The topic of transitional credit in GST regime has been a matter of debate over last three years and the jurisprudence in this regard has been contradicting throughout Courts. Recent decisions, on the subject matter, adds a fresh preceptive and narrates yet another conflicting story about the future of the taxpayers who are still struggling to transfer the transitional credits into the GST regime. The transitional arrangement for input tax credit is contained through Section 140(1) to the CGST Act, 2017 and the Rule 117(1) to CGST Rules, 2017 which allowed carry forward of credit available in its last return of erstwhile regime. Structurally, the entitlement to carry forward credit was prescribed in Section 140(1) while Rule 117(1) prescribed the form and time limits for carry forward of credit. and the provision read as under:-
“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 [of eligible duties]1 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]2 in such manner as may be prescribed.”
Originally, Rule 117(1) prescribed a time period of 90 days to file a declaration in Form GST TRAN – 1 to claim the aforesaid transitional credit. The said time period was extended till December 27, 2017 vide various notifications. In fact, the original Section 140(1) did not have the phrases emphasized above which dealt with kind of duties the credits for which can be passed on and empowerment to prescribe time limit. Clearly, the legislature made a grave error at the time of introduction of the provision.
Marred with teething technical issues of the GSTN, the new regime rolled out with transition becoming a disaster for many taxpayers who were left struggling to file the GST TRAN – 1 within the stipulated time period. The Government relaxed the timelines through introduction of Rule 117(1A) till March 31, 2019 for taxpayers who tried filing their GST TRAN – 1 electronically by December 27, 2017 but could not do so due to “technical difficulties on the common portal”. The aforesaid period was further extended till March 31, 2020.
What the legislature forgot to do was prescribe legal empowerment to the timeline through Section 140. This issue was taken up by the enlightened litigants before Hon’ble High Courts of the Country wherein in the case of Siddhartha Enterprises Vs The Nodal Officer – 2019-TIOL-2068-HC-AHM-GUJ the Hon’ble Gujarat High Court held that timeline of Rule 117 is only directory and not mandatory. The said view of the Court was on account of the fact that there was no empowering provision to set timeline for filing TRAN – 1. In absence of the same Rule 117 could not be held to be mandatory. It was also directed that GSTN be re-opened so that electronic functionality can be accessed for filing TRAN – 1.
Quick to realize this grave error, the Government came out with its ace of spade in the form a retrospective amendment in Section 140(1) in Finance Act, 2020 wherein it empowered Section 140(1) to prescribe time limit for filing TRAN – 1 & validated the sanctity of Rule 117. The Government for some reason did not notify the said amendment and it remained suspended.
In the mean while the Gujarat High Court had delivered the above judgement and it was now time for the Hon’ble Delhi High Court to take a view on this issue. In the case of Brand Equity Treaties Limited vs The Union of India and Ors. – 2020- TIOL-900-HC-DEL-GST the Delhi High Court came down heavily on the GST department and read down Rule 117 of the CGST Rules as being procedural & directory in nature.
The High Court went on to add that the time limit under Rule 117 shall not apply to anyone and all assessee who were aggrieved on account of technical and non technical glitches of the GSTN can claim their vested right of credit under erstwhile taxing statutes and carry it forward in the GST regime. Major findings of the High Court are as under: –
> Cenvat credit which stood accrued and vested (Absolute Right), is the property of the assessee and is a constitutional right under Article 300A of the Constitution.
> The aforesaid right cannot be taken away merely by way of delegated legislation by framing Rules prescribing the time limit, without there being any provision in the GST Act curtailing the aforesaid time limit.
> Exception created under Rule 117(1A) to file TRAN – 1 belatedly on account of “technical glitches” would equally apply to taxpayers who did not file TRAN – 1 due to their own follies (lack of good sense).
> GSTN is still under the “Trial & Error Phase”. Government struggling with shortcomings in the GSTN portal. Taxpayers were also facing challenges in terms of IT literacy.
> There is no definition of “technical difficulty on the common portal” and it is a broader term. Hence, cannot have a narrow interpretation. Technical difficulty doesn’t only include difficulties on the GSTN portal. The same would also include difficulties as a result of the respondent’s follies.
> Rule 117 is arbitrary, unconstitutional, and violative of the right to equality enshrined under the Article 14 of the Constitution to the extent that it imposes a time limit to carry forward transitional credit.
> In absence of any specific provisions under the Act, residuary provisions of the Limitation Act, should be the guiding principle & thus a period of 3 years from the appointed date would be the maximum period for availing of such credit
> The department should either open the online portal so as to enable the petitioners to file declaration in form TRAN-1 electronically, or to accept the same manually.
> The above observations were not limited to the Petitioner and it has been extended to all taxpayers who missed the deadline due to non-technical
Though the taxpayers welcomed the aforesaid decision the Hon’ble Delhi High Court, the legal fraternity has been dissecting the decision every day. Is the decision absolute and the taxpayers joy permanent? The answer is fairly debatable. There are some issues which could not be addressed by the Hon’ble High Court of Delhi while dealing with entitlement to transitional credits.
Section 140 of the CGST Act’2017 has been amended retrospectively w.e.f. 01.07.2017 vide the Finance Act’2020, to empower Rule 117 to frame timeline of availing credit. Since the said amendment was not notified, the Hon’ble Delhi Court could not address the same as by virtue of legislation it remained suspended. The Central Board of Indirect taxes and Customs (CBIC) issued Notification no. 43/2020-Central Tax dated 16th May’2020 to notify the amendment in Section 128 of the Finance Act, 2020. The said Section 128 amends Section 140 of the CGST Act, 2017 retrospectively w.e.f 01.07.2017 to include the words ‘within such time’ and manner as prescribed.
Thus, the aforesaid retrospective amendment in Section 140(1) of the CGST Act’2017 has not been dealt by the Hon’ble Delhi High Court in its verdict and the amendment now seems to have overcome the said Decision of the Delhi High Court. At the time of arguments before the Hon’ble Court, the amendment was already proposed but was not implemented. The Court has not considered, as to whether proposed retrospective amendment in Section 140(1) holds valid in the eyes of law or the same is not valid as the proposed retrospective amendment takes away the vested right of the tax payer & is violative of Article 14 of the Indian Constitution. In this regard reference can be made to the decision of the Hon’ble Apex Court in the case of Osram Surya (P) limited Vs. CCE, Indore – 2002 (142) ELT 5 (SC) which propounds that validly earned credit remains to be a vested right which cannot be taken away through retrospective amendment in law.
The manner in which the events have transpired, it appears that Government has made it a habit to implement the entire GST regime based on trial and error methods. It was time of the Government to react again in a hurry after the Delhi High Court came down heavily on revenue department for the errors in legislation. The Government was quick to notify Section 128 to Finance Act, 2020 as above without any State Government notifying the same. This is in absolute contrast to the stand of the Government in case of proposed amendment to Section 50 of the CGST Act, 2017, which gives heavy relief to tax payers by limiting applicability of interest to only cash portion of delayed tax payment. The Government had announced the relaxation way back in 2019 and have still been unable to notify the date of applicability of relaxing amendment. The reason of the Government for not being able to notify the same is State Governments not amending Section 50 in respective SGST Acts. This has been tweeted by CBIC tweet dated 15.02.2020. However, when it came to amendment relating to preventing a benefit of taxpayer, the Government was quick to act on after the decision of the High Court and making a retrospective amendment barring vested right of tax payers without any State making a corresponding amendment in SGST Acts.
Another question which requires consideration after retrospective amendment is, whether High Court’s reference to Limitation Act’1963 now holds good when the time limit has now been specifically provided in the amended CGST Act’2017. In this regard reference can be drawn to two important decisions in the case of Hotel & Restaurant Association Vs. Star India Private Limited – 2007 (5) STR 161 (SC) & Commissioner of Sales Tax Vs. M/s Parsons Tools & Plants – 1975 (4) SCC 22, wherein it has been held that, when the statutory provisions of the specific law constitute a self-contained code, all obligations there under are to be considered in terms of that special code and general provisions shall not find application thereto. The Government has kept its arsenal ready for challenging Brand Equities case before the Hon’ble Supreme Court.
It’s interesting to note that before the aforesaid turn of events, Hon’ble SC has already dismissed departmental SLP against order of P&H High Court which held that carry forward of unutilized pre-GST credit, being a ‘vested right’ cannot be denied on the ground of time-limit. SC held that, “we are not inclined to exercise our jurisdiction under Article 136 of the Constitution”. (Ref: – Union of India & Ors. vs. Adfert Technologies Pvt. Ltd TS-132-SC-2020-NT). It was believed that the refusal by SC to entertain departmental SLP has settled the position of law and has put an end to the ongoing litigation on TRAN – 1. However, the events which have transpired after the Brand Equities clearly shows that Government is not inclined to rest its case but instead is ready to take the fight head on. It will be interesting to now see the take of Hon’ble Supreme Court in the matter.
1 Ins. by Act 31 of 2018, S. 28(a) (w.r.e.f. 1-7-20 17)
2 Ins. and shall be deemed to have been inserted by Act 12 of 2020, S. 128(a) (w.r.e.f. 1-7-2017)
|Adv. Bhishma Ahluwalia
Mimansa Law Offices
|CA Jitendra Khanuja
Mimansa Law Offices