Contributed by: Singh & Associates
Recently, the Hon’ble Madras High Court in the matter of Sutherland Global Pvt. Ltd., held that utilisation of accumulated credit of Education Cess (EC), Secondary and Higher Education Cess (SHEC), and Krishi Kalyan Cess (KKC) against output GST liability is not allowed. It has been further held that the cesses were distinct and stand-alone levies and their credit cross utilization was never permitted even before implementation of GST.
This judgement adds to the woes of the ping pong game of contradictory judgements on the same issue from various foras, leading to confusion and unsettling of the issue in hand like many other ongoing litigious matters under GST. The Single Member bench of Hon’ble Madras High Court in Sutherland Global Pvt. Ltd. T had earlier held that the accumulated credit of EC, SHEC and KKC cannot be dead and gone unless there is a specific order under which it lapses.
Treatment of the Cesses under CENVAT and GST
In the erstwhile regime, Rule 3 of the CENVAT Credit Rules, 2004 allowed to take credit of EC, SHEC and KKC. However, CENVAT credit in respect of KKC was allowed to be utilised only towards payment of KKC on taxable services leviable under Section 161 of the Finance Act, 2016.
Subsequently, EC and SHEC were repealed in 2015 and KKC in 2017 with introduction of GST. During the switch from erstwhile regime to GST, Taxpayers have sought transition of credit of these Cesses to GST by filing FORM GST TRAN-1 under Section 140 of the CGST Act 2017 read with Rule 117 of the CGST Rules 2017.
The Central Board of Indirect Tax and Customs has clarified that the amount of CENVAT credit did not include the Cesses and the same are not eligible duties covered under Section 140 and credit cannot be availed for the same.
Thereafter Section 140 (1) of the CGST Act was amended and the words ‘CENVAT credit’ were followed by ‘of eligible duties’ and an explanation was inserted, clarifying that “eligible duties and taxes” excludes any cess with retrospective effect from 01.07.2017. However, the issue has been a matter of contention between business entities who do not want to forego the transitional credit in relation to the Cesses and department who has a clear mandate for not allowing the same.
On the issues under consideration, there is a lack of uniformity amongst the decisions of the various quasi-judicial bodies and High Courts. The Maharashtra Appellate AAR and AAR denied transition of credit and held ITC cannot be availed on the on the grounds that the Cesses did not get subsumed under GST and cross utilisation of cesses is not allowed. Reliance was placed on the decision of the Delhi High Court’s decision in the case of in Cellular Operators Association of India.
The Delhi Bench of the CESTAT in Bharat Heavy Electricals Ltd. held that the credits earned were a vested right and will not extinguish with the change of law unless there was a specific provision which would debar such refund.
Further the Delhi High Court in the case of Brand Equity Treaties Limited and the P&H High Court in the case of Aderft Technologies have taken a liberal view on the issue and held that Rule 117 of the CGST Rules providing for a time limit for transitioning of accumulated credit from the erstwhile regime is procedural directory in nature. However, the Bombay High Court in the case of Nelco Limited took a juxtaposed view and held that Rule 117 limiting the time to avail transitional ITC is mandatory in nature, which was followed by the Madras High Court in another case P.R. Mani Electronics.
The law makers while introducing GST would have never envisaged the number of contentious issues arising out of the dynamic shift in the indirect tax regime. It is important to note that the decision of the Division Bench of the Madras High Court while holding that input tax credit under the GST regime is a concession and a facility and not a vested right, which is in conflict with the jurisprudence laid down by the Hon’ble Supreme Court in the case of Eicher Motors. The Madras High Court has also erred in relying on Jayam and Co. since it dealt with strict requirements to be met for availing ITC. The point to be considered is that the case in hand pertains to validly earned credits which were neither utilised not lapsed under the erstwhile law, is a vested right which would continue until the facility available thereto runs out.
The retrospective amendment of Section 140 of the CGST Act and the subsequent denial of credit on KKC has been challenged before the High Courts of Telangana, Jharkhand and Karnataka. Thus, significant decisions pertaining to the nature of rights with respect to validly availed credits and their transition are expected soon, however, the conclusion by the Hon’ble Supreme Court will give an end to this loop.
Contributed by Singh & Associates
The above article is authored by Ms. Smita Singh, Partner - Indirect Tax, Customs & Trade.