Consider a scenario wherein a registered person under GST have availed transitional credits. Such person might have availed credits either in respect of closing balance of June return’s u/s 140(1) of the Central Goods & Services Tax (‘CGST’) Act, 2017 or in respect of stocks as on 30.06.2017 u/s 140(3) of the CGST Act, 2017. We shall assume that in respect of closing balance of June returns, the balance pertains to credit in respect of inputs or input services. Subsequently such person makes exports without payment of IGST under LUT or Bond and hence is eligible for refund of accumulated input tax credit (“ITC”). Issue before us is whether such transitional credit shall be considered as a part of calculation for determination of the eligible refund amount ?
Yesterday’s circular No. 37/11/2018-GST has opined that transitional credit shall not be considered as “Net ITC” and hence the same shall not be part of calculation of refund amount. We differ with the said view.
Sec. 54 of the CGST Act, 2017 contains provisions related to the refund of tax. As per Sec. 54(3) of the said Act, refund can be claimed at the end of any tax period in cases involving zero rated supplies made without payment of tax. Further Rule 89 of the CGST Rules, 2017 has been formulated to provide for the manner for claiming the refund. As the issue before us relates to calculation of refund amount, sub-rule (4) is applicable. Said sub-rule is reproduced for ready reference:
“(4) In the case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking in accordance with the provisions of sub-section (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), refund of input tax credit shall be granted as per the following formula –
Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷ Adjusted Total Turnover
(A) “Refund amount” means the maximum refund that is admissible;
(B) “Net ITC” means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both;
(C) “Turnover of zero-rated supply of goods” means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both;
(D) “Turnover of zero-rated supply of services” means the value of zero-rated supply of services made without payment of tax under bond or letter of undertaking, calculated in the following manner, namely:-
Zero-rated supply of services is the aggregate of the payments received during the relevant period for zero-rated supply of services and zero-rated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period reduced by advances received for zero-rated supply of services for which the supply of services has not been completed during the relevant period;
(E) “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding –
(a) the value of exempt supplies other than zero-rated supplies and
(b) the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both, if any, during the relevant period;
(F) “Relevant period” means the period for which the claim has been filed.”
From the above provision one can observe that Net ITC has been defined as the input tax credit availed on inputs and input services during the relevant period. Justification for including the transitional credit as Net ITC is as follows:
1. As per Rule 89, Net ITC means input tax credit availed on inputs and input services during the relevant period. Input tax is defined u/s 2(62) of the CGST Act, 2017 to mean central tax, state tax as well as integrated tax. Definition is reproduced below for ready reference:
“(62) “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes —
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy”
Further as per Sec. 2(63) of the CGST Act, 2017 input tax credit means the credit of input tax. Your reference is invited to Sec. 140(1) of the CGST Act, 2017 under which transitional credit is taken. Relevant portion is reproduced below”
“Sec. 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 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.”
Reference is also invited to relevant portion of Sec. 140(3) which is reproduced below:
“Sec. 140(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”
As per the above provisions, a registered person is “entitled to take” in his electronic ledger the amount of CENVAT credit carried forwarded in last return or attributable to stocks as on 30.06.2017 as CGST Credit. Said credit shall be credited in the online ledger as “CGST Credit”. It may be noted that CGST is covered within the ambit of “input tax” as per the above referred definition. Hence as per law, transitional credit though availed in earlier regime will be regarded again as fresh availed since the expression “entitled to take” has been used and not “carry forwarded”. Further we also submit that the transitional credit which has been availed has now character of “CGST” which is availed for the first time as per Sec. 140(1) or Sec. 140(3). Hence clearly the said tantamount to first time availment of “CGST” credit which is regarded as “input tax”. We also submit that as per the proviso to Sec. 140(1) as well as conditions stipulated u/s 140(3), such transitional credit can be availed only if it is admissible as input tax credit under the CGST Act, 2017. Hence once if it is admissible as ITC under the CGST Act, a registered person is entitled to take the credit of same. This clearly amounts to availment of ITC under the CGST Act, 2017 and hence shall be the part of Net ITC as it includes all the input tax credit availed during the relevant period.
2. We also draw reference to Form RFD – 01A. Said form needs to be filed online on the GST portal. From the GST portal one can observe that the amount of “Net ITC” availed is auto populated. Even while auto populating the said amount, portal is considering transitional credit as the credit availed during the relevant period.
3. Attention is also invited to the extract of electronic credit ledger. From the ledger one can observe that the transitional credit does not appear as opening balance. In fact it appears as a fresh credit entry which also signifies that it is availed during the relevant period.
4. As per statutory principles of interpretation, when the words used are not ambiguous, it has to be interpreted literally. In the present case, definition of Net ITC under Rule 89 is crystal clear. It takes within its fold all the input tax credit availed during the relevant period on the inputs and input services. It does not state that such inputs or input services must be received during the relevant period also. As an example, if a registered person receives inputs in July along with tax invoice but avails the input tax credit on the same in September, as per the definition of Net ITC, no refund of such tax credit will be granted in July even though inputs have been received since tax credit has not been availed. Refund can be granted only in September when the tax credit has been availed. We rely on following decisions with regard to principle of interpretation:
a. Rowlatt J. in the legendary case of Cape Brandy Syndicate v. Inland Revenue Commissioners (1 KB 64) has laid down the principle of interpretation as follows:
“In a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied.”
Above judgment has been quoted with approval by Supreme Court in several judgments.
b. Supreme Court in the case of A. V. Fernandez v. State of Kerala was faced with an issue related to method of calculation for determination of net turnover made by the assessee. Apex Court referring to strict interpretation of the words “turnover” as defined under the Travancore-Cochin General Sales Tax concluded that it shall include inter as well as intra state turnover. It held that while construing fiscal statute, one must have regard to strict letter of law and not merely spirit of the law. Said decision is squarely applicable to the issue before us as in the present case, Net ITC has been clearly defined and strict interpretation would include all the tax credit availed during the relevant period including transitional credit in respect of inputs and input services.
c. Again Supreme Court in the case of Commissioner of Sales Tax v. Modi Sugar Mills AIR 1961 SC 1047 was faced with the interpretation of notification which had changed the rate of tax applicable on non-edible oils. Issue before the court was whether the rate change will apply on sales made before the date of notification. Holding in favor of assessee that it shall apply from date of change only, Court observed the following which has been quoted in number of subsequent decisions with approval:
“In interpreting a taxing statute, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The Courts must look squarely at the words of the Statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed; it cannot imply anything which is not expressed; it cannot import provisions in the statutes so as to supply an assumed deficiency”.
In the present case also, when language of Rule 89 is clear, words must be construed strictly and there can be no assumptions. Transitional credit is clearly availed for the first time as “CGST” as per the provisions of Sec. 140(1) and hence will be regarded as ITC availed during the period.
d. In another case of Assessing Authority v. East India Cotton Mfg. Co. Ltd. 1981 (48) STC 239 (SC) before Supreme Court, issue was of interpreting the term “for sale”. The Court held that the tem shall include even if goods are manufactured on job-work basis as the phrase has to be literally construed. It cannot be interpreted to cover only goods “for sale by him”. It shall also cover goods which are “for sale” by anyone else. Ratio of said decision is also applicable to present issue since the words “input tax credit availed” in the definition of Net ITC shall include all the input tax credit including transitional credit availed by the registered person. It shall not be limited to input tax credit on inputs or input services received on or after 01.07.2017.
e. We also place reliance on the judgment in the case of Union of India v. Dharamendra Textile (2008 231 ELT 3 (SC)) delivered by Supreme Court. In the context of penalty u/s 11AC of the Central Excise Act, Supreme Court held that in absence of specific reference to mens rea, words being plain and unambiguous must be literally interpreted. Court cannot read anything into a statutory provision which is plain and unambiguous.
On the basis of above reasoning we submit that the transitional credit has to be regarded as “input tax credit availed” during the month in which TRAN – 1 is filed in view of Sec. 140(1) as well as Sec. 140(3). Hence the same shall be taken into account while determining Net ITC for refund working under Rule 89. It is well settled principle of interpretation that a circular which provides for an interpretation which runs contrary to the provisions of law is not binding on the tax payer.