Enclosed article examines legality of ITC reversal claims in light of recent Madras High Court Judgment in case of Sutherland Global Services.

What is the current status of KKC credits? After the retrospective amendment in CGST Act, 2017. Are these credits dead or merely dormant?

Recently, in Sutherland Global Services Case*, the Madras High Court clarified upon availing of Education Cess (EC), Secondary and Higher Education Cess (SHEC) and Krishi Kaylan Cess (KKC). The case has been summarized below for your reference:-


An ITeS service provider (i.e. taxpayer) was directed to reverse the credits pertaining to EC, SHEC and KKC by assessing officer. The taxpayer challenged the said decision and filed writ petition.


While allowing the writ petition, the High Court observed following:-

  • The intention of the Government was to provide seamless model for transition of all credits availed by taxpayers under erstwhile regime. The benefits that had been permitted to continue in the erstwhile regime were meant to be continued in GST regime.
  • The instructions dated 7th December, 2015 issued by CBEC does not allow utilization of accumulated EC, SHEC but nowhere lapses the credits. Till date, there is no notification/circular/instruction which lapses the credits pertaining to EC, SHEC and KKC. Thus, these credits continue to be available till the time it is specifically lapsed under law.
  • The interpretation of provisions should be on the basis of what is apparent, apart from being strict. The language of section 140(1) and (8) of CGST Act, 2017 allows transition of 'the amount of cenvat credit carried forward in the return relating to the period ending with the date preceding the appointed date' which includes EC, SHEC and KKC.
  • CGST (Amendment) Act, 2018 amended section 140 of CGST Act, 2017 to retrospectively disallow the transaction and carry forward of ES, SHEC and KKC in the GST regime by adding phrase 'eligible duties' after Cenvat Credit. The amendment only restricts carry forward of EC, SHEC and KKC in case of sub-section (1), (3) and (4) of section 140. Accordingly, section 140(8) of CGST Act remains untouched by such amendment which deals with centralized registration.

* Sutherland Global Services Private Ltd. vs. Assist. Commissioner CGST and Central Excise, Writ Petition no. 4773 of 2018

Summing up

  • Initially, at the time of introduction of GST, the transitional provisions permitted carry forward of CENVAT credit into GST regime. One prevalent view was that KKC credit qualified as CENVAT credit and carry forward of the same was permissible.
  • Amicus –Advocates & Solicitors had written trilogy of articles on carry forward of KKC i.e. Transitional credit for Krishi Kalyan Cess - A legal analysis - Part I, Transitional credit for Krishi Kalyan Cess - A legal analysis - Part II and Carrying forward KKC to GST regime – Reflections on recent AAR decision. These articles explained why KKC should be available as transitional credit in accordance with section 140 of CGST Act and rule 117 of CGST Rules.
  • To clear the air, Government introduced retrospective amendment and clarified that only 'eligible duties' could be carried forward under GST. The definition of 'eligible duties' excluded KKC credits and accordingly, utilization of KKC was prohibited by way of retrospective amendment [i.e. CGST (Amendment) Act, 2018]. Therefore, the taxpayers were restricted from utilizing the KKC credits even when they had carried forward the said credits from the erstwhile regime.
  • Madras High Court notes that the retrospective amendment is only restricted to sub-section (1) of section 140 of CGST Act. The definition of 'eligible duties' was originally applicable to sub-section (3) and (4) of Section 140 of CGST Act. Hence, sub-section (8) of section 140 remains untouched by the retrospective amendment, allowing carry forward of KKC credits.
  • However, even after the above judgment, KKC credits remain dormant in taxpayers' electronic credit ledger as the question on utilization of KKC credits under section 140(8) of CGST Act remains unaddressed by the Court. The question is whether KKC credits can lie in electronic credit ledger forever?
  • Recently, Grasim Industries* challenged the retrospective amendment before Gujarat High Court. The Court issued notice to tax authorities seeking clarity on constitutional validity of retrospective amendment disallowing carry forward of cess in GST regime. If favorable, the judgment may have tremendous implications.
  • Hence, in light of the above, taxpayers are advised to carefully examine eligibility of transitional credits and seek expert legal opinion before taking any action of reversal on the credits.

*Grasim Industries Ltd. vs. Union of India, [2017] 75 GST 70 (Gujarat) (MAG)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.