Sutherland Global Services – 2019 (30) G.S.T.L. 628 (High Court – Madras)

Input Tax Credit of EC, SHEC and KKC accrued in the previous tax regime could be carried forward into the GST regime.

Facts: In this case, the Petitioner is a company providing Information Technology enabled services to customers worldwide. Prior to GST, the Petitioner was centralized 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 utilized against turnover from taxable services.

The provisions of Section 140(8) of the CGST Act, 2017 (“CGST Act”) provide for Centralised Registration in respect of all the Petitioners’ units, pan India, and this was reflected in the Tran-1 return filed by it.

The request of the Petitioner for carry forward and utilisation of credit was rejected 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. 

Petitioner’s contentions:

  • Section 140(8) of the CGST Act entitle it to avail utilization 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 utilized.
  • The proviso to Section 140(1) of the CGST Act specifically delineates those circumstances/conditions under which credit availed may not be utilized 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.

Issue: Whether credit of EC, SHEC, and KKC that accrued in the previous tax regime could be carried forward into the GST regime.

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 the 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 operationalized 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 the 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 centralized 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.


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