Transitional Credit under GST regime; Explanation with Case Laws

I. Introduction:

Section 140 of the CGST Act contains ‘Transitional Provisions/Arrangement’ so as to ensure smooth transition of CENVAT credit from the erstwhile regime to the present GST regime. Further, to enable seamless flow of credit, these provisions contained certain provisions for claiming credit of tax paid on stock lying as on appointed date i.e.01 July, 2017. However, as per Rule 117 of the CGST Rules for claiming the same & crediting the ITC in the Electronic Credit Ledger under the GST Regime as per the scheme stipulated in Section 140 of the CGST Act r/w Rule 117 of the CGST Rules, the interested person is required to file a declaration in Form GST TRAN-1 within 90 days from the appointed day + extended dates (as per sub-rule (1A) added in Rule 117 of CGST Rules insertedvide Notification 48/2018 Central Tax dt. 10-9-2018. Last date to file the said declaration was extended till 31-3-2020). Some registered persons who, though legitimately entitled to avail such CENVAT credit, however, due to some reasons could not file the return, were denied the transition of their CENVAT credit to GST by the Revenue Department. In other words, CENVAT credit of such people were not allowed to be credited to the Electronic Credit Ledger under the GST regime. Being aggrieved by such deprivation, various writ petitions have been filed by such persons in different High Courts. In these cases, the central question posed before Hon’ble High Courts is “Whether the CENVAT credit legitimately earned by a person after paying appropriate taxes in the erstwhile regime can be denied by the Department on the pretext of expiration of time limit of filing declaration as stipulated in Rule 117 of the CGST Rules? And “Whether Rule 117 is ultra vires to Section 140?”. Central argument of the Petitioner in all such cases mostly revolved around the legal postulate that

“Transitional credit is a vested right and therefore CENVAT credit earned in erstwhile regime cannot be denied by dint of procedural limitations esp. time limits”

It is in this backdrop several High Courts have pronounced differing judgements which will be discussed in detail in the ensuing sections of this article.¹

However, before we advert to the High Courts’ decisions, it will be apropos to first take note of the Hon’ble Supreme Court’s views expressed on the issue -‘Whether CENVAT credit is a vested right in pre-GST era?’.

II. CENVAT Credit/Input Tax Credit-Whether vested right/tax concession in Pre-GST regime?

In Eicher Motors Ltd. v. Union of India 1999 taxmann.com 1769, the Hon’ble Supreme Court of India considered MODVAT Credit as an ‘absolute right’ regarding the input is used in the manufacture of the final product and on the date when the Assessee paid the tax on the raw materials or the inputs. In this regard , the Hon’ble COurt observed that:

“..Thus, the right to the credit has become absolute at any rate when the input is used in the manufacture of the final product. The basic postulate, that the scheme is merely being altered and, therefore, does not have any retrospective or retro-active effect, submitted on behalf of the State, does not appeal to us. As pointed out by us that when on the strength of the rules available certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that right, which had accrued to a party such as availability of a scheme, is affected and, in particular, it loses sight of the fact that provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the assessees concerned.

Therefore, the scheme sought to be introduced cannot be made applicable to the goods which had already come into existence in respect of which the earlier scheme was applied under which the assessees had availed of the credit facility for payment of taxes. It is on the earlier scheme necessarily the taxes have to be adjusted and payment made complete. Any manner or mode of application of the said rule would result in affecting the rights of the assessees. 6. We may look at the matter from another angle. If on the inputs the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus, a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed.”

Notably, the Supreme Court in addition to the above also held that provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the assessees concerned.

Similar views was again expressed by the Apex Court in Collector of Central Excise v. Dai Ichi Karkaria Ltd. 1999 (112) ELT 353.

However, in Osram Surya (P.) Ltd. v. CCE [2002] 122 Taxman 583Hon’ble Supreme Court, while considering the proviso II to Rule 57G of the Act of 1944, laid down that by providing limitation the statute has not taken away any of the vested rights, which accrue to the manufacturers and what is restricted is the time, within which, the manufacturer has to enforce that right

Further, in Jayam & Co. v. Assistant Commissioner [Civil Appeal Nos. 8070-8073 of 2016, dated 5-8-2016] Hon’ble Supreme Courtin the background of Tamil Nadu Value Added Tax Act, 2006 held that it is a trite law that whenever concession is given by statute or notification etc. the conditions thereof are to be strictly complied with in order to avail such concession. Thus, it is not the right of the ‘dealers’ to get the benefit of ITC but it s a concession granted under the said Act.

This view was reiterated by the Hon’ble Supreme Court of India in ALD Automotive (P.) Ltd. v. CTO[2018] 99 taxmann.com 202/70 GST 751 in the background of Tamil Nadu Value Added Tax Act, 2006, held as under:

Again, recently in 2018, the Apex Court in the case of TVS Motor Co. Ltd. v. State of Tamil Nadu [2018] 98 taxmann.com 343/70 GST 501, held that:

“41. It is very clear from the aforesaid discussion that this Court held that ITC is a form of concession which is provided by the Act; it cannot be claimed as a matter of right but only in terms of the provisions of the statute; therefore, the conditions mentioned in the aforesaid Section had to be fulfilled by the dealer; and sub-section (20) of Section 19 of TNVAT Act was constitutionally valid. It was also noted, in the process, that there were valid and cogent reasons for inserting that provision and the main purpose was to protect the Revenue against clandestine transaction resulting in invasion of tax.”

Thus, it appears that there was dissonance even in the views expressed by the Apex Court in pre-GST regime. In this backdrop, it is no surprise that post -GST regime even High Courts are conspicuous in their disagreement over this issue as discussed in the cases mentioned below:

III. Summary of outcome of the relevant cases has been discussed in the table below:

A. Courts which answered the captioned issue in Affirmative:

1. Adfert Technologies (P.) Ltd.[2019] 111 taxmann.com 27 (Punj. & Har.)

Held that: Where petitioners, migrated from VAT regime to GST regime on introduction of GST, sought direction to respondents to permit carry forward of unutilized CENVAT credit of duty paid under Central Excise Act, 1944 and Input Tax Credit (ITC) of VAT paid under PVAT Act, 2005 or HVAT Act, 2003 on account of non-filing or incorrect filing of prescribed statutory Form i.e., TRAN-1 by stipulated last date, i.e., 27-12-2017 due to technical glitches, petitioners were permitted to file Form TRAN-1 either electronically or manually on or before 30-11-2019.

While doing so, the Hon’ble Court noted that the Respondent authorities were having complete record of already registered persons and at present they are free to verify fact and figures of any Petitioner thus inspite of being aware of complete facts and figures, the Respondent cannot deprive Petitioners from their valuable right of credit.

[Note: Against this order of the Hon’ble P&H HC SLP was filed by the Revenue Dept. which was dismissed by the Apex Court in Adfert Technologies (P.) Ltd. (supra)

2. Siddharth Enterprises v. Nodal Officer [2019] 109 taxmann.com 62 (Guj.)

In this case, Hon’ble Gujarat High Court, inter alia held the following:

3. Nodal Officer v. GST Council[2020] 116 taxmann.com 132 (Guj.)

In this case Hon’ble Gujarat High Court was reviewing its earlier decision given in Siddharth Enterprises (supra) and inter alia held that:

4. Shree Motors v. Union of India[2020] 115 taxmann.com 344 (Raj.)

In this case it was held that where assessee could not file Form GST TRAN 1 due to various technical glitch at portal, it was to be permitted to submit online Form GST TRAN 1 subject to furnishing a proof that it had tried to upload Form GST TRAN 1 prior to 27-12-2017 and such attempt failed due to technical glitches on common portal.

5. Rohan Dyes and Intermediates Ltd. v. Union of India[2020] 115 taxmann.com 387 (Guj.)

In this case, Hon’ble Gujarat High Court relying on its earlier decision given in Siddharth Enterprises(supra) held that:

6. Brand Equity Treaties Ltd. v. Union of India[2020] 116 taxmann.com 415 (Delhi)

This is a case is of immense importance wherein Hon’ble Delhi HC interalia resolved the following vexed issues:

7. Amba Industrial Corporation v. Union of India[2020] 117 taxmann.com 195 (Punj. & Har.)

In this case Hon’ble Court had directed GST authorities to permit assessee to upload TRAN-I on or before 30-6-2020 where assessee failed to upload TRAN-I for availing benefit of previous unutilized input tax credit by last date i.e. 27-12-2017. Further, the Court also held that in case GST Authority fails to do so, assessee would be at liberty to avail ITC in question in GSTR-3B of July, 2020.

8. R.R. Distributors Pvt. Ltd v. Commissioner Of Central Tax, GST [W.P. (C) 4143 of 2020, dated 27-5-2021]

Very recently i.e. on 27-5-2021, Hon’ble Delhi High Court in this case aptly held that the non-filing of part 7B of table 7(a) and table 7(d) of TRAN-1 Form cannot impair the rights of the petitioner to claim transitional ITC, if he is otherwise eligible. The Hon’ble Court further noted that failure on the part of the Petitioner to give relevant details in TRAN-1 Form can only be taken as a procedural lapse which should not cause any impediment to its right to claim transitional ITC. In view thereof, the Court directed the Respondents to either open the online portal so as to enable the Petitioner to file the rectified TRAN-1 Form electronically or accept the same manually with necessary corrections, on or before 30th June 2021.

9. Union of India v. Mayhem India (P.) Ltd. [WA No. 570 of 2021, dated 5-7-2021]

Similar views were also expressed by Hon’ble Kerala High Court in Union of India v. Mayhem India (P.) Ltd. [WA No. 570 of 2021, dated 5-7-2021] wherein allowing the writ of the Petitioner, the Hon’ble Court held that “..A registered dealer had a statutory right under the VAT regime to get refund. Unutilized input tax credit of the erstwhile regime can be denied from being credited to the electronic credit ledger only under the contingencies mentioned in the proviso to section 140(1). On all other situations, this statutory right cannot be defeated by any procedural rules under the GST regime. In this context, we bear in mind the salutary principles enshrined in Article 265 and Article 300A of the Constitution of India also.”

(Note: At this juncture, it will also be interesting to note the recent decision given by the Hon’ble Madras High Court in BNP Paribas Global Securities Operations (P.) Ltd. v. Asstt Commissioner of GST & Central Excise [2021] 127 taxmann.com 35 wherein the Hon’ble Court considering the fact that the petitioner has also not been able to utilize the credit of duty (CENVAT credit) under the provisions of GST which came to be effected from 1-7-2017, held that legitimate export incentives cannot be denied to the petitioner. Resultantly, allowed the refund claim filed by the petitioner under Rule 5 of the CENVAT Rules, 2004 and directed the respondent authority to refund the amount to the petitioner within a period of six weeks.)

B. Courts which answered the captioned issue in Negative:

1. Willowood Chemicals (P.) Ltd. v. Union of India [2018] 98 taxmann.com 100 (Guj.)

In this case, the Hon’ble Gujarat High Court inter alia held thus:

2. NELCO Ltd. v. Union of India[2020] 116 taxmann.com 255 (Bombay):

3. P.R. Mani Electronics v. UOI [2020] 117 taxmann.com 868 (Mad.)

In this case, Hon’ble Madras High Court in addition to what has been already been discussed above in Nelco Limited case (supra) and Willowood Chemicals case(supra) also discussed the effect of the insertion of the words “within such time ” retrospectively w.e.f. 1-7-2017 ( inserted vide Finance Act,2020 which came into force w.e.f 18-5-2020) and held that:

IV. Concluding Remark:

In view of the foregoing discussion, it is clear that there is ostensible lack of consensus among the different High Courts on the captioned issues. Besides, after going through the aforementioned decisions of the High Courts, inter alia following three piquant views appears to have emerged:

The Author is of humble view that the 3rd view as elucidated above reflects the correct position of law. However, in view of the high stakes involved, this vexed issue is imminent to reach the doorsteps of the Hon’ble Supreme Court to attain finality (in fact some cases, involving this issue, are already pending before the Apex Court). Thus, until the Apex Court gives its final decision on this highly contentious issue, we may have to wait with bated breath.