1. At the advent of GST, it was hoped that the transition shall happen of all the unutilized closing credit balances of any tax/cess lying in the account of the taxpayer under the previous regime. This was to ensure that such balances do not become cost and therefore result in the cascading effect.
2. Largely the law kept that promise duly aided by the Courts where the taxpayer faced challenges in undertaking the transition by way of filing various forms (TRAN – 1, etc.). However, an issue arose in the context of the closing balances of various cesses (e.g. Education cess, Secondary & Higher Education Cess, Krishi Kalyan Cess) lying unutilized as of 30.06.2017 (on the day before GST implementation).
3. The law (Sec. 140(1) of the CGST Act, 2017) initially permitted to carry forward the amount of “CENVAT credit” lying unutilized in the last return filed for the period ending on 30.06.2017. As the term “CENVAT credit” under Rule 3(1) of the erstwhile CENVAT Credit Rules (‘CCR’), 2004 included the given cesses, a view emerged that even the closing balance of such cesses lying unutilized can be carry forwarded under GST. However, the lawmakers thought otherwise. A retrospective amendment applicable from 01.07.2017 was made u/s 140(1) supra vide CGST (Amendment) Act, 2018 to provide that only unutilized “CENVAT credit [of eligible duties]” can be carry forwarded to GST. Further, the Explanation to the said Sec. 140 also came to be inserted to provide that the “eligible duties” shall not include cess. Hon’ble Madras High Court in the case of Sutherland Global Services Pvt. Ltd. [2020-VIL-500-MAD] confirmed the legislative intent and held that the cess balances cannot be carry forwarded under GST.
4. The above brief background now brings us to the core issue for the present article which is as to whether the taxpayer having the unutilized cess balances as of 30.06.2017 can claim cash refund of the same in absence of the right to carry forward such balances?
5. We shall analyze the aforesaid issue from three aspects viz.
i. Whether on merits can the refunds be granted of the closing balances of cess?
ii, What shall be the time limitations for making the refund claims?
iii. What shall be the proper judicial forum (Tribunal) wherein the disputes arising on the given issue can be litigated?
Merits of the refund claim
6. Now before we analyze the specific decisions pronounced on the issue till date we need to consider that there are two streams of decisions on the issue of the merits of such claims.
7. The division bench of the Hon’ble Karnataka High Court in the case of Union of India vs. Slovak India Trading Co. Pvt. Ltd. 2006 (201) ELT 559 (Kar.) rejected the departmental appeal against the decision of the Hon’ble CESTAT holding that the taxpayer is entitled to the refund of the closing credit balances when the said taxpayer goes out of Modvat scheme (predecessor of Cenvat) or when the unit is closed in absence of any prohibition in allowing such refunds under Rule 5 of the CCR, 2004. Further Hon’ble Supreme Court dismissed the departmental SLP (2008 (223) E.L.T. A170 (S.C.)) on the basis that the decisions relied upon by the CESTAT while allowing the appeal have not been challenged by the department.
8. On the other hand, Hon’ble Bombay High Court in the case of Gauri Plasticulture P. Ltd. vs. Commissioner of C. Ex., Indore 2019 (30) GSTL 224 (Bom.) held that refunds of the unutilized credit balances on the closure of the unit cannot be allowed in absence of any provisions u/s 11B of the Central Excise Act, 1944. The Court observed that refunds can be granted to the taxpayer u/s 11B only if such amount is relatable to the credit of duty paid on excisable goods used as inputs in accordance with the rules and therefore Rule 5 permits refunds of the credit only in relation to the input or input service that is used in the final product, which is cleared for export. The Court also observed that the transitional provisions related to the introduction of the new CENVAT scheme vide CCR, 2004 only allows for the transition of the unutilized balances and hence do not allow for claiming the cash refund of such balances. The Court, therefore, held that refunds cannot be allowed of the unutilized credit balances on the closure of the unit in absence of such amounts relatable to exports. As regards the decision in the case of Slovak India Trading Co. Pvt. Ltd. (supra), the Court observed that the dismissal of departmental SLP by the Hon’ble Supreme Court was based on the concession that the decisions relied upon by the CESTAT while allowing the appeal has not been challenged by the department. Therefore the Court held that as the question of law still remains open the principle of the merger will not apply. One may also note that even before the decision of the Hon’ble Bombay High Court, the larger bench of CESTAT in the case of Steel Strips vs. Commissioner of C. Ex., Ludhiana 2011 (269) ELT 257 (Tri.-LB) has held that the refunds being a statutory right, in absence of any provisions in law allowing the refunds of the unutilized balances on the closure of the unit, the refunds cannot be allowed.
9. Now under GST, we find that the Principal Bench of CESTAT in the case of Bharat Heavy Electricals Ltd v. The Commissioner (2020-VIL-402-CESTAT-DEL-CE) held that the taxpayer is eligible for the cash refund of the cessess lying as cenvat credit balance as of 30/06/2017 in their accounts. It was noted that the revenue has not rebutted the facts of the relevant case that the taxpayer could not utilize the cess balances due to substantial physical or deemed exports where no Central Excise duty was payable and under the existing provisions, had the appellants chose to do so they could have availed refunds/ rebates under the existing provisions. The CESTAT reasoned that the credits of the cesses earned in such facts is a vested right and the same cannot be extinguished with the change in the law. The CESTAT, therefore, equated the given situation as akin to the situation of the closure of the unit or shifting of the unit and hence followed the first approach (Slovak India) to allow the refund claim. Hon’ble Madhya Pradesh High Court has admitted the departmental appeal (2021-VIL-504-MP-CE) against the said decision and has granted a stay as regards the operation of the CESTAT decision.
10. One may also refer to the decision in the case of Schlumberger Asia Services Ltd (2021-VIL-218-CESTAT-CHD-ST) wherein the CESTAT has followed the aforementioned decision and held that the appellant is entitled to the refund claim of the cess balances.
11. On the contrary the single-member decision in the case of the same appellant entity Bharat Heavy Electricals Ltd. v. Commr. of C.T 2020 (41) G.S.T.L. 465 (Tri. – Hyd.) followed the approach of the decision of Gauri Plasticulture (supra) and held that the refund of the cess balances cannot be granted.
12. Recently Bangalore Bench of CESTAT in the case of Kirloskar Toyota Textile Machinery Pvt Ltd v. Commissioner of Central Tax (2021-VIL-375-CESTAT-BLR-CE) followed the decision in the case of Bharat Heavy Electricals Ltd (supra) and held that the appellant shall be entitled to the cash refunds of the unutilized cess balances as on 30.06.2017. It may be noted that in this case also the cess balance was accumulated as the appellant was engaged in the export of services. It may also be noted that the CESTAT chose to follow the approach of Slovak India as the said decision was rendered by the jurisdictional High Court (Karnataka) and as part of judicial discipline, the bench of CESTAT in that jurisdiction is required to follow the said decision. Further, the bench did not follow the single-member contrary decision (supra) as the decision of the division bench shall prevail over the decision of the Single Member
13. We submit based on the aforesaid discussion that the approach to be followed in the GST context cannot just be a question of choice between the Slovak India approach and Gauri Plasticulture approach. The former relied on the fact that such refunds are not prohibited in law whereas the latter relied on the fact that such refunds are specifically not allowed in law. Although Sec. 11B of the Central Excise Act, 1944 do not contain an express provision to allow the refunds of such unutilized balances, one also needs to consider the transitional provisions in terms of Sec. 142 which allows the refunds of the claims related to CENVAT credit (that will include the cess) in cash. The same has been formulated to avoid the CENVAT credit that is otherwise allowable to become a cost. Hence we submit that the finality of the approach (by the Apex Court), as well as the interpretation of Sec. 142, shall hold a key to determine the eventual fate of the refund claims. Till such time it is advisable to keep the claims alive. That brings us to the two other facets of the issue viz. the time limitation and the forum wherein the issue can be litigated. We also feel, based on the readings of the aforementioned cases, that the stand of the taxpayer in the situations where the balance relates to exports shall be stronger than other situations where the cess remained unutilized.
14. If one adopts the Slovak India approach to justify the claim, one will be faced with a question as regards the time limits within which the claim is to be filed. It may be recollected that the decision in the case of Slovak India did not expressly refer to the provisions of Sec. 11B while allowing the refund claims of the unutilized credits on the closure of the unit. One may therefore be tempted to apply the normal limitation (3 years) under the Limitation Act, 1963 to be counted from 01.07.2017. One may also consider the fact that the amendment to Sec. 140 restricting the carry forward of the cess balances was made vide amendment dated 30.08.2018. Hence the period of three years shall have to be considered from the said date. Hence the same shall expire on 30.08.2021.
15. Hon’ble CESTAT in the case of Schlumberger Asia Services Ltd (2021-VIL-218-CESTAT-CHD-ST) applied the time limitation of one year (as was in Sec. 11B) from 30.08.2018. We humbly submit that the CESTAT has not given any reasoning as to how the said claims are covered u/s 11B so as to apply the said time limit of one year.
16. Interestingly the CESTAT in the case of Punjab National Bank v. Commissioner of Central Tax 2021-VIL-289-CESTAT-BLR-ST was faced with a situation wherein the appellant had applied for the refund of the incremental CENVAT credit availed upon the revision of the ST-3 returns. Said claim was made u/s 142(9)(b) of the CGST Act, 2017. The said claim was rejected by the department on the grounds that the same was time-barred (i.e. filed after the expiry of one year from the relevant date u/s 11B). The CESTAT held that in view of the words “notwithstanding anything contrary contain in said law” employed u/s 142(9)(b), only the test of unjust enrichment shall apply to the refund claims and hence the refund cannot be rejected on the basis of the time bar.
17. One may be inclined to follow the aforesaid ratio as even under other provisions of Sec. 142 the same words “notwithstanding anything contrary contain in said law” have been used in the context of refund claims. Therefore if the claim of the refund of the cess balances falls u/s 142, the question of the time limit may not arise.
18. The subject discussion clearly reflects that the refund claims are in respect of the cesses paid under the erstwhile laws. Hence the claims ought to arise under the said laws and therefore the appellate mechanism (i.e. CESTAT) under the earlier laws shall be the proper forum for deciding the cases. However the discussion also reflects that the given claims require even the application of Sec. 142 of the CGST Act, 2017 so as to establish that the claim to be allowed in cash and to also consider the time limitation in accordance with the said provisions. In fact, recently CESTAT in the case of Kaleesuwari Refinery Private Limited v. The Commissioner of G.S.T. [2021-VIL-108-CESTAT-CHE-CE] considering the interplay of the provisions of the erstwhile law with the GST law chose not to decide the case for the want of jurisdiction (as the claims under GST cannot be decided by CESTAT). We humbly submit that as the genesis of the claims is the amounts paid under the erstwhile law as well as the provisions of the erstwhile law, the CESTAT can assume jurisdiction to decide such disputes. In fact, as referred to earlier, the CESTAT has already decided on such disputes.
19. The aforesaid discussions reveal that refund claims of the unutilized cess balances have merits. However, the fate of the same will be decided by the Apex Court in the times to come. Till then in our opinion, one can consider keeping the claims alive to avail the benefit if the issues are decided favourably.
(Views are strictly personal)