person, ……….. shall be entitled to take
The expression used in Section 140 (1) ibid are “shall be entitled”, and not “shall (only) be entitled”, meaning thereby Section 140 (1) ibid is only one of the prescribed method of claiming the impugned credit, but it certainly not the only method.
At this juncture, comparisons could be drawn to the locus standi Rule 5 of the Cenvat Credit Rules, 2004, as interpreted by the Hon’ble Courts. Rule 5 ibid was a provision for granting refund of Cenvat Credit in cases of export of goods or services. The Hon’ble Karnataka High Court in UOI vs Slokvak India Trading Co. Pvt. Ltd.[7], held that although Rule 5 grants Cenvat Credit refund in specified cases therein, said rule cannot act as deterrent for claiming refund of Cenvat Credit under the other provisions. So is same held by Gujarat High Court in the matter of Ishan Copper Pvt. Ltd.[8]. The defence of above argument also flows from the analogy of proviso to Section 54 (3) of the Act, which says that no refund of ITC shall be allowed other than in the prescribed cases, meaning thereby the acting as a negative provision. Section 140 (1) ibid and other transitional provisions are again unlike Section 54 (3) are a positive provision.
To conclude therefore it can be inferred that rights, privileges, obligations, liabilities saved under Section 174 (2) ibid are saved no matter what, and transitional provisions under Section 140-142 are merely tools, not a deterrent to rights, privileges, obligations, liabilities.
5. Examining the credibility of recent judgments on TP
In quite questionable judgment in case of Willowood Chemicals (P) Ltd. vs UOI[9], the Hon’ble Gujarat High Court failed to appreciate the essence of saving clause and held that the saving clause has to be read and appreciated in tune with the specific transitional provisions made in the Act. Any interpretation of saving clause cannot run counter to the express legislative intent of restricting or limiting enjoyment of the existing rules, or in other words to make continuous enjoyment of the rights.
It appears that the Court got bandwagon with the half interpretation of TP. The Court in-effect gave precedence to TP over saving clause, in gross violation of the established principles. It is true for TP, that TP gets spent when all the past circumstances with which it is designed to deal have been dealt with. However, it can be envisaged that such spending could take a considerable time, consequently, the time thereof should not be read as a rider in totality – Lord Keith in Regina v Secretary of State for Social Security, Ex parte Britnell [10]. Also see Empire Waste Pty Ltd v District Court of New South Wales[11]; R v Sayers[12]; Isman Ismail v Minister of Immigration and Ethnic Affairs, Margaret JM Korn and the Commonwealth of Australia[13].
In United Seamless Tubular Pvt Ltd. vs CCT, Rangareddy GST[14], the Hyderabad CESTAT has refused to entertain the Refund Claim of Cenvat Credit in cash, owing to the lack of jurisdiction over the matters truly covered under the appellate mechanism under the Act.
The decision and facts of case are quite amusing so much so that, the assessee therein tried a mischief of en-cashing Cenvat Credit qua deemed exports (of course not permitted under the last version of Rule 5 of Cenvat Credit Rules, 2004 before GST). The attempt was, even if the authority were to deny the refund claim under Rule 5 ibid, re-credit of credit thereof would be given in Cash under Section 142 (3) of the Act.
The Tribunal (gauging the clever attempt or not) instead washed of its hand on the ground that refund claims being governed under the Act, hence they don’t exercise comprehensive jurisdiction over interpreting the provisions of Act. Also left the assessee hanging on the foothold of proviso to Section 142 (3) ibid, that refunds rejected shall stand lapsed (as mediocre it may sound). One wonder had this been a genuine claim by an honest assessee, would Tribunal been so harsh?
The judgments above and multiple other judgments, it appears are very naïve and have been delivered in haste, and do not set any precedent whatsoever. The one thing that one shouldn’t do is get dissuaded by these belittled judgments, and continue proceedings, hopefully some good bench will take rationale cognizance of the issue at hand.
6. Ratio from the recent judgments on Saving clause
Another interesting thing that came out of the interpretation of saving clause is with respect to “Fresh Service Tax Audit to be initiated after the transition date”. The anomaly lies in the interpretation of Section 174 (2) (e) of the Act, relevant part reproduced below;
174. (2) The repeal…… shall not affect –
(e) affect any investigation, inquiry, verification (including scrutiny and audit), assessment proceedings, adjudication and any other legal proceedings ……………… and any such investigation, inquiry, verification (including scrutiny and audit), assessment proceedings, adjudication and other legal proceedings or recovery of arrears or remedy may be instituted, continued or enforced, and …… as if these Acts had not been so amended or repealed;
[Emphasis Supplied]
Section 174 (2) (e) ibid, has two limbs with its fold, (1) the first limb speaks about that repeal of Service Tax Law shall not affect any investigation etc., and (2) the second limbs enshrines that any such investigation may be instituted, continued or enforced. The correct interpretation of both the limbs is prejudice before multiple High Courts. Two sets of thoughts emanate;
- The expression “instituted” implies proceedings which stood already instituted before repeal or omission of Service Tax. Meaning thereby fresh institution of proceedings is not permissible.[15]
- Fresh proceedings can be instituted[16]. The savings clause provided under Section 174(2) (e) will enable the continuation of the investigation, enquiry, verification etc. that were made/to be made under Service Tax Law.
The above judgments express only prima facie views [Refer State of Uttar Pradesh v. R.C. Mishra[17], for instituted]. Nothing concrete could be said as to where would the decision tilt, in favour of the revenue viz. allowing the fresh institution of Service Tax Audit or otherwise. However, one thing that could be said from the whole ludicrous situation is that, revenue is caught in its own trap. If revenue were to take a stand that saving clause has to be interpreted in its widest possible meaning, then not only the audits would get saved but also the credits as above would also have to be saved. On the hand, if the revenue succeeds that credits as highlighted above are not saved owing to the strict interpretation of saving clause, then assessee have a strong foot to count the same qua audits as well.
Bring it on, North block!
7. Doctrine of Equality
There is one code which is beyond both saving clause and TP, in fact beyond the entire GST Code, the Constitution of India (“the Constitution”). A taxation statute is be strictly construed…. Blah! Blah! , they are still (amongst others) subject to the doctrine of equality before law under Article 14 of the Constitution. An action survives the doctrine of equality, provided;
- The classification is founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group;
- The differentia must have rational relation to the object sought to be achieved by the statute in questions
Re-creditable Cenvat Credit under Rule 5 ibid
Illustratively to implicate Article 14 ibid, facts of United Seamless Tubular Pvt Ltd. supra may be borrowed except the rejection of refund claim was not on account of deemed exports, but on account of actually disputable issue such as “Cenvat Credit on renting of bus for employees”.
Assuming the refund was denied to the assessee on the ground that such Cenvat Credit is ineligible under Rule 2 (l) of Cenvat Credit Rules, 2004, the assessee would’ve been allowed to take re-credit given the eligibility of Cenvat Credit has been settled post GST. And given that such re-credit was of no use, such claim could’ve been again claimed as Cash Refund under Section 142 (3) ibid. Now had any authority tried to challenge such cash refund, Article 14 ibid would probably kick in, since if such claim is not given to the assessee, it would be place him in unequal position to a person who’d gone for Transition route of claiming such Credit[18]. Hence, saving clause, TP [proviso to Section 142 (3) ibid] cannot lost sight of the very fundamentals of the Constitution.
Capital Goods in-transit on 30th June 2017
Another grey in TP, where the government has intentionally tried to create a vacuum for Article 14 ibid is under Section 140 (5) of the Act, which has permitted the migrated taxpayers to avail Central Tax-ITC of inputs and input services (suffering Excise Duty and Service Tax) which were in-transit on 30th June 2017. However, similar modus has not been accorded for Capital Goods which were in-transit on 30th June 2017. The complete of denial Credit apart from susceptible from the challenge of saving clause as worded in foregoing paragraphs is also subject to the vice of Article 14 ibid.
The Gujarat High Court though in RSPL Ltd vs UOI [19], has expunged the challenge on the ground that the differentia is intelligible in as much as inputs and Capital Goods have been treated differently over the years and such distinction is reasonable so as to ride over Article 14 ibid. It appears though that the Court again got bandwagon with the apparent difference between inputs and capital goods, the actual test of difference should have been seen qua the manifested illogicality in not permitting Cenvat Credit on Capital goods. Again the judgment appears to be very naïve.
I’m not afraid, I’m not afraid (yeah) To take a stand, it’s been a ride Everybody, I guess I had to Go to that place To get to this one
Now some of you Might still be in that place If you’re tryin’ to get out Just follow me I’ll get you there – EMINEM
Conclusion
From the consolidated reading of the TP, it could be easily said that TP has conspicuously or un-conspicuously avoided many of the credible aspects that should been crossed-over from the earlier laws. In the author’s opinion, all such un-transitioned aspects deserves re-ignition by virtue of the saving clause.
The assessee could very challenge the claim not transitioned, however owing to the freshness of the law, the courts being naïve, it appears that challenge would to be taken to the final court before a relief is expected. Given the un-transition goes both ways (Credits as well as audits), and also are inter-dependent, interesting times are expected.
Apologies for the Grammar.
Manish Sachdeva- manish619sachdeva @ yahoo.in
[1] read with State Goods and Services Tax Act(s), 2017 and Integrated Goods and Services Tax Act, 2017
[2] 2012 (282) ELT 0513 (Tri. – Mumbai)
[3] 2015 (322) ELT 0469 (Bom.)
[4] 2008 (228) ELT 0533 (Tri. – LB)
[5] 2003 (159) ELT 129 (Bom.)
[6] 1999 (106) ELT 0003 (S.C.)
[7] 2006 (201) E.L.T. 559 (Kar.) affirmed by Hon’ble Supreme Court in 2008 (223) E.L.T. A170 (SC)
[8] 2018 (8) TMI 794 – GUJARAT HIGH COURT
[9] 2018-TIOL-133-HC-AHM-GST
[10] [1991] 1 WLR 198 at 202; [1991] 2 All ER 726 at 730. “One feature of a transitional provision is that its operation is expected to be temporary, in that it becomes spent when all the past circumstances with which it is designed to deal have been dealt with, while the primary legislation continues to deal indefinitely with the new circumstances which arise after its passage. In the present instance [the transitional regulation concerned] must eventually become spent, although it may be envisaged that that could take a considerable period of time.”
[11] [2013] NSWCA 394 at [77]
[12] [1997] QCA 274
[13] [1996] FCA 1346 at [20]
[14] 2019-VIL-210-CESTAT-HYD-CE
[15] Sulabh International Social Service Organization [W. P. (T) No. 1599 of 2019 Jharkhand HC], TR Sawhney Motors Pvt. Ltd. [WP (C) 2138/2019 Delhi HC], OWS Warehouse Services LLP [R/SCA 16226 of 2018 Gujarat HC], Akbar Travels of India Pvt. Ltd. [R/SCA 20444 of 2018 Gujarat HC], Oil Field Warehouse and Service Ltd [R/SCA 16232 of 2018 Gujarat HC]
[16] Gitanjali Vacationville Private Limited [WP 380 (W) of 2019 Calcutta HC], Laxmi Narayan Sahu [WP (C) 2059/2018 Gauhati HC]
[17] (2007) 4 SCR 360: (2007) 9 SCC 698
[18] Mind that the assessee had followed the law, not mischief
[19] R/SCA 22056 of 2017 – Gujarat HC
Author Bio
TENTATIVE (being too eartly to venture anything conclusive /final, as of now) (:
Tussle between …!
Could this have been nipped vin the BUD, on DAY 1; when, ….?!
author>
“Apologies for the Grammar.
Manish Sachdeva-
manish619sachdeva @ yahoo.in”
– what Grammar he had in mind ;or is it anything else- say, wanting ratonal thinbking in conceiving of, with no mindful thouighs / consideration of the pros and cons; or …?-
Q
The assessee could very challenge the claim not transitioned, however owing to the freshness of the law, the courts being naïve,IT APPEARS THAT CHALLENGE WOULD BE TAKEN TO THE FINAL COURT BEFORE before a relief is expected. Given the un-transition goes both ways (Credits as well as audits), and also are inter-dependent, interesting times are expected.
UQ
Pending eminent EXPERTS sparing and sharing independent views/counterviews- while the challencge may or may nort be so taken – á relief’as expected, again depends upon- whether the ‘final court’ hands down a favourable opinion, by taking a rigid look through, or by deciding to do ‘violence and / ‘or resort to read – down or – up , going into the not- so – made- clear facet of – LEGISLATIVE INTENT ?
Disclaimer (personal) :
Own independent apology for any irresolute deficiency in Grammar; whch possibly may be expected to have crept in !