Thursday 7 November 2019

Madras High Court allows accumulated credit of cesses from CENVAT regime to be transitioned to GST

Facts
  • The issue involved whether unutilised and accumulated CENVAT credit of the cesses (namely Education Cess, Senior and Higher Education Cess and Krishi Kalyan Cess collectively referred to as “cesses”) can be transitioned and subsequently utilised for paying GST.
  • The claim for transition was rejected on the ground that the Explanations to section 140 of the CGST Act, 2017 (CGST Act) do not include cesses as “duties and taxes” eligible to be carried forward to GST.
  • The taxpayer approached the Madras High Court via a writ with a prayer to quash the order of rejection and for direction towards carry forward of cesses.1

High Court’s decision
The Madras High Court upon examining a plethora of judgements and while referring mainly to the Supreme Court and Delhi High Court’s decisions in Eicher Motors2 and Cellular Operators Association of India3 respectively, held that the credit of the cesses could be transitioned and utilised for payment under the GST. The High Court decided in favour of the taxpayer, challenging the denial of carry forward of credit of cesses for the following reasons:
  • The intention of the Government, while introducing GST, was to provide a seamless model for transitioning all CENVAT credits hitherto availed by taxpayer under the erstwhile law by subsummation of historical taxes.
  • Credits continue to be available till such time that they are expressly stated to have lapsed by the statute. Additionally, the Revenue was not able to provide any mention of a policy document by Central Board of Indirect Taxes and Customs indicating complete lapse of such cess credit.
  • Availment of credit and the utilisation thereof is a substantive right of the taxpayer and should be denied only in the event of an express legal prohibition to this effect.
  • Sections 140(1) and 140(8) of the CGST Act allow transition of credit carried forward in a return furnished under the erstwhile law, subject to fulfilment of certain conditions. The credit of cesses reflected in the return cannot be denied in the event all such conditions are satisfied by the taxpayer.

TBM   comments
This decision of the Madras High Court is based on the principles of vested rights accruing to a taxpayer to avail credit and the seamless flow of credit as envisaged under GST, in the absence of specific provisions providing for lapse of credit. However, the judgment does not clearly examine the implication of Explanation 3 to section 140 of the CGST Act that came into force from 1 February 2019 with retrospective effect from 1 July 2017. Explanation 3 categorically states that the credit of cesses would not be allowed as transitional credit under GST. Accordingly, the Revenue could still continue to deny transition of credit of the cesses and further litigate this issue.

1 Writ Petition No.4773 of 2018 & WMP Nos.5916 & 13148 of 2018
2  Eicher Motors Limited & Anr. v. Union of India [1999] (106) E.L.T. 3 (SC)
3  Cellular Operators Association of India & Others v. Union of India [W.P (Civil) No. 7837 of 2016]

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