GST UPDATE ON LANDMARK MADRAS HIGH COURT DECISION ALLOWING CARRY FORWARD OF CESSES INTO GST REGIME

The dispute as regards disposal of the balance of Education Cess and SHE Cess was ignited when the said cesses were scrapped by the government in 2015. This is for the reason that according to erstwhile provision contained in Rule 3(7)(b) of the Cenvat Credit Rules, 2004, the cenvat credit of cesses could be utilised only towards payment of such cesses and when the levy of education cess and SHE cess itself was removed, the cenvat credit available of such cesses was also under dispute. This baggage of erstwhile litigation has crept into GST regime too as to whether the balance of education cess, SHE Cess is allowed to be carry forward in the GST regime? The government has from time to time indicated that it is not permissible to carry forward the balance of cesses into GST era and this is evident from the retrospective amendment made in section 140 of the CGST Act, 2017 pertaining to transitional credit and clarifications issued thereon. There are many Advance Rulings and decisions rendered by AAAR denying carry forward of cesses in GST regime, one of them being KANSAI NEROLAC PAINTS LIMITED [2018 (15) G.S.T.L.594 (AAAR-GST)]. However, this issue has also been litigated by the assessee before many High Courts and remains unsettled till date. The issue regarding carry forward of balance of cess is pending before Hon’ble Gujarat High Court in the Case of M/s GRASIM INDUSTRIES LTD. VERSUS UNION OF INDIA [2019(27) G.S.T.L. 322 (GUJ.)]. However, recently, Hon’ble Madras High Court has rendered a landmark decision allowing the carry forward of cesses into the GST regime after analysing the retrospective amendment made in section 140 of the CGST Act, 2017. The said decision namely SUTHERHLAND GLOBAL SERVICES PVT. LTD. VERSUS UNION OF INDIA is analysed in the present update.

Brief Facts:- The issue involved in this Writ Petition was admissibility of the carry forward of various cesses such as education cess, SHE Cess, KKC etc. into the GST regime in light of the retrospective amendment made in section 140 of the CGST Act, 2017. It was contended by the petitioner that there is no provision of lapsing of credit of cesses accumulated in the cenvat register. It was also submitted that the provision of section 140(1) uses the expression “Cenvat Credit” having the same meaning as assigned in Central Excise Act, 1944 and rules thereunder and so the education cess, SHE cess are also covered by “cenvat credit” and should be transitioned in GST regime. It was also contended that the provisions of section 140(8) which pertains to assessees having centralised registration, uses the term “cenvat credit” and not “eligible credit”. Reliance was also placed by the petitioner on the Apex Court decision given in the case of EICHER MOTORS LTD. VERSUS UNION OF INDIA [1999 (106) E.L.T. 3] wherein it was held that Modvat credit lying to the balance of an assessee represented a vested right accrued or acquired by the assessee which cannot be taken away.

Reasoning adopted by Hon’ble High Court:- The hon’ble Madras High Court held analysed the situation be referring to clarifications issued in erstwhile indirect taxation regime. It was concluded that the credit of cesses continues to be available by the assessee till such time it is expressly stated to have been lapsed. It was held that there were many instances available to the government/CBIC when they could have stated that the credit of cesses has lapsed but that has not been done. The High Court held that the credit has been carried forward manually and reflected in the returns from time to time. Having permitted the assessee to carry forward the credit, the authorities cannot now take a stand that such credit is unavailable for use. The provisions of sub-section (1) read with sub-section (8) of section 140, and the Explanation thereunder make it more than clear that all available credit as on the date of transition would be available to an assessee for set off.

The reliance placed by the revenue authorities on the decision of Delhi High Court in the case of Cellular Operators Association of India Versus Union of India was also distinguished on the grounds that the said decision was pronounced in the light of pleading of the assessee to allow utilisation of cess against payment of excise duty/service tax but the High Court held that when such cross utilisation was specifically prohibited earlier, the same could not be allowed now. The said issue is different from the issue under consideration.

The High Court held that the according to section 140(1), the assessee is eligible to carry forward the balance of cesses as far as the conditions prescribed thereon are satisfied. It was also held that the amendment made so as to insert the phrase “eligible duties” after the phrase “cenvat credit” is restricted to section 140(1) and not apply to section 140(8). Explanation (1) defining 'eligible duties' that was originally made applicable only to sub-sections (3) and (4) of Section 140 was extended to cover sub-section (1) as well. However, sub-section (8) of Section 140 remains untouched. Hence, assessee is eligible to carry forward balance of cesses in terms of section 140(8).

Comment:- The battle regarding eligibility to carry forward balance of cesses into GST regime will go a long way as the issue is pending before various High Courts but the judgment discussed above proves as a saviour to assessees who have transitioned the balance of cess to the GST regime. It is pertinent to mention here that although the Hon’ble High Court discussed the amended section 140 but the explanation no. 3 stating that “eligible duties and taxes” excludes any cess remained unnoticed in the judgment. Not only this, the clarification issued vide Circular No. 87/06/2019-GST dated 02.01.2019 clearly stating that no transition of credit of cesses, including cess which is collected as additional duty of customs under sub-section (1) of section 3 of the Customs Tariff Act, 1975, would be allowed in terms of Explanation 3 to section 140 was also not discussed in the judgment as the same was not placed before the Hon’ble Madras High Court. It is probable that the department will challenge this decision before the Apex Court. Nonetheless, we hope that the issue is finally resolved in favour of the assessee but in that case, another issue regarding claiming such credit by the assessees who have not claimed such credit in transitional return or who have already reversed the said credit would crop up, particularly, when there is so much hassle as regards claiming of input tax credit vis a vis reflection in GSTR-2A. It can only be said that transition of cesses into GST would be really a difficult task.

This is solely for educational purpose.

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GST UPDATE ON LANDMARK MADRAS HIGH COURT DECISION ALLOWING CARRY FORWARD OF CESSES INTO GST REGIME

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