prpri Transitional Credit under GST – The Never Ending controversy Transitional Credit under GST – The Never Ending controversy

Sandeep Goyal, Advocate

Sandeep GoyalFirst major litigation before various courts across the country in GST era was pertaining to the transitional credit where the assessees were not able to file TRAN-1/ TRAN-2 within the requisite time. Whereas Government being already short of revenue was adamant on recovering some undue amount from the dealers, the assessees could not let go an amount which was available with them under the pre GST era, especially keeping in the view the fact there were many teething problems with the GST Network which was the only option for using the accrued credit. Also the fact that in some cases the amount involved was huge.

There were three categories of litigants. One, those who logged into the portal but could not file the Form due some to portal related technical hitches. Secondly, those who claim to have attempted the filing of TRAN-1 but there was no proof or there was insufficient proof that they could not file the TRAN-1 due to portal related glitches. Thirdly, those who wanted to revise the form filled within time but with errors and those corrections were not allowed after 27.12.2017 as the portal took off the template relating to TRAN-1 after 27.12.2017.

Litigation erupted. Huge amounts were at stake. Though there was no denial to the fact that the credit was lawfully admissible to the assessees, the Revenue contested with full vigour to collect some undeserved tax on the basis of technicalities. In the first place there was no need to have the requirement of TRAN-1 for the credit claimed on the basis of unutilised credit under the old law. Once the requisite returns were to be filed under the old law, the same very figures could have been allowed as credit under GST while filing returns, subject of course to verification. However, that was not to be. The GST think tank considered this an opportunity to fill the coffers thorough double taxation. This was in complete contrast to the basic principle of GST i.e. to remove cascading effect. Also it took away sheen from the popular rhetoric of the Government that it was a Good and Simple Tax.  Some relaxation was, though, sought to be given by way of constitution of IT Grievance Redressal Mechanism by way of circular dated 3rd Apr 2018. However it was confined to only those cases which according to the committee could not be filed due to technical glitches. This was full of subjectivity.

On the litigation front, the most significant judgement in this regard was delivered by Punjab and Haryana high court in the case of Adfert Technologies Limited[1] in which relying upon the judgement of Gujarat High Court in the case of Siddarth Enterprises vs The Nodal Officer[2], the division bench had held that the assessees are entitled to take credit of the amount lying in their books to be used under the new regime irrespective of the fact whether the declaration as required under rule 117 was filed within time or not. Parties were granted the permission to file the necessary form after the disposal of writ petition and even if the portal was not opened for them, the same could have been filed manually. The High Court had allowed the petitions observing the following issues:

1. The ITC is a vested right which could not have been taken away.

2. The GST Network had lot of technical problems which could not be denied by the respondents and everyone faced these technical issues in the beginning.

3. The mistakes were bound to occur considering that there were many complex issues in filling of forms.

4. As per press release the last date was extended to 31.12.2017 but the option to file TRAN-1 had been taken off on 27.12.2017 itself.

5. Principles of ‘Legitimate Expectations’ would come into play considering that a going concern would always expect a credit to be available to him to be used in future.

6. Denial of credit would be violative of Article 14 of the constitution of India.

7. Denial of transitional Credit would lead to double taxation.

After the judgment of Punjab & Haryana High Court in the case of Adfert Technologies Ltd., vs Union of India (Supra), assessees across the country heaved a sigh of relief when the said judgment had been affirmed by Hon’ble Supreme Court of India in Union of India vs Adfert Technologies Ltd. (SC)[3] on 28/2/2020 dismissed the petition filed by Union of India. The said view of Punjab and Haryana High Court had been consistently followed by various High Courts namely Delhi High Court, Calcutta High Court, Karnataka High Court, Kerala High Court and many others.

Adfert Technologies Ltd. (Supra) was primarily based upon Siddharth Enterprises case of Gujarat High Court, in which a review had been filed by Revenue contending that it was in ignorance of earlier judgments of Willowood Chemicals Ltd. vs Union of India[4]) and Jay Chemicals Industries Ltd. vs Union of India[5] The said issue also came to be decided in favour of Assessees when Gujarat High Court had recently dismissed the Review Applications on 14/2/2020 filed by Revenue[6]. The Hon’ble court opined that the judgment under review was in league with the earlier judgment of same High Court in case of Filco Trade Centre Pvt. Ltd. vs Union of India[7] which recognised the accrued ITC as a vested right. The court held that Rule 117 is only procedural in nature and is not mandatory.

Calcutta High Court also took the similar view on 4/3/2020 in a bunch case of RISHI GRAPHICS vs Union of India[8] and allowed the assessees to file their TRAN-1 after the lapse of period prescribed by the rules. It had become more or less clear that the time restriction provided by way of Rules is not mandatory and a person would be entitled to take credit of ITC lying with him under the old law even if he had failed to file TRAN-1 within the prescribed time.

Contrary view by Bombay High Court

Then came a shocker by way of a contrary judgment of Bombay High Court in case of Nelco Ltd. vs Union of India[9] decided on 20.3.2020. Bombay High Court took departure from the consistent view taken by various High Courts from the country with regard to the issue of TRAN-1. Whereas most of the High Courts had agreed with the contention of assessees that prescription of time under rule 117 read with section 140 of the CGST Act, 2017 is not mandatory and therefore if a person files the declaration even after the cut-off date i.e. 27th of December 2017, the same will still be admissible and the assessee would be granted the benefit of transfer of credit lying in their books subject to verification by the authorities concerned.

In my opinion the Bombay High Court is not correct. While taking up the petition, the court has failed to notice the dismissal of SLP by Honourable Supreme Court in case of Adfert Technologies (Supra) though it was prior in time to the Bombay High Court judgment. Secondly the judgment has place a strong reliance upon the Gujarat High Court judgment in the case of Willowood Chemicals(Supra) which has also been considered by the subsequently by Same High Court in Review case relating to Siddharth Enterprises(Supra) and Revenue application has been dismissed.

Even on consideration of the reasoning given in the judgment, it appears that Sub-section 164(2) has weighed with the Bench which according to it is wider in scope than Sub-section 164(1). I beg to differ. A collective reading of Section 164 clearly shows that 164(1) is much wider in scope and 164(2) merely clarifies that without prejudice to the generality of provisions of sub-section (1), the Government may make rules which as per Act are required to be prescribed. This is in no manner wider in scope than 164(1). It is only a clarificatory provision which rather has smaller scope than 164(1). Moreover Section 140 in no manner can be read to empower Government to prescribe time in Rule 117 especially with reference to section 164(2) and that too in contradiction to the recommendations of the GST Council.

On the question of ITC being the substantive right which could not have been taken away by way of framing of rules and prescribing time, the court observed that ITC is not a substantive right at all. While doing so the court has distinguished various judgments which were cited by assessee. In my opinion the court has failed to notice the difference between entitlement of ITC and the Accrued ITC. Whereas the admissibility of ITC can be a concession given by law, once having permitted ITC on purchase of some goods, the same cannot be taken away as it becomes a vested right which cannot be taken away except by a legislative provision.

A single bench of Rajasthan High Court[10] has also taken a view as has been taken by Bombay High Court denying credit to those persons who could not file the TRAN-1 upto 27.12.2017 and were not able to submit the proof of having faced technical problems as per GST Council. The court proceeded on the fact that vires of Rule 117 have already been upheld by a Division Bench of Rajasthan High Court earlier. The intra court appeal is also stated to be pending against that order before Rajasthan High Court.

To add to the already pending controversy, the legislature has also stepped in. By way of Finance Act, 2020 certain changes have been made to Section 140. The changes are made to give power to the Rule making Authority to prescribe time to claim the credit. It may not have much effect on the already decided cases as none of those cases had proceeded on the basis that Government did not have the power under section 140 to prescribe time. In fact Bombay High Court in Nelco case (Supra) has proceeded on the basis that Government did have power to make rule prescribing time. All those cases where the relief was granted, were based upon the fact that ITC being a vested right cannot be taken away. However the amendment is certainly going to add fuel to the controversy in the pending litigation.

In certain cases the Revenue had approached Supreme Court also where the notice has been issued in SLP and the matters are pending. It is, however, expected that with dismissal of SLP in case of Adfert Technologies, those petitions may also be dismissed. However till all these cases are decided, the Controversy Continues………..


[1] 2019 (11) TMI – 282

[2] 2019 (9) TMI 319

[3] Special Leave to Appeal (C) No.4408/2020 :: 2020(3)TMI 188 – SC Order

[4] 2018 (19) GSTL 228 (Guj)

[5] 2018 (19) GSTL 440 (Guj)

[6] The Nodal Officer vs The Goods and Service Tax Council (Misc. Civil Application (For Review) No. 1 of 2019 in R/Special Civil Application No. 5758 of 2019))

[7] 2018 (17) GSTL 3 (Guj)

[8] 2020-TIOL-561-HC-KOL-GST

[9] 2020-TIOL-641-HC-MUM-GST


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August 2021