One of the most controversial legal issues in India has been with respect to the power with the Government to make retrospective amendments in taxing statutes. This trend of retrospectivity in statutes was first stirred in the case of Chhotabhai v Union1, wherein through a retrospective amendment duty was sought to be imposed on manufactured tobacco from the date of the introduction of the Bill and not from the date in which the law came into force. The Supreme Court validated the act on the principle that retrospective amendments are brought into effect to correct earlier flaws which defeated the purpose of the legislation in the first place. Among the various cases leading to retrospective amendments, a landmark judgement which shook the industry was of Vodafone International Holdings BV vs. Union of India & Anr.2 ('Vodafone Case'). The Hon'ble Supreme Court held the case in favour of Vodafone holding that the transaction in question could not be taxed under the Income Tax Act, 1961 (the 'IT Act'). Consequent to the judgement, the provisions of IT Act were amended retrospectively, such that the transaction under question could be subjected to tax within India. Such a retrospective amendment resulted in a negative impact on the foreign investment in India and the government was faced with major backlash.
Pursuant to the Vodafone case, there were immense controversies on fairness of imposing tax implications with retrospective effect. It is an undisputed fact that business decisions are arranged upon the tax law prevalent at the time of taking decision and it is impractical to organize or plan for present activities basis a future law that may arise. The tensions with respect to retrospective amendments were narrowed down to a few basic principles by the Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Vatika Township3. In the said case, the Court laid down general principles concerning retrospectivity of legislations. By doing so, it provided a much needed blanket test for scrutinizing validity of legislations brought into effect retrospectively.
Retrospective amendments tend to modify vested rights or impose obligations which cause unnecessary financial burden. Of late, one of the pressing issue under the Goods and Services Tax ('GST') has been of transitional credit. In terms of Section 140 of the Central Goods and Services Tax Act, 2017 (the 'CGST Act'), a registered person is allowed to carry forward eligible duties from the erstwhile regime to the GST regime "in such manner as prescribed". The manner to avail transitional credit was provided in Rule 117 of the Central Goods and Services Tax Rules, 2017 (the 'CGST Rules'), which also sought to impose a time limit to carry forward the transitional credit.
Various writs were filed before High Courts challenging this aspect of time limit restricting carry forward of transitional credit on the basis that the act did not empower the rules to provide for any time limit. Most Courts provided relief whereby, the department was directed to provide opportunity to all registered taxpayers to file requisite form for carry forward of duties from the erstwhile regime. One such favourable judgement arising of High Court of Punjab & Haryana4 was further challenged before the Hon'ble Supreme Court however, the Court refused to divulge into the matter and dismissed the case5.
In the meanwhile, Section 140 of the CGST Act was amended vide Finance Act, 2020 whereby, the CGST Act was amended to allow rules to 'prescribe a time limit' in addition to the manner for the transition of eligible duties. The amendment was to be made applicable retrospectively from 01.07.2017 however; the amendment was not immediately notified. During the same time, various cases were pending before different High Courts on the issue of transitional credit. One such case was that of Brand Equity Treaties & Ors. vs. Union of India6 ('Brand Equity'). The Delhi High Court in this case categorically held that transitional credit is an accrued and vested property of the Assessee which could not be taken away. Additionally, the Court came on very strong and held that Rule 117 of the CGST Act is to be read down as being directory in nature, insofar as it prescribes the time-limit for transitioning of credit. Immediately after the judgement rendered by the Delhi High Court, the government on 18.05.2020 vide Notification No. 43/2020 – Central Tax dt. 16.05.20207, notified the retrospective amendment in Section 140 of the CGST Act. Consequently, the department filed a petition before the Hon'ble Supreme Court of India against the Delhi High Court judgement.
Since then, speculations have been rife on whether the amendment would apply to judgements rendered in favour of registered taxpayers prior to the amendment being notified and also as to whether the Courts would use their power of judicial review to invalidate such a draconian retrospective amendment on the basis of unreasonableness. The question of applicability of the retrospective amendments on prior judgements was answered by the Delhi High Court in the case of SKH sheet metals components vs. Union of India and ors.8, wherein the Court held that the decision in Brand Equity did not entirely rest on the fact that the CGST Act did not prescribe for any time limit for availing the transition of the input tax credit. There were several other grounds and reasons enumerated and discussed in the decision, that continue to apply with full rigour even today, regardless of amendment to Section 140 of the CGST Act. Furthermore, the Hon'ble Supreme Court vide judgement dt. 03.06.2020 in the case of Union of India & Ors. vs. Chogori India Retail Ltd9., did not interfere with the judgement of the Delhi High Court10 whereby the Court had directed the department to reopen the portal or allow manual filing of form TRAN-1. Furthermore, it is a well settled legal position that a Court's decision must always bind unless the conditions on which it is based are so fundamentally altered that the decision could not have been given in the altered circumstances11. Thereby, it can be inferred that the retrospective amendments tend to not apply on judgements rendered prior to date on which the amendment is notified.
As for the latter question i.e. the validity of the retrospective amendment, it is trite to note that a legislative amendment can be held to be valid only in cases where the intent is to cure inadvertent defects. Time and again the courts have held that the legislature must recognize the concept of separation of powers and not encroach upon power vested with the judiciary in so much as it aims to bring into effect legislative amendments with retrospective effect in a manner so as to nullify the effect of a decision of the Court12. Likewise, Courts have consistently held that retrospective amendment maybe treated as 'unreasonable' when it tries to take away accrued rights and/or is against Article 14 of the Indian Constitution, whereby it tends to create disparity among registered taxpayers.
1. 1962 Supp 2 SCR 1
2. (2012) 6 SCC 613
7. https://www.cbic.gov.in/resources//htdocs-cbec/gst/notfctn-43-central-tax-english-2020.pdf (assessed on 18.06.2020)
11. Prithvi Cottons case 1969 2 SCC 283
12. Civil Appeal No. 5793 OF 2008
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