The issue of transfer of closing balance of credit through TRAN 1 from erstwhile regime to GST regime refuses to settle down even after three years of implementation of GST. While the GST Act and Rules created confusion on what can or cannot be transferred, the GST system failed to provide the critical technical support to facilitate the transfer of credit. Even if the tax payer managed to understand what has to be transferred, the technical glitches on the GST system prevented many assessees from transferring the credit to GST. As the GST technical teams were unsuccessful in resolving the TRAN 1 issues in-time, approaching the Court was the only way forward to the tax payer to recoup the credit trapped in transit.
The Bombay High Court, in the case of Nelco Limited vs. UOI, upheld the time limit prescribed under Rule 117 of the Central Goods and Services Tax Rules, 2017 (CGST Rules). Further, the Court also observed that Rule 117(1A) (which extended the time limit for filing TRAN 1 till 31.03.2019 in the case of registered persons who could not submit the TRAN 1 by the due date on account of technical difficulties) is specific to technical difficulties faced and unless the registered person shows evidence of technical issues, no relief can be granted on the time limit for filing of TRAN 1.
The good or the bad thing about case laws is that the high court decisions are challengeable and even new lines of interpretation are adopted by different benches of high court. The taxpayers were treated to a new line of interpretation of Rule 117 of the CGST Rules by the Delhi High Court.
The Delhi High Court in the case of Brand Equity Treaties Limited vs. UOI, read down the provisions of Rule 117. The Court observed that Rules cannot take away the substantive rights provided by the Act and hence a time limit cannot be unreasonably imposed on the registered person thereby denying the right to transfer of credit. The Court also read the term “technical difficulties on the common portal” used in Rule 117(1A) in a broader way and included difficulties other than mere system related difficulty. However, the Court also observed that credit cannot be allowed to be availed into eternity. Based on the above observations and relying on the Limitation Act, the Court held that all taxpayers should be allowed to file Form GST TRAN -1 within a period of 3 years from the date of enactment of CGST Act, i.e., till June 30, 2020.
In the meantime, Section 128 of the Finance Act, 2020 had proposed to retrospectively amend the transition provision Section 140 of the CGST Act from July 1, 2017, by inserting the term “within such and in such manner as may be prescribed” into various sub-sections of Section 140 of the CGST Act. The Central Government has now a issued a Notification No. 43/2020-CT dated 16.05.2020 giving effect to Section 128 of the Finance Act, 2020 from 18.05.2020.Through this amendment the Central Government intends to empower itself to specify the due date for taking transitional credit. In other words, the Government is either trying to negate the observation of the Delhi High Court which held that Rule 117 cannot take away the substantive right given by the Act or is trying to restrict the extended time frame benefits only to registered persons who faced difficulty in filing TRAN 1 and not to all registered persons.
To argue in favour of the Central Government, it would be a practical system nightmare for the Government to re-open the GST system for all registered persons to file or revise TRAN 1. In cases where incorrect or partial credits have got registered into the electronic credit ledger and the credit have already been utilize by the registered person, revision of TRAN 1 and giving effect to incremental adjustments would be technically challenging. Further, opening up the TRAN 1 only for selected registered persons who faced technically difficulties would also be cumbersome to execute, manage and monitor from the GST system perspective. Given the practical difficulties associated with re-opening TRAN 1, the Government may bury TRAN 1 and prefer introduction of a new FORM on the system to accommodate only registered persons who missed filing and incremental adjustments where TRAN 1 was filed with errors.
In view of the retrospective amendment to Section 140 of the Act through Section 128 of the Finance Act, 2020, it is also likely that the Government may not re-open TRAN 1 and prefer an appeal against the decision of the Delhi Hight Court in the case of Brand Equity Treaties Limited vs. UOI and argue that Section 140 of Act stands corrected by the amendments in Finance Act,2020 notified in Notification No. 43/2020 dated 16.05.2020. This argument if upheld by the Supreme Court would push the issue of TRAN 1 back to square one.
So, we have not seen the end of TRAN 1 issue and the assessees have to wait much longer before this issue can be laid to rest. Many more legal battles between the taxpayer and the Central Government are in the vicinity.