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Whenever a new tax regime replaces an old tax regime there are numerous changes which a taxpayer faces and there are  lot of legal challenges in the transition from old regime to new regime. For the smooth transition of the new tax regime it is quite common to introduce the transitional provisions under the new tax law.

GST law is no different with respect to introduction of transition provisions. Since the existing indirect taxes had the system of input tax credit which was continued in the GST regime, there was a need for transition of input tax credit and credit of other taxes available to the taxpayers under the existing regime. Hence Chapter XX was incorporated in the CGST and SGST Acts, 2017 for the smooth transition of the GST laws over the existing indirect tax regime which consisted of different  indirect taxes such as VAT, Central excise service tax. Section 140 of CGST and SGSTs Act under Chapter XX provides for transitional arrangements for the input tax credit.

The aim was that the input tax credits available to the taxpayer in the older regime do not get affected and they get the similar ITC under GST subject to certain conditions so that there can be no tax cascading effect due to changeover.

Time limit for Transitional credit:   Rule 117 of CGST Rules, 2017 provided an important timeline for claiming the input tax credit under transitional arrangements of 90 days with a power to commissioner to extend this period further for 90 days.  The period was extended till 27th December, 2017 to claim transitional credit. It is pertinent to mention here that no time limit for filing transitional claim was provided in the Act itself rather it was provided in the Rules.  Since the time limit was very short the transitional credit could not be taken by many taxpayers. As a result lot of writ petitions were filed in various High Courts challenging the transitional provisions and for claiming the transitional credit after the elapse of prescribed time limit.

Thereafter vide Notification No 48/2018 Central Tax Dated 10.09.2018 sub-Rule (1A) was introduced in Rule 117 to allow those taxpayers who could not submit the Transition form within time limit notified due to technical glitches. This term technical glictches is never defined in the Rules of Act and continued to be interpreted in vague manner both by the Government and taxpayers before the High Courts.

Court’s verdicts: Punjab and Haryana High court while deciding the writ petition in favour of the taxpayers in Adfert Technologies Pvt Ltd vs Union of India allowed the claim of petitioners with respect to the transitional credit even after the elapse of time notified. The SLP filed against this order was dismissed by SC.

Similarly other High courts in the different cases allowed petitioners to claim the transitional credit even after the elapse of notified time limit. By and large apart from Bombay High Court in case of Nelco Ltd. vs Union of Indiait was principally accepted that the transitional credit is a vested right and is subject to scrutiny by the Department and the same cannot be taken away by prescribing a time limit in the Rules and the time prescribed in the Rules is directory in nature and not mandatory.

Delhi High Court’s verdict:  Recently Delhi High Court in the case of Brand Equity Treaties Ltd vs Union of India by going a step further has  held that time prescribed in  rule 117 of CGST Rules, 2017 for transitioning of credit (during Transition from Pre-GST Regime to GST Regime), is directory in nature and would not result in forfeiture of rights, in case credit is not availed within period prescribed. This, however, does not mean that availing of CENVAT credit can be in perpetuity, but the court held that in terms of residuary provisions of Limitation Act, a period of three years from appointed date would be maximum period for availing of such credit.

Delhi High Court also observed with regard to technical gliteches in para 18 as under:

“In above noted circumstances, the arbitrary classification, introduced by way of sub Rule (1A), restricting the benefit only to taxpayers whose cases are covered by “technical difficulties on common portal” subject to recommendations of the GST Council, is arbitrary, vague and unreasonable. What does the phrase “technical difficulty on the common portal” imply? There is no definition to this concept and the respondent seems to contend that it should be restricted only to “technical glitches on the common portal”. We, however, do not concur with this understanding. “Technical difficulty” is too broad a term and cannot have a narrow interpretation, or application. Further, technical difficulties cannot be restricted only to a difficulty faced by or on the part of the respondent. It would include within its purview any such technical difficulties faced by the taxpayers as well, which could also be a result of the respondent’s follies…….”.

It has also been held by the Hon’ble Delhi HC that rule 117 whereby mechanism for availing credits has been prescribed, is procedural and directory, and cannot affect substantive right of registered taxpayer to avail of existing/accrued and vested CENVAT credit. Procedure could not run contrary to the substantive right vested under sub-section (1) of section 140.

Retrospective amendment in section 140 wef 01.07.2017: In the Finance Act, 2020 the Government came with a retrospective amendment in section 140 of CGST Act, 2017 wef 01.07.2017 in the section by adding the words “as may be prescribed” where ever required, to plug in a loopwhole to the effect that section 140 before this amendment did not prescribe any time limit of claiming transitional credit.

The notification No. 43/2020 Central Tax is introduced on 16.05.2020. The said notification has brought in force the amendment u/s 140 as introduced in the Finance Act, 2020. Now after adding the words “as may be prescribed” with retrospective effect from 01.04.2017 u/s 140, the Government seem to have attempted to cure the defect as pointed out above.

Impact of the retrospective amendment:  But the question here is, will this amendment make any difference to the rulings already passed by various High courts in the favour of taxpayers allowing them transitional credit beyond the time limit notified. To my mind it makes no difference. The Hon’ble High courts which have given favourable judgements  including Delhi High Court’s Rulling in the case of Brand Equity Treaties Ltd, have upheld the principle that transitional credit is a vested and substantive right and merely due to procedural lapses like non filing of Tran-1 or Tran-2 form within the time limit notified, it should not result in lapse of such right.

Delhi High court in Brand Equity Treaties Ltd case has even gone a step further ahead by asking Government to publicise this judgment widely including by way of publishing the same on their website so that others who may not have been able to file TRAN-1 till date are permitted to do so on or before 30.06.2020.

Even after the passing of the judgement Tran-1 has not been opened on the GST portal by the Government till date. It remains to be seen whether Government will challenge the Delhi HC verdict by way of SLP before the SC. But if it is not challenged the government will have to open Transition forms on the common portal for whole of India. It is however advisable that any taxpayer who has not filed Transition form may file it manually before 30.06.2020 in view of Delhi HC verdict.

 However, considering the today’s scenario of Covid-19 pendemic, where Government is looking forward for pumping the liquidity in the market, the government should allow all the taxpayers to file Tran-1 who could not file rather than prolonging the litigation unnecessarily.


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July 2024