Case- M/s. P.R.Mani Electronics Vs Union of India (Madras HC) Decision dated 13th July 2020
Petitioner is a proprietary concern involved in the retail trade of mobile phones, electrical, electronic, and other items. Earlier, Petitioner was registered as a dealer under the Tamil Nadu Value Added Tax Act, 2006 (the TNVAT Act) and, upon the coming into force of the CGST Act, the Integrated Goods and Services Tax Act, 2017 (the IGST Act) and the State Goods and Services Act, 2017 (the SGST Act) on 01.07.2017, the Petitioner obtained registrations under the GST laws.
When CGST and SGST Acts were introduced, as a transitional measure, carry forward of credit for taxes paid on inputs under previously existing indirect tax laws, which may be referred to as transitional ITC (Transitional ITC), was enabled by making provision in respect thereof. In terms thereof, according to Petitioner, he is entitled to avail Transitional ITC of Rs.4,62,496/- under the head of CGST and Rs.7,512/- under the head of SGST under the respective GST laws.
Assessee submitted copy of TRAN-1 before the Department on 29th December 2017 and obtained an acknowledgement-According to Petitioner, on that date, Petitioner’s consultant could not enter the common portal and upload the form. Petitioner was not in possession of any evidence of logging-into common portal. However, Petitioner approached Sales Tax Collection Inspector, in person, on 29.12.2017, and submitted a hard copy of Form GST TRAN-1 and also received an acknowledgment. In spite of repeated follow up with Respondents, thereafter, Petitioner states that there was no response with regard to the entitlement of the Petitioner to Transitional ITC.
2. Ground raised by the Petitioner
a) The words “within such time” were not originally a part of Section 140(1) and were introduced by the Finance Act, 2020 under Notification No.43/2020 dated 16.05.2020 with retrospective effect from July 1, 2017.
b) ITC is in the nature of the Petitioner’s property and, therefore, the Petitioner cannot be deprived of its property merely because the requisite form could not be submitted within the prescribed time limit. The prescription of such time limit in Rule 117 is ultra vires Section 140 and violates Article 14 and 300-A of the Constitution of India in as much as it deprives the Petitioner of its property by way of ITC. (Comment-This ground was not later on pressed upon by the Petitioner)
c) The tax authorities were fully cognizant of the fact that registered persons were unable to submit the on line declaration within the prescribed period on account of technical glitches therefore, time limit was subsequently extended by inserting Sub Rule 1-A in Rule 117. The said provision itself states that it is introduced so as to enable submission of declaration by persons who could not submit the same within previously prescribed time limit on account of technical difficulties in the common portal. As per the learned counsel, this clearly indicates that the provision is intended to be directory and not mandatory notwithstanding the use of the word “shall” in Rule 117(1).
Relied upon Judgement-Micromax Informatics Ltd. v. Union of India, WP(C) No.196 of 2019 (Micromax Informatic)
3. Contention by the Respondents
ITC is in the nature of a concession granted to registered persons and, therefore any conditions, including time limits, subject to which such concessions are granted should be enforced strictly. In other words, concessions cannot be availed of unless the conditions relating thereto are fully complied with and time limit in Rule 117 should also be construed as mandatory.
Relied upon Judgements-
Jayam and Company v. Assistant Commissioner and another, (2016) 15 SCC 125
ALD Automotive Private Limited v. Commercial Tax Officer, now upgraded as Assistant Commissioner(ct) and others, (2019) 13 SCC 225
4. Observation by Hon’ble High Court
a) As stated earlier, the rule making power is contained in Section 164, which is couched in wide terms, and enables the Government to frame rules to give effect to the provisions of the Act and, in particular, to make rules for matters that are required to be prescribed by the CGST Act. Interestingly, the power to frame rules with retrospective effect is also conferred subject to the limitation that it should not pre-date the date of entry into force of the CGST Act. Pursuant thereto, Rule 117 was framed whereby a time limit was fixed for submitting the on line Form GST TRAN -1.
By Finance Act of 2020, words “within such time” were introduced in Section 140, with retrospective effect from 01.07.2020, thereby conferring expressly the power to prescribe time limits in Section 140 even without relying entirely on the generic Section 164. In this statutory context, Hon’ble Court concluded that Rule 117 of the CGST Rules is intra vires Section 140 of the CGST Act.
b) Judgement Referred for Time Limit prescribed under the Statue for claiming Input Tax Credit
- Judgement referred of Apex Court for validity of the conditions prescribed for claim of Credit
Case-1-Jayam and Company v. Assistant Commissioner and another, (2016) 15 SCC 125 (Jayam)- Hon’ble Supreme Court in the give case, albeit in context of TNVAT Act, wherein Hon’ble Supreme Court categorically concluded that ITC is a form of concession provided by the legislature and that it can only be availed of by satisfying prescribed conditions.
Case-2-ALD Automotive Private Limited v. Commercial Tax Officer, now upgraded as Assistant Commissioner(ct) and others, (2019) 13 SCC 225-Section 19(11) of TNVAT Act, 2017 also pertained to time limit for claiming ITC and uses the word “shall”. After examining the language of Section 19(11) and the context, including the object and design of the statute, the Hon’ble Supreme Court concluded that the time limit specified in Section 19(11) is mandatory.
- Judgement referred of Other High Courts for Section 140 read with Rule 117 Favoring the Petitioner-
Case-1-Blue Bird Pune Pvt. Ltd. v. Union of India [2019 SC Online Del 9250]- The said decision was based on earlier judgments of the Delhi High Court wherein it was observed that the GST system is in a “trial and error phase”.
Case-2-SKH Sheet Metals Components v. Union of India [2020 SCC online Del 650]- Mandatory or directory nature of Rule 117 was considered and Court concluded that it is directory both on the basis that the CGST Act does not specify the consequences of not complying with the time limit and because construing it as mandatory would prejudice the assessee.
Case-3- Brand Equity Treaties Ltd. v. Union of India [(2020) Taxmann.com 415]- CENVAT credit had accrued and vested in the assessee and is, consequently, property of the assessee. Brand Treaty Equities was decided prior to the amendment to Section 140 of the CGST Act whereby the words “within such time” were introduced. On the other hand, SKH Sheet Metals Components was decided after the amendment; nonetheless, the Delhi High Court concluded that the amendment settles the question as to the power to frame rules fixing the time limit for filing the declaration but does not fix a time limit for transitioning credit.
- Judgement referred of Other High Courts for Section 140 read with Rule 117 Favoring the Respondent-
Case-1- Nelco Limited v. Union of India [2020 SCC Online Bom 437] (Nelco)- The case was decided before Section 140 was amended. Even so, Court concluded that Section 164 of the CGST Act is wide enough to enable the framing of rules fixing a time limit to claim Transitional ITC. In addition, the Court concluded that ITC is a concession which is required to be availed of within the prescribed time, failing which it would lapse.
Case-2- Willowood Chemicals Ltd. v. Union of India [2014 (306) ELT 551]-Transitional ITC is a concession and that Rule 117 is intra vires Section 140 of the CGST Act.
c) ITC is a concession and not a vested right and prior to retrospective amendment to Section 140, Section 164 is widely and provides rule making powers except that such rules should be for the purpose of giving effect to the provisions of the CGST Act
ITC is not a vested Right-In light of judgment of Supreme Court in Jayam, contention of learned counsel for Petitioner to the effect that ITC is the property of the Petitioner cannot be countenanced and ITC has to be construed as a concession. In addition, it is evident that ITC cannot be availed of without complying with the conditions prescribed in relation thereto.
Prior to retrospective amendment to Section 140, power to frame rules for fixing a time limit in Rule 117 was “arguably” not traceable but section 164 is widely worded and provides rule making powers except that such rules should be for the purpose of giving effect to the provisions of the CGST Act – Prior to the amendment to Section 140 of the CGST Act, the power to frame rules fixing a time limit was arguably not traceable to the unamended Section 140 of the CGST Act, which contained the words “in such manner as may be prescribed”, because such words have been construed by the Supreme Court in cases such as Sales Tax Officer Ponkuppam v. K.I. Abraham [(1967) 3 SCR 518] as not conferring the power to prescribe a time limit. A fortiori, upon amendment of Section 140 by introducing the words “within such time”, the power to frame rules fixing time limits to avail Transitional ITC is settled conclusively.
In view of Hon’ble Court, Section 164, is widely worded and imposes no fetters on rule making powers except that such rules should be for the purpose of giving effect to the provisions of the CGST Act.
In SKH Sheet Metals, Delhi High Court concluded, in paragraph 26, that the statute had not fixed a time limit for transitioning credit by also referring to the repeated extensions of time. Given the fact that the power to prescribe a time limit is expressly incorporated in Section 140, which deals with Transitional ITC, and Rule 117 fixes such a time limit, Hon’ble High Court did not subscribe to the view. The fact that such time limit may be extended under circumstances specified in Rule 117, including Rule 117A, does not lead to the sequitur that there is no time limit for transitioning credit
d) Claim of Input Tax Credit cannot be kept open for an indefinite time and a reference to the time limit under section 16(4) of CGST Act, 2017
Provision of Section 16(4) is indicative of legislative intent to impose time limits for availing ITC. Besides, Section 19(3)(d) of the TNVAT Act itself imposed a time limit for availing ITC and further provided that it would lapse upon expiry of such time limit. In view of Hon’ble Court, keeping the above statutory backdrop in mind, in the context of Transitional ITC, the case for a time limit is compelling and disregarding the time limit and permitting a party to avail Transitional ITC, in perpetuity, would render the provision unworkable.
Hon’ble High Court concurred with conclusion of Bombay High Court in Nelco that both ITC and Transitional ITC cannot be availed of except within the stipulated time limit. Such time limits may, however be extended through statutory intervention.
In SKH Sheet Metals, Delhi High Court observed that ITC is the heart and soul of GST legislations in as much as such legislations are designed to prevent the cascading of taxes. Hon’ble Court agreed with the position and said that there can be no quarrel with this conceptual position; however, it is not a logical corollary thereof that time limits for availing ITC and, in particular, Transitional ITC, are inimical to the object and purpose of the statute.
e) Whether Compliance of Rule 117 is to be treated as mandatory or Directory
- How to determine a provision is directory or mandatory
Hon’ble Court referred to the provisions of how to determine whether a provision is directory or mandatory. Following were the rules provided for construing a provision mandatory or directory referring to the below mentioned judgements-
f) Use of peremptory or negative language, which raises a rebuttable presumption that the provision is mandatory;
g) Object and purpose of statute and the provision concerned;
h) Stipulation or otherwise of the consequences of non-compliance;
i) Whether substantive rights are affected by non-compliance;
j) Whether the time limits are in relation to the exercise of rights or availing of concessions; or
k) Whether they relate to the performance of statutory duties
Case-1-Union of India v. A.K. Pandey [(2009) 10 SCC 552] and Bachhan Devi v. Nagar Nigam [(2008) 12 SCC 372]
Case-2- C. Bright v. The District Collector, [2019 SCC Online Mad 2460]
- Why Compliance of Rule 117 is mandatory and no directory
I)The object and purpose of Section 140 clearly warrants the necessity to be finite.
II) ITC has been held to be a concession and not a vested right. In effect, it is a time limit relating to the availing of a concession or benefit.
III) If construed as mandatory, the substantive rights of the assessees would be impacted; equally, if construed as directory, it would adversely impact the Government’s revenue interest, including the predictability thereof.
On weighing all the relevant factors, which may be not be conclusive in isolation, in the balance, it was concluded that the time limit is mandatory and not directory.
I) Rule 117 specifies that return in Form GST TRAN – 1 is required to be filed electronically on the common portal. This requirement is not satisfied by handing over the form in person to the Sales Tax Collection Inspector, Tiruvannamalai. Consequently, in view of Hon’ble Court, Petitioner has completely failed to make out a case to direct the Respondents to permit the Petitioner to file Form GST TRAN -1 and claim the Transitional ITC of Rs.4,70,008/-.
Needless to say, if any dispensations are granted by the tax authorities with regard to availing of Transitional ITC, whether by filing Form GST TRAN-1 or otherwise, and to which the Petitioner may be entitled, this order will not preclude the Petitioner from making a claim for Transitional ITC
In the result, the writ petition was dismissed. Consequently, the connected miscellaneous petition is closed.
The never-ending battle of TRAN-1 credit moves ahead. It is evident that the given matter would only be settled at Apex Court and till then taxpayers of every state are queuing up for decision by Hon’ble Apex Court.
However, most striking feature about judgement is mentioning of time limit of Section 16(4) and linking the time limit with reference to intention of Legislature and Rule 117.
Strictly construing it’s not an opinion about validity of time limit of Section 16(4), therefore might not fall with in the ambit of “obiter dictum”. However more importantly, underlying principle in judgement following precedent laid down by Hon’ble Apex Court regarding validity of time limit to avail Input Tax Credit might become be a ratio decidenti and binding precedent for times to come for Section 16(4). Although the issue for validity of time limit under Section 16(4) would be settling in the times to come but mention of Section 16(4) in the decision vis-à-vis Rule 117 and underlying principle of validity of time limit to be prescribed under the Act for claim of Input Tax Credit would only lend support to the claim for validity of limit in Section 16(4).
Some of the Articles on the subject of Section 140 of CGST Act, 2017 on our website are as follows:
a) Brand Equity Treaties Ltd. v. Union of India  116 taxmann.com 415 (Delhi)- https://gst-online.com/gstcase-122-round-up-of-leading-judgments-of-high-courts-in-april-and-may-2020-on-section-39-50-73-79-132-and-140-of-cgst-act-2017/
b) Nelco Ltd v. Union of India 116 taxmann.com 255 (Bombay)- https://gst-online.com/gstcase-121-round-up-of-leading-judgments-of-high-courts-in-march-2020-on-section-50-73-83-132-and-140-of-cgst-act-2017/
c) Rohan Dyes & Intermediates Ltd. v. Union of India 115 taxmann.com 387 (Gujarat)- https://gst-online.com/gstcase-121-round-up-of-leading-judgments-of-high-courts-in-march-2020-on-section-50-73-83-132-and-140-of-cgst-act-2017/
d) Shree Motors v. Union of India 115 taxmann.com 344 (Rajasthan)- https://gst-online.com/gstcase-121-round-up-of-leading-judgments-of-high-courts-in-march-2020-on-section-50-73-83-132-and-140-of-cgst-act-2017/ e) #GSTCase-55-Gist of Cases on TRAN-1 (Jan-Feb 2019)- Petitioner allowed to take credit on documents evidencing payment of Duty since no documents have been prescribed U/Sec 140(3)(iii) till date, Error in Filing or Non Filing of TRAN-1 due to technical Glitches-https://gst-online.com/petitioner-allowed-to-take-credit-on-documents-evidencing-payment-of-duty-since-no-documents-have-been-prescribed-u-sec-1403iii-till-date/