Synopsis: The Hon'ble HC, Madras in the matter of M/s Sutherland Global Services Private Limited v. Assistant Commissioner CGST and Central Excise, has allowed the writ petition challenging the denial of transitional credit of Education Cess ("EC"), Secondary and Higher Education Cess ("SHEC") and Krishi Kalyan Cess ("KKC") into GST regime through the TRAN-1 declaration.
Facts:
M/s Sutherland Global Services Private Limited ("the Petitioner") is a company providing Information Technology enabled services to customers worldwide.Prior to GST, the Petitioner was centralised registered in service tax and was availing CENVAT credit on inputs, capital goods and input services, utilizing the same against payment of service tax liability.
The Petitioner followed the procedure for carrying forward CENVAT credit availed under the erstwhile regime, set out in terms of Rule 117 of the Central Goods and Services Tax Rules, 2017 ("CGST Rules"). The Rules provide that every person entitled to the input tax credit ("ITC") under Section 140 shall submit a declaration electronically in Form GST Tran-1 within 90 days of the appointed date, being July 1, 2017, for carrying forward such credit to be utilised against turnover from taxable services.
The provisions of Section 140(8) of the CGST Act, 2017 ("CGST Act") provide for CentralisedRegistration in respect of all the Petitioners' units, pan India, and this was reflectedin the Tran-1 return filed by it.
The request of the Petitioner for carry forward and utilisation of credit was rejected vide impugned order dated February 9, 2018 on the ground that credit could be set-off only as against the specific duties and taxes enumerated in the Explanation to Section 140(1) of the CGST Act read with Rule 117 of the CGST Rules. According to the Assessing Officer, since the explanation did not cover cesses such as EC, SHEC and KKC, the same could not be carried forward. The Petitioner was thus directed to reverse the aforesaid credits.The Petitioner challenged the order dated February 9, 2018.
Issue involved:
Whether credit of EC, SHEC and KKCthat accrued in the previous tax regime could be carried forward into the GST regime?
Petitioner's contentions:
• Section 140(8) of the CGST Act entitle it to avail utilisation of the credits carried forward in a return relating to the period ending with the day immediately preceding the appointed day.
• For the purpose of the Central Excise Act, 1944 and Rules framed therein, EC, SHEC as well as KKC are 'credits' and thus, in the light of the explanation to Section 140 of the CGST Act, such credits would also be eligible to be credited, transitioned and utilised.
• Proviso to Section 140(1) of the CGST Act specifically delineates those circumstances/conditions under which credit availed may not be utilised and there is nothing thereunder, to militate against the availment in question.
• The term used in Section 140(8) of the CGST Act is 'CENVAT credit' and not 'eligible duties and taxes'. Therefore, even though Rule 117 of the CGST Rules refers to Section 140 of the CGST Act as a whole, on a conjoint reading, it becomes evident that the term 'eligible duties and taxes' is applicable only to credit sought to be transitioned under Section 140(5) of the CGST Act and not to other sub-sections.
Held - Original Order:
The Hon'ble HC, Madras in Writ Petition No.4773 of 2018 & WMP Nos. 5916 & 13148 of 2018 decided on September 5, 2019, held that the claim of the Petitioner was liable to be accepted, in view of following observations:
• The Court observed that the intention of the Government was to provide a seamless model for transitioning of all credits hitherto availed of by an assessee under the erstwhile VAT and other indirect tax levies to the GST regime as well. The benefits that had been made available and that had been permitted to continue in the erstwhile taxing regime were thus meant to be continued.
• In Section 140(1) of the CGST Act which provides for transfer of all credits and levies, there are only 3 conditions that bar the transfer of accumulated credit and the revenue has not made out any bar for the transitioning of EC, SHEC and KKC into the GST regime and the Petitioner satisfies all conditions under Section 140 (1) & (8) of the CGST Act.
• Rejects the revenue's contention that as the cesses have been phased out and since there is no new liability to pay these cesses, no vested right can be said to exist in relation to the past accumulated credit in the light of Rule 3(7)(b) of the CENVAT Credit Rules, 2004 ("CENVAT Credit Rules").
• The Court relied upon SC ruling in case of Eicher Motors Ltd. v. Union of India [(1999) 106 ELT 3] wherein SC reiterated that MODVAT Credit lying to the balance of an assessee represented a vested right accrued or acquired by the assessee and stated that the embargo placed by Rule 3(7)(b) of the CENVAT Credit Rules is long gone with the introduction of GST.
• Rejects the Revenue's claim that the accumulated credit of EC, SHEC and KKC is dead and gone and there is nothing that the assessee could claim as having been carried forward. Holds that credit continues to be available till is expressly stated to have lapsed and since there has been no instructions/notification/circular from the Board till date, stating the same, despite there being several occasions to do so, the Petitioner is allowed to carry forward cesses without any move to state that the credits could not be so carried forward, since they had lapsed.
• HC further stated that the amendment carried out in Section 28 by way of CGST Amendment Act, 2018 by inserting Explanation (3) which clarified that the expression 'eligible duties and taxes' excludes any cess not specified in Explanation (1) or (2), has not been notified.
Accordingly, HC allowed transition of EC, SHEC and KKC into GST.
Held - Revised Order:
Since the provision inserting Explanation 3 to Section 140 (introduced vide clause 28(d) of the CGST Amendment Act, 2018) is among those which have been operationalised with effect from February 1, 2019, the Hon'ble HC, Madras has revised its above judgment under Para 21, 47 and 49 of the order.
Importantly, now the Court has expressly allowed transition of cesses to the Petitioner even under the amended CGST Act. Para 49 of the revised order states as under:
• The amendment proposed, to insert the phrase 'eligible duties' after the phrase 'cenvat credit' is restricted only to Section 140(1) and the Explanation (1) defining 'eligible duties' that was originally made applicable only to sub-sections (3) and (4) of Section 140 was extended to cover sub-section (1) as well.
• However, Section 140(8) remains untouched. As a result, Section 140(8) continues, as on date, to read that where a registered person having a centralised registration under the existing law has obtained a registration under the CGST Act, such person shall be allowed to take, in his electronic credit ledger, credit of the amount of cenvat credit carried forward in a return furnished under the existing law by him, in respect of the period ending with the day immediately preceding the appointed day in such manner as may be prescribed.
• Thus, even if one were to assume that EC, SHEC and KKC are not liable to be transitioned, since they are not 'eligible', though the provisions of sub-sections (1), (3) (4) and (6) may contain a limitation to this effect, sub-section (8) contains no such limitation and any credit carried forward, without restriction of eligibility or otherwise, can be transitioned.
• The HC also made it clear that this conclusion is over and above its conclusion on the larger issue of eligibility under Section 140(1), which the Court has held in favour of the assessee.
Our Comments:
The Hon'ble HC has rightly observed that the retrospective amendment by the CGST Amendment Act, restricting cesses to be transferred as GST credit, has its applicability only for Section 140(1) of the CGST Act and the Explanation defining 'eligible duties'. The CGST Amendment Act did not amend Section 140(8) dealing with transition of credit by a registered person having centralised registration in pre-GST era. Section 140(8) allows a registered person having centralised registration under the pre-GST law to take, in his electronic credit ledger, credit of the amount of CENVAT credit carried forward in a return, furnished under the earlier law, in respect of the period ending with the day immediately preceding the appointed day. Though second proviso to Section 140(8) provides that the registered person shall not be allowed to take credit unless the said amount is admissible as ITC under the GST Act, but the amendments made in Section 140(1) and the Explanations are not applicable to said provision.
At this juncture, it may also be noted that earlier the Gujarat HC had issued notice in writ challenging constitutional validity of amendment to Section 140 of the CGST Act which disallowed transition of cesses retrospectively in case of Grasim Industries v. Union of India [R/Special Civil Application No. 11061 of 2019 dated July 10, 2019].On similar lines, the Hon'ble High Courts of Odisha, Jharkhand, Telangana & Karnataka have also issued notice to Revenue in similar writs being filed.
But, the Authority for Advance Ruling in cases of Kansai Nerolac Paints Limited [Advance Ruling No. 18 dated January 6, 2018]and CMI FPE Limited [Advance Ruling No. 25 dated February 2, 2018] have ruled out that the credit of EC, SHEC and KKC will not be an eligible transition credit under CGST Act, even before any amendment in the CGST Act.
Relevant Provisions:
Section 140(1) and (8) of CGST Act:
"140. Transitional arrangements for input tax credit.
(1) 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][i] 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 in such manner as may be prescribed:
Provided that the registered person shall not be allowed to take credit in the following circumstances, namely: -
(i) where the said amount of credit is not admissible as input tax credit under this Act; or
(ii) where he has not furnished all the returns required under the existing law for the period of six months immediately preceding the appointed date; or
(iii) where the said amount of credit relates to goods manufactured and cleared under such exemption notifications as are notified by the Government.
(8) Where a registered person having centralized registration under the existing law has obtained a registration under this Act, such person shall be allowed to take, in his electronic credit ledger, credit of the amount of CENVAT credit carried forward in a return, furnished under the existing law by him, in respect of the period ending with the day immediately preceding the appointed day in such manner as may be prescribed:
Provided that if the registered person furnishes his return for the period ending with the day immediately preceding the appointed day within three months of the appointed day, such credit shall be allowed subject to the condition that the said return is either an original return or a revised return where the credit has been reduced from that claimed earlier:
Provided further that the registered person shall not be allowed to take credit unless the said amount is admissible as input tax credit under this Act:
Provided also that such credit may be transferred to any of the registered persons having the same Permanent Account Number for which the centralised registration was obtained under the existing law.
Explanation 1.-For the purposes of [ii][sub-sections (1), (3), (4)] and (6), the expression "eligible duties" means- -
(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957.);
(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975 (51 of 1975.);
(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975(51 of 1975.);
[iii][****]
(v) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);
(vi) the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986); and
(vii) the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001 (14 of 2001) ;
in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day.
Explanation 2.-For the purposes of [iv][sub-sections (1) and (5)], the expression "eligible duties and taxes" means- -
(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957);
(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975; (51 of 1975)
(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975; (51 of 1975)
[v][****]
(v) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985; (5 of 1986.)
(vi) the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985; (5 of 1986.) and
(vii) the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001; (14 of 2001) and
(viii) the service tax leviable under section 66B of the Finance Act, 1994, (32 of 1994.)
in respect of inputs and input services received on or after the appointed day.
[vi] [Explanation 3.-For removal of doubts, it is hereby clarified that the expression "eligible duties and taxes" excludes any cess which has not been specified in Explanation 1 or Explanation 2 and any cess which is collected as additional duty of customs under sub-section (1) of section 3 of the Customs Tariff Act, 1975 (51 of 1975)]
DISCLAIMER: The views expressed are strictly of the author and A2Z Taxcorp LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.
- [i]Inserted vide Central Goods and Services Tax (Amendment) Act, 2018 w.e.f 01-07-2017 and shall always be deemed to have been inserted
- [ii]Substituted vide Central Goods and Services Tax (Amendment) Act, 2018 w.e.f 01-07-2017........... and shall always be deemed to have been substituted, before it was read as "sub-sections (3), (4)"
- [iii] Omitted vide Central Goods and Services Tax (Amendment) Act, 2018 w.e.f 01-07-2017 shall always be deemed to have been omitted, before it was read as
- "(iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 1978.) ;"
- [iv]Substituted vide Central Goods and Services Tax (Amendment) Act, 2018 w.e.f 01-07-2017...........and shall always be deemed to have been substituted, before it was read as "sub-section (5)"
- [v] Omitted vide Central Goods and Services Tax (Amendment) Act, 2018 w.e.f 01-07-2017 shall always be deemed to have been omitted, before it was read as
- "(iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978; (40 of 1978.)"
- [vi]Inserted vide Central Goods and Services Tax (Amendment) Act, 2018 w.e.f 01-07-2017 and shall always be deemed to have been inserted
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