GST Update No 162 on treatment of service tax paid under RCM in GST era

Transition to GST was not smooth as expected as lot of complexities were faced by the taxpayers on account of various technical glitches on the GST portal. Apart from technical glitches, there were interpretational issues too which haunted the minds of assessees while transformation into new tax regime. To illustrate, one such issue was regarding the eligibility to carry forward balance of Education Cess, Secondary Higher Education Cess and Krishi Kalyan Cess lying in the balance as on 30.06.2017. Another issue that was recently raised before hon’ble Madras High Court in the case of M/S GANGES INTERNATIONAL PRIVATE LTD. V/S THE ASSISTANT COMMISSIONER OF GST & CENTRAL EXCISE was the admissibility of refund of service tax paid under reverse charge mechanism (RCM) post implementation of GST. The outcome of this decision is the subject matter of discussion of our present update. The petitioner is engaged in providing various construction services to Government/ Private parties and was registered under the Service Tax Department. The service tax return for quarter from April 2017 to June 2017 was filed by 15.08.2017. Audit was conducted by CERA wherein it was pointed out that petitioner is liable to pay service tax as per Notification No. 22/2016 w.e.f. 01.04.2016 on services rendered under reverse charge basis for the period for which royalty was already paid by the petitioner to the Government for mining stones. The petitioner, therefore, deposited the amount of service tax along with interest on 31.12.2017. It was contended that since it is input service, credit of service tax shall be available. However, as per transitional provisions u/s 140 to 142 of GST Act, taxpayers were required to file GST TRAN-1 within 90 days from 01.07.2017 which was further extended to 27.12.2017. Since the petitioner paid service tax on 31.12.2017, the petitioner was unable to file TRAN-1 as per Section 140 of GST Act, 2017. The counsel of the petitioner argued that as per Section 142 of the Act, a person can file refund of cenvat credit available to them under “Miscellaneous Transitional Provisions”. It was argued that as the petitioner could not make application u/s 140 of the Act by filing TRAN-1, benefit as per Section 142(3) should not be denied. Further, it was argued that if the credit was accrued in petitioner’s account on 30.06.2017, claim u/s 140 (1) of GST Act, 2017 could have been made. Since the service tax itself was paid as on 31.12.2017, filing TRAN-1 was not possible. The Counsel of the petitioner argued that if the CENVAT credit claim for the period prior to 30.06.2017 can be claimed only if they pertain to the returns furnished in the said period. Further, as no claim accrued in return as on 30.06.2017, petitioner cannot claim refund of cenvat credit under GST. The departmental representative submitted that Section 142(3) of GST Act is related to refund application only. It was contended that to claim refund, Rule 3 & 4 of CENVAT Credit Rules should have been fulfilled wherein one such condition is that the manufacturer cannot take CENVAT credit after 1 year of date of issue of any documents which in the present case already expired. The court held that as per provisions of Section 140(1) of CGST Act, 2017, the credit eligible as on 30.06.2017 should only be carried forward. It was further analyzed looking into the facts of the case that the services although were rendered before 30.06.2017, but payment of service tax was however made in December 2017. It was further held that in case no GST would have been introduced, the petitioner would be able to claim input credit easily. Merely because of transition phase, the petitioner is unable to claim credit. Further, the Court placed emphasis on “Doctrine of Necessity” and placed reliance on Mohapatra and Company and another Vs. State of Orissa and another [1985] 1 SCR 322, (1996) 4 SCC 104, Election Commission of India and another Vs. Dr.Subramaniam Swamy and another and also in (2006) 3 SCC 276 in State of U.P. Vs. Sheo Shanker Lal Srivastava and others, Duncan Agro Industries Limited Vs. Union of India. It was held that as per “Doctrine of Necessity” if there is no provision for a situation in law, the assessee cannot be made remediless and so in the absence of specific provision for the case, the petitioner cannot be denied the substantial benefit of input tax credit. Consequently, the High Court directed to re-consider the application u/s 142(3) of CGST Act, 2017 and pass the decision accordingly. However, it was specified that the claim need not be considered for refund but for permitting the petitioner to carry forward the accrued credit to the electronic credit ledger of the GST regime. The above judgment rendered by the High Court is contrary to the favourable decisions pronounced by the Tribunals. Reference may be made to decision given in the case of FLEXI CAPS AND POLYMERS PVT. LTD. VERSUS COMMISSIONER, CGST & CENTRAL EXCISE-INDORE [2021 (9) TMI 917- CESTAT NEW-DELHI] that has allowed refund of CVD and SAD paid on default in export obligation with respect to imports made under advance license in the GST regime for which availment of credit was not possible. Similarly, refund of service tax paid under RCM on import of software was allowed by the CESTAT in the case of M/S. CIRCOR FLOW TECHNOLOGIES INDIA PRIVATE LTD. V/S THE PRINCIPAL COMMISSIONER OF GST & CENTRAL EXCISE by placing reliance on the decision given in the case of ADFERT TECHNOLOGIES PVT. LTD. VS UOI wherein it was held that transitional credit being a vested right, it cannot be taken away on procedural or technical grounds. The decision of Madras High Court is setback to the assessees as it does not allow the benefit of refund but only directed the department to allow the petitioner to carry forward the accrued credit to the electronic credit ledger in the GST regime. As we all know that availment of input tax credit in the electronic credit ledger is digitized and there being no specific provision for the situation discussed, considerable technical issues may be faced by the petitioner for implementing the said decision of the High Court.

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GST Update No 162 on treatment of service tax paid under RCM in GST era

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