Aditya Singhania

Objective behind transition into GST

As GST sought to consolidate multiple taxes into one it was very essential to have transitional provisions to ensure that the transition to the GST regime is very smooth and hassle free and no ITC (input tax credit)/benefits earned in the existing regime are lost. The transition provisions can be categorized under three heads:

(a)  Relating to input tax credit

(b) Continuance of existing procedures such as job work for a reasonable period without any adverse consequence under GST law.

(c) All claims (pending as well as future) pertaining to existing laws filed before, on or after the appointed day.

Funds on account of transition

As per C.B.E. & C. Press Release No. 99/2017, dated 22nd September, 2017, INR 1.27 lakh crore of credit of Central Excise and Service Tax was lying as closing balance as on 30th June, 2017 as per department’s record. Of course, some of these credits may not be admissible under GST regime, for example the credits, which are blocked under Section 17(5) of CGST Act or which are not covered under the definition of GST. Also, some of the credits, which are claimed in TRANS-1 form may be under litigation and, therefore, it may not be available to the assessee to carry forward or for utilization.

Transitional arrangements for input tax credit.

Section Applicable to Transition of Credit in respect of Inputs /Input service /Capital Goods Credit pertaining to the period /Other particulars Manner Form
140(1) of CGST Act A registered person, other than a person opting to pay tax under section 10 i.e. Composition Scheme The amount of CENVAT credit [of eligible duties – The said term ‘of eligible duties have been inserted with retrospective effect.] Inputs/Input service /Capital Goods Credit carried forward in the return furnished by him under the existing law relating to the period ending with the day immediately preceding the appointed day Rule 117 Table 5a of TRAN-1
Conditions:

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

(i) Said amount of credit is not admissible as ITC under CGST; or 

(ii) If he has not furnished all the returns required under the existing law for the period of 6 months immediately preceding the appointed date; or

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

Rule 117 of CGST Rules, 2017 provided that every person entitled to input tax credit under section 140 shall submit a declaration electronically in Form GST TRAN-1 within 90 days of the appointed date, being 1-7-2017, and as extended from time-to-time, for carrying forward such credit to be utilised against turnover from taxable services.

In order to verify the correctness of credit transitioned in Table 5a C.B.I. & C. vide Letter D.O.F. No. 267/8/2018-CX.8, dated 14th March, 2018 has stipulated that the credit has been taken against closing balance of CENVAT credit in ER-1/2/3 or ST-3. Credit can be taken only where the last return was filed and credit taken in Table 5(a) should not be more than closing balance of credit in ER-1/2/3 or ST-3 minus the education/secondary education Cess/KKC/SBC.

Origin of EC, SHEC and KKC

Before taking up the issue of transition of EC, SHEC and KKC, let us first recapitulate that vide Finance Act 2004, Parliament introduced the levy of Education Cess and vide Finance Act 2007, the levy of Secondary and Higher Education Cess. The CENVAT Credit Rules 2004, (in short Rules) enabled a manufacturer of final products or a provider of output services to avail CENVAT credit in respect of EC and SHEC against duty levied on excisable goods or taxable services in terms of Rules 3(1)(vi), (via), (x) and (x-a) thereof. The Rules specifically provided that once availed, the utilization thereof shall be only as against payment of EC or SHEC respectively.

It is significant to note that cess on excise duty was withdrawn w.e.f. 1st March, 2015. Further, cess on service tax was subsumed w.e.f. 1st June, 2015 in the standard service rate itself. In the light of the specific stipulation that EC and SHEC availed could be set of/utilised only against the payment of EC and SHEC respectively, the credit that had been accumulated on this account lay unutilised in the CENVAT account.

Further, vide Finance Act 2016, Krishi Kalyan Cess (in short ‘KKC’) was levied on taxable services by the Central Government with effect from 01.06.2016 with the avowed object of financing and promoting initiatives, including agriculture or related activities. Notification No.28/2016-CE (MT) dated 26.05.2016 enabled a provider of output services to avail CENVAT credit and utilise the same against KKC liability. KKC was abolished vide Taxation Laws (Amendment) Act, 2017.

Transition of EC, SHEC and KKC into GST

The Central Goods and Services Tax Act (CGST) came into effect on 01.07.2017 and many taxpayers availed accumulated credit of EC, SHEC and KKC in Form GST TRAN-1. The issue in this regard arose when there was denial or demand for reversal of the said credit on the grounds that credit could be set-off only against the specific duties and taxes enumerated in the Explanation to section 140(1) read with rule 117 and the Explanation did not cover cesses such as EC, SHEC and KKC. The entire problem statement with the transition of EC, SHEC and KKC was merely due to the scope of the terms defined by way of Explanation to section 140 of CGST Act, 2017. Basically, there are few terms used in section 140 like “eligible duties”, “CENVAT Credit”, “eligible duties and taxes”. Therefore, it is very important to reproduce the entire Explanation (after retrospective amendment) for ease-of-understanding:

Definitions Eligible duties Eligible duties and taxes
Explained in Explanation 1. Explanation 2.
Applicable on sections 140(1), 140(3), 140(4), 140(6) 140(1), 140(5)
Meaning of the term 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 (58 of 1957);

(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975 (51 of 1975);

(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975 (51 of 1975);

[(iv) *   *   *]

(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 (5 of 1986); 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.

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 (58 of 1957);

(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975 (51 of 1975);

(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975 (51 of 1975);

[(iv) *   *   *]

(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 (5 of 1986);

(vii) the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001 (14 of 2001); and

(viii) the service tax leviable under section 66B of the Finance Act, 1994 (32 of 1994),

in respect of inputs and input services received on or after the appointed day.

 Issue in transition of EC, SHEC and KKC in GST

The entire problem began when the Competent Authority rejected the request of the Sutherland Global Services Pvt. Ltd. for carry forward and utilisation of credit of EC, SHEC and KKC on the ground that credit could be set-off only against the specific duties and taxes enumerated in the Explanation to section 140(1) read with rule 117 and the Explanation did not cover cesses such as EC, SHEC and KKC. Therefore, the same could not be carried forward and assessee was directed to reverse the aforesaid credit. 

Section Applicable to Transition of Credit in respect of Inputs/Input service /Capital Goods Credit pertaining to the period /Other particulars Manner Form
140(8) of CGST Act A registered person having centralised registration under the existing law has obtained a registration under this Act, Credit of the amount of CENVAT credit carried forward in a return Input/Input Service/Capital Goods Return furnished under the existing law by him, in respect of the period ending with the day immediately preceding the appointed day 117 Table 8 of TRAN-1
Conditions:

If the registered person furnishes his return for the period ending with the day immediately preceding the appointed day within 3 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.

The registered person shall not be allowed to take credit unless the said amount is admissible as input tax credit under CGST Act.

Such credit may be transferred to any of the registered persons having the same PAN for which the centralised registration was obtained under the existing law.

Retrospective amendment vide CGST (Amendment) Act, 2018

In section 140 of the principal Act, with effect from the 1st day of July, 2017,––

(a) in sub-section (1), after the letters and word “CENVAT credit”, the words “of eligible duties” shall be inserted and shall always be deemed to have been inserted;

(b) in the Explanation 1— (i) for the word, brackets and figures “sub-sections (3), (4)”, the word, brackets and figures “sub-sections (1), (3), (4)” shall be substituted and shall always be deemed to have been substituted;

….

(d) after Explanation 2 as so amended, the following Explanation shall be inserted and shall always be deemed to have been inserted, namely:— ‘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.’.

CBIC vide CGST (Amendment) Act, 2018, has retrospectively amended section 140(1) to allow CENVAT credit only of ‘eligible duties which does not consists of such cesses’. However, inadvertently section 140(8) was not amended to such extent which appears to allow CENVAT credit of such cesses where a registered person had centralized registration under the existing law.

Since such Cesses were treated as CENVAT credit under pre-GST regime, therefore, 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 the Cess which has not been specified in Explanations 1 and 2.  

Writ Petition against the denial of transition of EC, SHEC and KKC in GST

Aggrieved by the order of the officer, a writ petition was filed before the Hon’ble Madras High Court wherein Single Bench of Hon’ble Madras High Court in case of Sutherland Global Services Pvt. Ltd. v. Assistant Commissioner CGST and Central Excise, Chennai [2019] 111 taxmann.com 264 (Madras) dated 5th September, 2019 has allowed the transition of accumulated credit pertaining to EC, SHEC and KKC was available to assessee for set-off against its GST liabilities stating that a fiscal statute has to be read and understood, as seen. The interpretation should be on the basis of what is apparent, apart from being strict.  If one were to apply these propositions to the case on hand, the provisions of section 140(1) provide for the transfer of all credits and levies, barring those set out in the proviso. It has been categorically held that though there may be embargos placed by the Statutes and Rules, such as the embargo against cross-utilisation placed by rule 3(7)(b) of the Cenvat Credit Rules, 2004, the accumulated credit continues in the books of the assessee till specifically wiped out, for availment. It has been held that section 140(8) continues, as on date, to read that where a registered person having a 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. Thus, even if one were to assume that EC, SHEC and KKC are not liable to be transitioned, since they are not ‘eligible’, though the provisions of sub-sections (1), (3), (4) and (6) may contain a limitation to this effect, sub-section (8) contains no such limitation and any credit carried forward, without restriction of eligibility or otherwise, can be transitioned. This conclusion is over and above the conclusion on the larger issue of eligibility under section 140(1), which is held in favour of the assessee.

Department’s Appeal against the decision of order of Single Bench of Hon’ble Madras High Court

Later on, the said judgement was reversed by the Divisional Bench Assistant Commissioner of CGST and Central Excise, Chennai v. Sutherland Global Services (P.) Ltd. [2020] 120 taxmann.com 295 (Madras) dated 16th October, 2020 which denied the transition of such Cesses on the grounds that only the seven specified duties as “Eligible 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. 1-7-2017 will be eligible to be carried forward and adjusted against GST Output Tax Liability with reference to Explanation 1. Apparently, EC and SHEC or KKC are absent from the seven categories in Explanation 1. 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 Act. Similarly, Explanation 2 refers to sub-sections (1) and (5) of section 140 even though the words “Eligible Duties and Taxes” jointly are not used in sub-section (1) of section 140, but are used only in sub-section (5) of section 140, and again the eight specified “Eligible Duties and Taxes”, first seven are repeat of Explanation 1 “Duties” and the eight one is Service Tax, eligible to be set-off and carry forward under CGST Act, 2017. Therefore, the Court by any intendment or implication cannot include the aforesaid three types of Cesses, with which we are concerned, 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 Act. It has been further held that 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 assessee to claim such transition and set-off against such Output GST Liability.

Absence of clarity and interplay between section 140(1) and 140(8)

However, the fact cannot be ignored that such credit continues to be available till such time it is expressly stated to have lapsed. There are multiple instances where the CBIC/Government provides for specified credits to lapse mentioning the exact point in time when the lapsing would commence and/or stipulating other conditions in this regard. Infact, there is no notification/circular/instruction that has expressly provided that the credit accumulated would lapse. Here, it is worthwhile to note that the provisions of section 140(1) read with section 140(8) and the Explanation thereunder make it more than clear that all available credit as on the date of transition would be available to an assessee for set-off.

A certain amount of planning and strategizing is undertaken by an assessee bearing in mind the credits and concessions available as well as liabilities imposed by a taxing Statute at any given point in time. The credit available in regard to EC, SHEC and KKC are no different. In strategising and conducting its business, the assessee would certainly have taken into account that credit was available for set-off against output tax liability. Such credit accumulated has not been stated to have lapsed.

Difference of treatment between NCCD and Other Cess

Regarding National Calamity Contingent Duty (NCCD) which was imposed in section 136 of the Finance Act, 2001, though named it as duty was, in fact, a Cess and that fund was created to meet expenditure to manage any national calamity but set-off thereof has been specifically allowed by the Legislature possibly because that levy imposed under the Finance Act, 2001 continued even after GST Regime was in force with effect from 1-7-2017. However, the imposition or levy of EC and SHEC and KKC did not operate after 1-7-2017. The Departmental Circular No. 87/06/2019-GST, dated 2nd January, 2019, rightly clarified this position with reference to Explanation 3 to section 140 of the Act. The fact stil remains that NCCD being in the nature of Cess should also have been kept outside the scope of transition and should not have been covered with the definition of “eligible duties” and “eligible duties and taxes” which makes the same discrimination in treatment of NCCD and other Cess like EC, SHEC and KKC.

Challenging to retrospective amendment to section 140 of CGST Act, 2017

It is worthwhile to note that the similar matter is pending before Hon’ble Gujarat High Court in the case of Grasim Industries Ltd. Versus Union of India 2019 (27) G.S.T.L. 322 (Guj.) dated 10th July, 2019 challenging the constitutional validity of retrospective amendment to section 140 of CGST Act, 2017 by Amendment Act of 2018 barring transition of such Cesses by pleading that the same is arbitrary, unreasonable and violative of Article 19(1)(g) of Constitution of India.

Further, one should not discount the fact that the Cesses levied under the State laws in existing regime were considered for compensation by the Centre on account of transition into GST as per section 5(1)(g) of The Goods and Services Tax (Compensation To States) Act, 2017. 

Chandigarh CESTAT allows refund of unutilized credit of EC, SHEC and KKC after reversal of the credit in GSTR 3B availed in GST TRAN-1

In the instant case, the CENVAT credit of various duties and services paid by them and EC, SHEC, KKC were lying unutilized and could not be utilized till 30-6-2017. The same was transitioned into GST, however, after amendment on 30-8-2018 in Section 140 of the CGST Act, 2017 that the assessee could not carry forward the credit lying in their CENVAT credit account of EC, SHEC and KKC, the appellant immediately reversed the amount of CENVAT credit pertaining to EC, SHEC and KKC and filed the refund claim under Rule 5 of Cenvat Credit Rules, 2004.

The issue began when the SCN was issued to the appellant that in terms of Section 140 of the CGST Act, 2017 the appellant is not entitled to carry forward the CENVAT credit in GST regime, therefore, the refund claim filed on 30-8-2019 is barred by limitation and hence their refund claim has lapsed of credit as EC including SHEC has been abolished from 1-6-2015. It was alleged that the refund application should have been filed under GST provisions. The matter was adjudicated and refund claim was rejected.

The Hon’ble Chandigarh CESTAT in the case of Schlumberger Asia Services Ltd. v. Commissioner of CE & ST, Gurgaon-I [2021] 127 taxmann.com 509 (Chandigarh – CESTAT) dated 24th May, 2021 has observed that the facts of the case are not in dispute that on 1-7-2017, the new regime of GST came into force and on the said date, there was no bar on carry forward of the CENVAT credit of EC, SHEC and KKC to GST regime. In these circumstances, the appellant has taken the CENVAT credit under CGST Act. It is also a fact on record that Section 140 of the CGST Act, 2017 was amended on 30-8-2018 and was applied retrospectively. As per the amendment, any credit which was not admissible cannot be a GST credit for transitional credit and when it is not a GST credit, the appellant reversed the credit abandoned caution the said amount in their GST account and filed the refund claim on 30-8-2019. As the appellant has reversed the said amount in their GST account, in terms of the amendment to Section 140 of the CGST Act, 2017 on 30-8-2018, the said amount shall remain lying unutilized in their cenvat credit account on account of EC, SHEC and KKC as good as on 1-7-2017. Further, as admitted by both the sides that in terms of Section 140 of the Act, the amount of EC, SHEC and KKC cannot be transferred to GST account then it is only a CENVAT credit of EC, SHEC and KKC lying unutilized as on 1-7-2017 in their CENVAT credit account.

It has been further observed that the amendment to Section 140 came after one year of the switching to the GST Regime on 30-8-2018 which is applicable retrospectively. In those circumstances how the appellant could have filed the refund claim within 1 year from 1-7-2017 till 30-8-2018, when there was no provision of law existed, when amendment itself takes on 30-8-2018, therefore, the relevant date of filing the refund claim shall be 30-8-2018 and within 1 year of the said date, the refund claim has been filed by the appellant. In that circumstance, it has been held that the refund claim filed by the appellant is not barred by limitation.

Accordingly, it has been held that the appellant is entitled to file the refund claim and, in such case, relevant date shall be considered as the date on which retrospective amendment has been notified i.e., 30-8-2018.

 Cases in favor of the taxpayer

The issue of refund of unutilized credit of cessess in the form of EC, SHEC was considered by the Delhi Tribunal in the case of BHEL Ltd wherein it has been observed on whether the balance lying as on 30-6-2017 can be considered as CENVAT credit or not, wherein it has been stated that the credits earned were a vested rights in terms of the Hon’ble Apex Court judgement in Eicher Motors case and will not extinguish with the change of law unless there was a specific provision which would debar such refund. It is also not rebutted by the revenue that the appellants had earned these credits and could not utilize the same due to substantial physical or deemed exports where no Central Excise duty was payable and under the existing provisions, had the appellants chosen to do so they could have availed refunds/ rebates under the existing provisions. There is no provision in the newly enacted law that such credits would lapse. Thus, merely by change of legislation suddenly the appellants could not be put in a position to lose this valuable right. Thus, we find that the ratio of Apex courts judgment is applicable as decided in cases where the assessee could not utilize the credit due to closure of factory or shifting of factory to a non-dutiable area where it became impossibly to use these credits. Accordingly, the ratio of such cases would be squarely applicable to the appellant’s case. Following the judgement of Hon’ble Karnataka High Court in the case of 2006 (201) E.L.T. 559 (Kar) in the case of Slovak India Trading Co. Pvt Ltd. and similar other judgements/decisions cited supra, we hold that the assessee is eligible for the cash refund of the cessess lying as cenvat credit balance as on 30/06/2017 in their accounts.

Cases not in favor of the taxpayer

It must be relevant to note that CESTAT Hyderabad in the case of BHEL Ltd. has disallowed the refund claim of such unutilized cesses on the ground that there is no provision under Rule 5, which allows such unutilized Cenvat credit to be refunded in cash (as because  Rule 5 is permissible where any input is used for the final product, which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate products cleared for export) by following the decision of the larger Bench judgment of the Bombay High Court in the case of Gauri Plasticulature (P.) Ltd.

Inference

Basis the perusal of the aforesaid discussion, it would be prudent for the taxpayers who had filed refund application under rule 5 of the CENVAT Credit Rules, 2004 immediately after reversal of said credits taking the cognizance of the retrospective amendment by taking into account the instant case law for their kind reference to expedite the refund process. However, the question arises for those taxpayers who have reversed the credit of EC, SHEC and KKC on account of retrospective amendment but have not filed refund applicable within the time line and are currently time barred. 

The author can be reached at [email protected]

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