1. While transitioning from the previous taxation regime to the new GST regime, eligible taxes paid in the previous regime were allowed as transitional credits under GST. It was intended to lower the cascading effect and preserve the vested credits. Sec. 140 of the CGST Act, 2017 along with Rule 117 contains the provisions related to such transitional credits. However certain restrictions and limitations were imposed in the law concerning such transitional credits. One of the limitations imposed via Rule 117 was that the said transitional credits cannot be taken by filing FORM TRAN – 1 beyond 27th December 2017 (eventual normal due date after many extensions). Separate due dates have also been prescribed for TRAN – 2. Many taxpayers however faced technical issues on the GSTN portal and hence were not able to file the said form by 27th December, 2017. Therefore an exception was carved out under Rule 117 via sub-rule (1A) to extend the time limit for such taxpayers who faced technical difficulties. Hence the time limit for such taxpayers who have been approved by the Council was extended till 31st March 2020 (for TRAN – 1).
2. During the implementation of the above-referred provisions taxpayers across the country faced several challenges. Illustrative situations can be the challenges of the GSTN portal, challenges of the accounting system at the end of the taxpayers, ignorance of the law, etc. Hence many taxpayers were not able to or did not file the transitional forms for taking the valid credits within the normal time limits.
3. Therefore many petitions were filed across the country by such taxpayers. In cases involving technical difficulties of the GSTN portal (we shall come to the meaning of this term later) majority of the Courts across the country have allowed the petitions directing the Government to permit the filing of the forms and allow the taking of the credits (whether online or manually). However in cases where there were no technical difficulties of the GSTN portal (i.e. no attempts were made to file the form within the normal due dates) the courts have not taken a uniform view. In some cases the petitions have been allowed whereas in some cases the courts have strictly interpreted the time limits contained under Rule 117 and hence have dismissed the petitions.
4. In cases where the petitions were filed in situations not involving technical difficulties (i.e. no attempts were made to file the form online) one of the arguments involved was that the provisions of the Act (Sec. 140) do not grant any power to the Government to prescribe any time limits. Therefore Rule 117 prescribing the time limits is going beyond the provisions of the Act and hence the same is ultra vires to the Act. Accordingly it has been contended that the time limits under Rule 117 have to be struck down and delayed filing of transitional forms should be permitted. Now to overcome the said contention, a retrospective amendment has been made u/s 140 of the CGST Act, 2017 by Finance Act, 2020 to enable the Government to prescribe the time limits for taking transitional credits. Vide Notification No. 43/2020 – Central Tax dt 16.05.2020, Government has appointed 18th May, 2020 as the date on which the said retrospective amendment shall come into force. Hence in a way the gap in the provisions of the Act to grant the power to the Government to prescribe the time limits by way of rules (which were already prescribed under Rule 117) is plugged.
5. Now three issues would require deliberations after the said retrospective amendment:
a. Will it affect the taxpayers who could not file the transitional forms due to technical difficulties?
b. Will it affect the taxpayers who could not file the transitional forms due to reasons other than technical difficulties? In other words whether the gap between the provisions of the Act and the Rules was the only ground on which the Courts have allowed the petitions for such taxpayers in the past and therefore now with the plugging of the said gap the Courts would take an adverse view?
c. What happens in cases where the taxpayers have already succeeded in the Courts? Whether with the amendment the Government would file appeals/petitions before the Hon’ble Supreme Court and seek the reversal of favorable decisions? Also whether a taxpayer in a similar situation should claim the transitional credits on or before 30.06.2020?
6. Let us look for answers to all the above issues.
7. As discussed earlier the situations wherein the taxpayers attempted to file the transitional forms but could not file the same due to issues of the GSTN portal have been considered favorably by the Courts. Courts and even law has allowed such taxpayers to file the transitional forms by 31.03.2020 with the approval of the Council.
8. However still the question begs as to what is the meaning of the term “technical difficulties”? Can it even include difficulties beyond the issues of the GSTN portal? This is because if a given case of a taxpayer does not involve “technical difficulties”, the retrospective amendment may cause some issues as we shall see later if transitional forms were not filed within the normal due dates. On the flip side if a case involves “technical difficulties” then as the law itself allows the delayed filing of the transitional forms the retrospective amendment will not have any adverse impact.
9. Therefore it needs to be examined whether any justifiable cause (e.g. accounting issues at the end of the taxpayer or his consultant, data compilation issues due to large set-up, mistake in considering a portion of the claim, etc.) can also be regarded as “technical difficulties”?
10. Recently Hon’ble Delhi High Court in the case of BRAND EQUITY TREATIES LIMITED v. THE UNION OF INDIA & ORS (W.P.(C) 11040/2018 and C.M. No. 42982/2018) had to examine four different factual situations wherein in one of those it was a case wherein the errors were made by the petitioner (viz. owing to dependence at group level in the context of tax compliances and multiple entities involved) for which they could not file the transitional forms within the normal due dates. Allowing the petition the Court interpreted the words “technical difficulties” as under:
“In our view, there could be various different types of technical difficulties occurring on the common portal which may not be solely on account of the failure to upload the form. The access to the GST portal could be hindered for myriad reasons, sometimes not resulting in the creation of a GST log-in record. Further, the difficulties may also be offline, as a result of several other restrictive factors. It would be an erroneous approach to attach undue importance to the concept of “technical glitch” only to that which occurs on the GST Common portal, as a pre-condition, for an assessee/tax payer to be granted the benefit of sub-Rule (1A) of Rule 117.”
11. In reaching the said conclusion the Court relied on several precedents wherein the aspect that the GST System is still in a ‘trial and error phase’ as far as its implementation is concerned weighed heavily to take a favorable view.
12. Therefore we can say that the scope of the term “technical difficulties” has been interpreted contextually and widely. An interpretation favoring the petitioners have been adopted. However the said scope needs to be seen along with the second larger issue which we shall now discuss.
Curtailment of a right
13. As discussed earlier the retrospective amendment has been brought in to plug the gap between the provisions of the Act vis-à-vis the Rules. Hence the issue to deliberate is whether the gap (which existed before the amendment) was the sole reason given by the Courts to allow the petitions? That is because if that was not the sole reason, the earlier decisions even after the retrospective amendment will remain valid. Hence the taxpayers who could not take the credit for reasons other than technical difficulties will also be entitled to take the same even if the transitional forms are filed late.
14. A perusal of several favorable decisions (list of decisions examined is at the end) would reveal that the time limits contained under Rule 117 has not been strictly applied on the following grounds:
i. The eligible transitional credits (which belong to the previous regime) stood accumulated, acquired and vested at the hands of the taxpayer. Therefore the said right cannot be curtailed by way of a delegated legislation when the Limitation Act, 1963 provides for the enforcement of civil rights within a period of three years. Therefore applying the Limitation Act, 1963 the right to take the transitional credit shall be permitted till 30.06.2020 (i.e. three years from the date of GST implementation).
ii. It would be arbitrary and discriminatory under Article 14 of the Constitution if a narrow meaning is assigned to the term “technical difficulties” considering the background of a new GST system as well as errors on the GSTN portal.
iii. It would also be arbitrary and discriminatory under Article 14 of the Constitution if duly vested transitional credits are not allowed to be taken especially when sufficient cause is shown for not been able to take the same within the normal due dates.
iv. Transitional credits which stood accrued and vested is the property of the assessee and is a constitutional right under Article 300A of the Constitution. The same cannot be taken away merely by way of delegated legislation by framing rules, without there being any overarching provisions in the GST Act.
v. The mechanism for availing the credits under Rule 117 is procedural and directory, and cannot affect the substantive right of the registered taxpayer to avail of the existing/accrued and vested CENVAT credit. Procedural law is not to be a tyrant but a servant, not an obstruction but an aid to justice.
vi. The transitory provisions purport to allow a smooth migration from the erstwhile tax regime to the new GST regime and the interpretation must align with the said purpose.
vii. 140 only permits to prescribe the manner i.e. the procedure of carrying forward of transitional credits and does not permit to prescribe the time limits within which the same needs to be taken.
viii. In a nutshell seven key reasons have been cited across various favorable decisions to allow the petitions by not reading the time limits strictly even in cases not involving technical difficulties.
16. Therefore we can conclude that the retrospective amendment u/s 140 to plug one of the seven contentions may not be enough to persuade the Courts to overlook other contentions discussed above.
What happens now?
17. This brings us to the last issue. What happens in cases where the taxpayers have already succeeded in the Courts? Whether with the amendment the Government would file appeals/petitions before the Hon’ble Supreme Court and seek the reversal of favorable decisions? Also whether a taxpayer in a similar situation should claim the transitional credits on or before 30.06.2020?
18. It appears that the issue will go to the Supreme Court. It is because the Government will consider the retrospective amendment as a tool to overcome the reasons based on which favorable judgments have been given in the past. However from the above discussions it will appear that the retrospective amendment cannot take away the merits of other contentions on which favorable orders have been passed. Also in one of the favorable decisions (wherein also the above-referred contentions have been expressed) Hon’ble Supreme Court has dismissed the revenue SLP (Adfert Technologies CWP No. 30949/2018 (P & H)). Hence the taxpayers stuck in similar situations should not miss the deadline of 30.06.2020 for claiming transitional credits. We would suggest that you should fight for your rights as you have valid reasons to do so.
Cases examined during research for the present article:
ii. SCG Contracts India Pvt. Ltd. vs. KS Chamankar Infrastructure Pvt. Ltd. 2019 SCC OnLine SC 226 (Del.)
ix. Willowood Chemicals Pvt. Ltd. vs. Union of India 2018 (19 G.S.T.L 228 Gujarat) (contrary favorable view expressed subsequently in Siddharth Enterprises v. The Nodal Officer 2019- VIL-442-GUJ, JakapMetind Pvt Ltd v Union of India 2019-VIL-556-GUJ and Indsur Global Ltd. v. Union of India 2014 (310) E.L.T. 833 (Gujarat))
(views are strictly personal)