Is everything over after Retrospective Amendment of Section 140 of CGST Act

GST has been enforced in India w.e.f. 1-7-2017.  Whenever a new law replaces the existing law, it provides for (i) repeal of the earlier law; (ii) savings of the rights and liabilities and (iii) migration from the earlier law to the new law.  In conformity with this practice, the CGST Act provides for repeal and savings in section 174; migration of the assesses under the earlier enactments to GST under Section 139 of the CGST Act by providing for migration of the persons registered under the earlier laws to GST.

Since the earlier excise, service tax and VAT were based on the principle of Value Added Tax, it was obvious and quite probable that the assesses earlier registered would be having credit of input tax available with them.

 Now, under the GST, it was open to the legislature to allow or not to allow the benefit of such credit under the new law.  The legislature decided to allow the erstwhile credit of input tax (CENVAT) to the assesses by enacting section 140 in the CGST Act which, so far as relevant, reads as under:-

“Section 140(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 [within such time and] in such manner as may be prescribed:”

Section 140(1) entitles the assessee to claim the benefit of Transitional credit by making the claim in the prescribed manner. Rule 117 of the CGST Rules prescribes form GST TRAN-1 for claiming transitional credit by filing the same within 90 days of the appointed day.

We all know that from day 1, everyone was facing problem in making the compliances because of system glitches of GSTN. Therefore, this time period was extended from time to time.

In spite of these extensions, the assesses, in general, were not able to file TRAN-1 because of the continued system glitches.  Therefore, a number of Petitions were filed in various High Courts. The High Courts in most of the cases, without holding Rule 117 of CGST Rules to be ultra virus or invalid, allowed the Petitions with the direction to GSTN to open its portal or in the alternative allowed the assesses to file hard copies of TRAN-1 manually. [A.B. Pal Electricals v. Union of India WP(C) 6357/2019 (Del.); Blue Bird Pvt. Limited v. Union of India2019 SCC Online 9250(Del.); SARE Realty Projects Pvt. Limited v. Union of India WP(C) 1300/2018;Bhargava Motors v. Union of India WP(C) 1280/2019 (Del.); Kusum Enterprises Pvt. Limited v. Union of India WP(C) 7423/2019 (Del.);  Aadinath Industries & Anr. v. Union of India WP(C) 9775/2019 (Del.); Lease Plan  India Private Limited v. Govt. of NCT of Delhi and Ors. WP (C) 3309/2019 (Del.); Godrej and Boyce Mfg. Co. Ltd. v. UOI WP(C) 8075/2019 (Del.); Krish Automotors Pvt. Ltd. v. UOI 2019-TIOL-2153(Del.); Adfert Technologies Pvt. Ltd. v. UOI CWP No.30949/2018 (P&H) (SLP against this decision was dismissed by the Supreme Court); Hans Raj Sons v. Union of India & Ors. CWP 36393/2019;  Silicon Construction Pvt. Ltd. v. UOI CWP 14192/2019; Sidharth Enterprises v. Nodal Officer 2019-TIOL-2068-HC-AHM-GST; Baril Marketing Pvt. Ltd. v. UOI & Ors. (2020) 73 GSTR 257 (Gau.)]

Bombay High Court took a contrary view by holding that Transitional Credit is only a concession and not a right in Nelco Limited v. UOI & Ors. WPC No.6998 of 2018 (Bom.) & Rajasthan High Court dismissed the Petition in Shree Motors v. UOI CWP No. 440/2020 as the Petitioners could not show proof that they had attempted to file TRAN-1 but could not do so because of system glitches.

After these decisions, in Rule 117 of CGST Rules, sub-rule (1A) has been inserted  w.e.f. 10-9-2018 vide Notification No. 48/2018-CT dt. 10-9-2018 which authorises the Commissioner to extend the date for submitting the declaration electronically in FORM GST TRAN-1 by a further period not beyond 31^st December, 2019, in respect of registered persons who could not submit TRAN-1 by the due date on account of technical difficulties on the common portal in respect of whom the Council had made the recommendation for such extension.                          .

The Classic Case of Brand Equity Treaties Limited and Others v. Union of India: Some of the assesses who had no proof that they could not file TRAN-1 due to system glitches also filed Writ Petitions.  The Delhi High Court recently, allowed all such Writ Petitions and passed its judgment on 5-5-2020 in Brand Equity Treaties Limited and Others allowing all the Petitioners to file TRAN-1 on or before 30-6-2020. The Court has also directed the respondents i.e. The Union of India to either open the online portal or to accept the same manually. With a view to give the benefit of their judgment to other similarly placed assesses the Court has expressed the view that they should also be entitled to avail the benefit of its judgment. The Court has further directed the Union of India to publicise its 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 can also do so on or before 30-6-2020.  The Hon’ble Court held:

“23. Accordingly, since all the Petitioners have filed or attempted to file Form TRAN-1 within the aforesaid period of three years they shall be entitled to avail the Input Tax Credit accruing to them.  They are, thus, permitted to file relevant TRAN-1 Form on or before 30.6.2020. Respondents are directed to either open the online portal so as to enable the Petitioners to file declaration TRAN-1 electronically, or to accept the same manually. Respondents shall thereafter process the claims in accordance with law.  We are also of the opinion that other taxpayers who are similarly situated should also be entitled to avail the benefit of this judgment.  Therefore, Respondents are directed 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 30-6-2020.”

Retrospective Amendment in Section 140 of the CGST Act : An amendment has been made in Section 140 retrospectively w.e.f. 1-7-2017 vide Notification No.  43/2020-CT   dt. 16 -5-2020 which notification has come into force on 18-5-2020.  By this retrospective amendment the words “within such time” which were earlier not there have been added in sub-sections of section 140 whereby the Rule making authority has been given the power to specify the time within which form GST TRAN-1 for claiming the transitional credit is to be filed. Rule 117 already prescribed such time but the same was earlier not authorised by the Act. This does not mean that the Rule will have to be notified again. There is no need to prescribe the time afresh.

The question that is disturbing the minds of the assesses as well as the Professionals is that “IS EVERYTHING OVER AFTER THIS RETROSPECTIVE AMENDMENT IN SECTION 140 OF THE CGST ACT?” DO THE JUDGMENTS OF THE VARIOUS HIGH COURTS AND DELHI HIGH COURT IN PARTICULAR IN THE CASE OF BRAND EQUITY STAND NULLIFIED?

While some of the authors and experts think so, here are some of the reasons to suggest that ALL IS NOT OVER.

Transitional Credit is a vested right and not a concession: Section 140(1) states  that a registered person “shall be entitled to take”, in his electronic credit ledger…… The use of the words “shall” and “entitled” show in clear terms that Transitional Credit is a right. Entitlement is only of a right and not of a concession. The use of the expression “shall” shows that the right under section 140 is a vested right and it became vested when the CGST Act came into force on 1-7-2017.

The principle of law is that the words should be given their plain meaning. Had the intention of the legislature been to treat the transitional credit as a concession, the legislature would have used the expression “may avail” and not “shall be entitled”.

Moreover, Section 174 of the CGST Act provides for Repeal and Savings. The said section while repealing the earlier enactments SAVES ALL RIGHTS AND LIABILITIES. The relevant part of Section 174 reads:

“174. Repeal and Saving

(2) The repeal of the said Act and the amendment of the Finance Act, 1994 (hereafter referred to as “such amendment” or “amendment Act”,) 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 amendment Act or repealed Acts or orders under such repealed or amended Acts………”

 Transitional credit is a right that is why it has been saved and allowed to be claimed under section 140. Further, mere making an amendment in the section to empower the rule making authority to fix the time within which TRAN-1 could be filed, cannot have the effect of effacing the vested right of the assessee or the concession even if it was to be considered as a concession.

Is CENVAT credit or ITC Property of the assessee? Under the Value Added Tax system the assessee pays the tax at the time of making the purchases or removal. The tax is paid by the assessee out of his own funds/capital. No part of the tax is recovered by the assessee at the time of  making the purchase or removal. The tax having been paid by the assessee from his own funds is his property. Property, although no longer a fundamental right, still gets the protection of Constitution under article 300A which reads as under:

“No person shall be deprived of his property save by the authority of law.”

He cannot be deprived of his property without the authority of law. Denial of transitional credit to him would amount of deprivation of his property.

Are the System Glitches Over: It was because of the system glitches that the assesses were not able to file TRAN-1 which impelled them to approach the High Courts all over India by way of filing Writ Petitions. System glitches were evident and even admitted by the Government. It was because of the system glitches that the High Courts allowed the large number of writ petitions. It was the system glitches which led to the introduction of Rule 117A. The question that one asks oneself is ARE THE SYSTEM GLITCHES OVER?

The argument that those who could not file TRAN-1 because of the system glitches have been given the benefit of filing TRAN-1 on proof of their showing evidence that they attempted to file the TRAN-1 but could not do so because of the system glitches does not lie in the mouth of those who were responsible for the system glitches and could not provide a flawless system in 3 years. Once an assessee knows that the system is not working, why should he waste his time in attempting to file form TRAN-1. What about an assessee who tried to upload TRAN-1 and suddenly his system crashed? What proof will he have to show that he had attempted to file TRAN-1 in time? Can and Should the assesses be penalised by not giving credit of his legitimate claim by those who themselves failed to provide an efficient and flawless machinery to do so?

Is the Prescription of time even retrospectively in section 140 mandatory or directory? Limitation is a matter of procedure whereas the vested right of the assessee is substantive in character. Settled position of law is the procedure cannot override substantive right.

On the principle of statutory construction also, the time prescribed in rule 117 even after retrospective amendment in secton140 of the CGST Act is to be regarded as directory. One of the rules of construction to consider whether a provision is mandatory or directory is to see the language used by the legislature. While the affirmative language suggests that the provision is directory, the use of negative language suggests that the provision is mandatory. If the legislature had intended to make the time for claiming transitional credit as mandatory, the legislature would have used the language like this “No claim for transitional credit shall be allowed unless the TRAN-1 is filed within such and such time.

 Is retrospective amendment valid: The law is that the legislature which has the power to enact a law can enact the law prospectively or even retrospectively. Retrospective amendment which is clarificatory in nature or which explains what was obvious or intended by the legislature can be made on the doctrine of small repairs. [Empire Industries Ltd. v. Union of India (1987) 64 STC 42 (S.C.) approved by the Constitution Bench in Ujagar Prints 74 STC  (S.C.); Krishnamurthi & Co. v. State of Madras (1973) 31 STC 190 (S.C.)].  However, where the retrospective amendment is made to destroy or extinguish existing or vested rights, such amendment must be looked upon by the court with a lynx eye as not violating any fundamental or constitutional right of the assessee. It is said that retrospectivity (being artificial) and artificiality generally being repugnant to law should be kept in as narrow a compass as will accord with the legislative intent. [Twin City Jewellers Association v. State of A.P. (1999) 112 STC 51 (A.P.)] The amendment made in Section 140 appears to be a case of small repairs. However, if on a challenge being made, it is sought to be argued by any side that the vested right of the assessee is not available to him because of the retrospective amendment, the same may have to be held as violative of the Constitution.

It may be clarified that Rule 117 having not been declared as ultra virus by the Delhi High Court, the same would not be required to be reframed or renotified.

Effect of the retrospective amendment on the Parties before  the Court:  In the petitions filed before the High Court, the Hon’ble Court has issued mandamus to the Government and GSTN to allow the assesses to filed their TRAN-1 on the portal or manually. Retrospective amendment cannot override or nullify or affect the mandamus issued by the High Court between the parties. [Indodan Milk Products v. State of UP 48 STC 197 (All.)  Therefore, the retrospective amendment does not affect the rights of the assesses who were before the Court.  The recent judgment being a judgment in rem is applicable to all the assesses including those who had not approached the court by way of a writ petition and, therefore, the mandamus can be said to be issued to the Union of India and GSTN in their favour also.

Course open to the assesses : The judgment of the Delhi High Court in Brand Equity a judgment in rem should be construed to apply also to those assesses who were not before the Court and, thus, protecting their rights also. Therefore, all those assesses who have so far not filed TRAN-1 irrespective of whether they had filed the Writ Petitions or not should file the same manually by 30-6-2017. We must not forget, allowing the assesses to file TRAN-1 does not result in any loss of revenue to the Government as the tax on the stock stood already paid in the earlier regime.

Way Ahead for the Government: Only recently on 3.6.2020, the Supreme Court has dismissed another SLP relating to TRAN-1 in the case of Union of India v. Chagori  India Retail Limited by passing the following order:

“Delay Condoned.

In the case of the facts of the present case, we are not inclined to interfere in the present Special Leave Petition. However, question of Law are kept open.”

Earlier the Supreme Court had dismissed the SLP against the decision of the Punjab & Haryana High Court in the case of Adfert Technologies Pvt. Ltd.

It is learnt that the Government has also filed SLP against the decision of the Delhi High Court in Brand Equity Treaties Limited and Others. The SLP may even be admitted in view of the fact that there is difference of opinion between the Delhi High Court and Bombay High Court. But is it expected of a Government, particularly during the present times, when the Government itself, in view of the Corona Pandemic, is extending time for various compliances under the GST. Should the time for filing TRAN-1 be not extended up to 30-6-2020 which is the legitimate expectation of the assesses who had already paid tax on the stock held by them as on 30-6-2017 and, therefore, will not result in any loss of revenue to the Government.

The Silver lining: No one knows what is in store in the future and whatever be the final result but the judgment of Delhi High Court surely shows that whenever the situation demands the HIGH COURTS SHOW THE LIGHT.