In an unprecedented decision, the Delhi High Court in the case of Brand Equity Treaties Limited v Union of India and Another (Writ Petition Civil No 11040 of 2018) has held the credit of taxes paid on inputs to be a vested right. In the lead petition (which was argued by us), the Court has concluded that the time limit prescribed under Rule 117 of Central Goods and Services Tax Rules, 2017 (CGST Rules) is directory and not mandatory. In absence of any specific statutory limitation under the Central Goods and Service Tax Act 2017 (CGST Act), the Court has read down the above provision of the CGST Rules and pragmatically declared that the time limit of 3 years under the residuary provisions of the Limitation Act 1963 (Limitation Act) would apply.
The indirect tax regime in India witnessed a paradigm shift with introduction of the goods and services tax (GST). Plethora of central and state levies including the Central excise, Service tax and value added taxes were subsumed and replaced with a unified levy. To enable smooth transition, the new regime entitled the taxpayers to carry forward the amount of CENVAT credit accrued till 30 June 2017, i.e. the last day before the introduction of GST, in the manner prescribed by filing a declaration in form GST TRAN-1 (TRAN-1). The CGST Rules prescribed a time limit of 90 days for such transition, which was extended only in case of technical glitches. Several taxpayers, including the Petitioner (in the present case), could not file the TRAN-1 declaration and did not fall within the category of system fault or technical glitches. The Petitioner approached the Delhi High Court under its writ jurisdiction to impugn the arbitrary time limit imposed under Rule 117 for carrying forward the transitional credits due to missing the deadline prescribed under Rule 117.
Decision of the Court
The Petitioner primarily contended Rule 117 to be in contravention to Section 174(2)(c) of the CGST Act, since it curtailed the right of the Petitioner for claiming credits legitimately availed under the erstwhile law. It was contended that it had fulfilled all conditions mentioned under the CENVAT Credit Rules 2004 for availing the credit and had duly reflected the credit in the statutory returns filed on time. Hence, the transitional credit became a vested right which was absolute.
The Petitioners further contended that the accumulated CENVAT credit was a property protected by Article 300A of the Constitution. Thus, the credit which had legitimately accrued to the Petitioner cannot be denied by framing incongruous rules without there being a substantive provision in this regard under the CGST Act.
While evaluating the facts and circumstances, the Court observed that:
- The transition of tax credits to GST regime was by way of filing the TRAN-1 declaration electronically and for which the prescribed date was extended for technical glitches by way of several notifications.
- Several taxpayers were unable to file the form due to inefficiencies of the GSTN portal which was beyond the control of the taxpayers.
- The government sought to condone the delay in TRAN-1 filing only for those taxpayers which faced technical glitch at the time of filing.
- Technical glitch was not defined but what the government contemplated was to cover those cases wherein the taxpayers faced issues on GSTN portal only.
In view of the above, the Court accepted the contentions of the Petitioners and held as under:
- The CENVAT credit which stood accrued and vested was the property of the taxpayer and was constitutionally protected under Article 300A of the Constitution.
- The GST Act enabled all taxpayers registered thereunder to transition legitimate CENVAT credit. The vested right of the taxpayers which was constitutionally protected could not be curtailed by a delegated legislation i.e., CGST Rules, without any overarching provision in the parent statute.
- Provisions of Rule 117 have to be read down as being directory in nature, insofar as it prescribed the time-limit for transitioning of credit and therefore, it would not result in the forfeiture of taxpayers' rights.
- In absence of any specific provisions on time limit under the CGST Act, the residuary provisions of the Limitation Act which prescribe a limitation period of 3 years, should be applied. A period of 3 years from the appointed date would be the maximum period for availing transitional credit.
- The benefit of this judgement should not be limited only to the petitioners but extend to all taxpayers who were unable to file the TRAN-1.
The present decision is significant for taxpayers across the length and breadth of the nation as it entitles them the benefit from legitimately acquired property. It has come at an opportune time when all taxpayers are struggling from the economic crisis on account of Covid-19 lockdown and are facing liquidity crunch. While the Court has extended the benefit of this judgement to all taxpayers facing TRAN-1 filing issues, its availability to those who are registered outside Delhi or even those whose plea were rejected in past by jurisdictional High Courts will need to be evaluated as the GST authorities in other jurisdictions may seek to deny this benefit. Finally, the decision attains immense significance as it is for the first time that the limitation period prescribed under the Limitation Act is made applicable to the GST provisions. It is hoped that the taxpayers who missed the benefit will get the desired credit, based on this landmark decision.
Originally published 6 May 2020.
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