CASE STUDY

BRIEF FACTS OF THE CASE:

The Deputy Commissioner vide their letter intimated that M/s Mahabali International (hereinafter referred to as Appellant) had availed excess transitional credit as per the assessment order passed for the F.Y. 2017-18 and has not furnished the proof of documents availed by them in TRAN-1. The ITC mainly related to the ITC availed through TRAN-1 Electronic Credit which is bifurcated into the following:

ITC carried forward under Section 140(1): It was alleged that although the Appellant furnished the ER-1 return for June 2017 and the VAT Assessment Order, it failed to produce the underlying invoices and other documentary evidence substantiating the admissibility of the CENVAT/VAT credit carried forward through TRAN-1. Further, in respect of the VAT credit, it was alleged that the Appellant had not obtained verification from the VAT authorities regarding the finality of the assessment order and non-grant of refund.
Unavailed credit on capital goods under Section 140(2): The Department observed that the Appellant had availed only 50% of the CENVAT credit on capital goods under the erstwhile law and claimed the balance 50% through TRAN-1. However, it was alleged that the Appellant had failed to furnish invoices in respect of most of the capital goods and, therefore, had not sufficiently established the admissibility of such transitional credit.
Credit relating to goods in transit under Section 140(5): It was alleged that the Appellant had not furnished complete declarations and documentary evidence to establish that the goods covered under the relevant invoices were received on or after the appointed day invoices were recorded in their books of account within a period of thirty days from the appointed day. There is no mention of date of entry of goods in the business place of the Appellant from which it can be confirmed that the said goods were received by them on what date and time. The Department, therefore, questioned the fulfilment of the conditions prescribed under Section 140(5) and Rule 117 of the CGST Rules, 2017.

Consequently, a Show cause Notice was issued proposing recovery of demand of tax along with applicable interest and penalty under Section 74 read with Section 122(2)(b) of CGST Act. The submissions made by the appellant in the reply were not considered and Order in Original was passed to confirm the demand. Being aggrieved by the order, appellant preferred an appeal before Hon’ble Commissioner (Appeals).
CA Pradeep Jain, Authorised representative of the Appellant appeared for the personal hearing to present the submissions and relevant explanations on behalf of the Appellant.

Key issues covered in the case:

Whether Transitional credit can be disallowed on the grounds of

non-submission of invoices pertaining to credit furnished in the ER-1 return for June 2017
non-submission of verification report of VAT department for excess paid VAT
Non submission corroborative evidences to prove that 50% of credit admissible to them under the erstwhile law and remaining in the existing law .
Non submission of prove that the invoices pertaining to the goods in transit recorded in their books of account within a period of thirty days

Submissions by Appellant:

CA. Pradeep Jainsubmitted the following contentions: -
On issue of Credit related to credit of Central Excise duty carried forwarded through Excise Return for the month of June-2017

That the transitional credit related to ITC of Central Excise Duty has been taken as closing balance of ER-1 return. The closing balance is some random figure comprising of opening balance plus credit taken on various types of inputs, capital goods and input services as reduced by credit utilized for payment of Excise Duty. To substantiate this fact, appellant furnished the copy of ER-1 return. Further, it is impossible for the appellant to segregate the closing balances of ER-1 and find the relevant invoices as there is no enabling mechanism in this regard. Therefore, the demand is liable to be dropped in view of Maxim-lex non cogit ad impossibilia.

On issue of Credit related to VAT credit carried forwarded through assessment order

With regards to the credit of VAT amounting it was contended the appellant could only provide the copy of VAT return filed by them, which has been duly provided by them. Further, that the appellant is not authorized to submit the verification report from the VAT department. Appellant cannot be penalized for non-receipt of verification report from the VAT department which is beyond the control of the appellant. Therefore, expecting the documents which the appellant is not authorised is beyond his control. Thus, extending the benefit of Maxim-lex non cogit ad impossibilia the impugned order should be set aside.

On issue of Credit related to 50% of credit of capital goods under section 140(2)

With regards to the 50% ITC of capital goods, it was submitted that the impugned order has affirmed that the copy of invoices submitted by them has all the details about the goods on which input tax credit has been availed. This invoice contains the tariff heading, description of goods, value, amount of excise duty, name and address of the supplier. Further, copy of RG-23 C part II was provided which substantiates the receipt of capital goods. Thus, there is no doubt about the fact of the receipt of capital goods. Further, that the said capital goods fall under tariff heading 84602910 which is tariff heading of heavy-duty grinding machine. In this regard, it is worthwhile to mention that chapter 84 covers the various types of machinery which fall in the definition of capital goods as provided in the erstwhile Central Excise Act 1944 and CGST Act 2017. Thus, the invoice itself was evidence of the fact that the capital goods were purchased on which credit is undoubtedly admissible.

On issue of Credit related to credit of Central Excise duty paid goods in transit under section 140(5)

With regard to the credit of excise duty paid on capital goods in transit, appellant contended that this ITC pertains to three invoices. Copy of ledger of account of the supplier and invoice of the transporter, L/R copy ,Weighment slip have been provided to substantiate the fact that the goods were duly received and accounted for by the appellant within 30 days of the appointed day. Therefore, the transitional ITC should be allowed, and the impugned order should be set aside.

Impugned Notice issued beyond Jurisdiction: -

In accordance with the Circular no. 31/05/2018-GST dated 09.02.2018, the Superintendent can issue SCN only if the amount involved in the SCN is upto 10 lakhs. However, as the amount involved in the instant notice is more than 10 lakhs, the issuance of show cause notice is beyond jurisdiction and therefore void ab initio. In alignment with above, corrigendum issued to change the order passing authority cannot remove the defect of the issuance of the Show Cause Notice.

Demand of interest is not sustainable:

That in view of the above made submissions, as the demand of tax itself is not sustainable, therefore, the question of paying interest does not arise at all.

Demand of Penalty under Section 74 of CGST Act 2017 is not tenable:-

That impugned order has been passed by invoking the provisions of Section 74 of the CGST Act 2017. For this reference was made to the Section 74 . Thus, Section 74 itself makes it clear that there is requirement of two conditions for invoking Section 74:

There is a Non-payment or short payment of tax or wrong availment of ITC or erroneous refund or the said non-payment or short payment and presence of wilful misstatement or suppression of facts with intent to evade payment of tax.

For this reliance was placed upon the decision of Hindustan Steel v. State of Orissa [1978 2 ELT J 159 (Supreme Court)], Commissioner of Sales Tax, in which it was held that an order imposing penalty for failure to meet statutory obligation is a result of proceedings which are quasi judicial in nature and penalty should not ordinarily be imposed upon the person acted deliberately in defiance of law.

Judgement & Findings:

Based on the submissions given by the appellant, the Appellate Authority observed the following findings: -
Section 140(1) does not mandates requirement of furnishing copy of invoices:-

With regard to the transitional credit taken as per their closing balance of RE-1 return for the Month of June-2017, it was observed that the proceedings of adjudicating authority solely lies upon the rejection of ITC due to the non-production of copy of invoices. However, on detailed analysis of the Section 140(1), it was observed that the requirement contemplated under Section 140(1) of the CGST Act 2017 is limited to the existence of eligible CENVAT credit duly carried forward in the return relating to the period ending immediately preceding the appointed day furnished under the existing law. Further that the statute does not mandates production of invoices as a pre-condition for transition of such carried forward credit, where the same already stands reflected in the statutory return filed under the erstwhile law. That the position may also be understood from the settled practice under GST, wherein the ITC carried forward in the GSTR-9 returns is ordinarily accepted as a valid carried forward ITC for subsequent period. The department does not insist upon production of invoice-wise details for permitting such carry forward ITC.
Further it was observed that once credit has been validly self-assessed and carried forward in a statutory return filed under the erstwhile regime, the same attains a presumption of correctness under specifically rebutted by cogent evidence. Mere insistence upon production of underlying invoices, in absence of any statutory mandate or any specific allegation demonstrating ineligibility of such credit, cannot constitute a valid ground for denial of transitional credit. The transitional mechanism under Section 140 is intended to ensure seamless flow of eligible credit into the GST regime and cannot be frustrated by importing conditions which have not been specified/prescribed under the statute.

Appellant produced VAT assessment order passed by the competent authority which substantiates the excess VAT paid:-

With regard to credit of SGST, that the adjudicating authority itself has categorically recorded in his order that the appellant had wrongly carried forward SGST credit in Table 5(c) of TRAN-1.
With respect to the remaining disputed credit, appellant has produced the VAT assessment order passed by the competent VAT authority wherein net excess VAT paid stood determined in favour of the appellant. The transitional credit was availed on the strength of the said statutory assessment order. Thus, rejection of this credit by the adjudicating authority was merely on the basis of presumptions. Such reasoning is speculative in nature and was not supported by any cogent evidence.
Along with that, there has been no material has been brought on record to establish that the said VAT assessment order was ever rectified, modified, set aside or that any refund against the said excess VAT was actually sanctioned to the appellant. In absence of any such concrete evidence, denial of transitional credit merely on presumptions possibilities cannot be sustained in law. A statutory assessment order, passed by the competent VAT authority carries legal sanctity and remains valid and enforceable.

There is no alternative mechanism to utilise the remaining ITC relating to the capital goods received during the period April 2017 to June 2017:-

It was held that the adjudicating authority itself has accepted the fact that appellant is in possession of one invoice relating to capital good for which they had already recorded in R.G. 23 C Part II register on capital goods under the existing law. The appellant has already availed 50 % of the credit on the capital goods received during the period April 17 to June 17. Therefore, the remaining 50% credit can be carry-forwarded by the appellant as CGST in TRAN-1 as per Section 140(2) of CGST Act 2017. However, the same was rejected by the adjudicating authority. For this reliance was placed upon the Rule 4(2)(a) and Rule 4(2)(b) of the CENVAT Credit Rules 2001 and it was held that statutory scheme itself permitted availment of only 50% CENVAT credit in the year of receipt of capital goods and the balance 50% in the succeeding financial year. Hence, once the adjudicating authority has accepted and recorded that the appellant had duly availed 50% credit during the period April 2017 to June 2017 under the Existing law, the admissibility of the remaining 50% automatically and mandatorily follows the provision specified. Further it was held that with the GST regime coming into effect from 01.07.2017, the appellant could not have availed such balance credit under the former law in the subsequent F.Y. Hence, the only statutory mechanism left with the appellant is to carry forward the same.

Goods were received within 30 days of the appointed day and the carry forwarding of credit on such goods is Revenue Neutral:-

With regard to the credit of CGST related to credit of Central Excise Duty paid goods in transit under Section 140(5) of the CGST Act 2017, appellant submitted copy of three invoices along with ledger account, transporter receipt, LR copy, Truck weighing slip to substantiate the fact that the goods were duly received and accounted by them within 30 days of the appointed day. Further, order passed by the adjudicating authority was referred and it was observed that sole ground for rejection of the said credit is pertaining to non-declaration and descriptions of the said credit in the FORM TRAN-1 as per the provisions of the Rule 117(2)(C) of the CGST Rules 2017. On perusal of the documents furnished by the appellant, it is evident that the material which was dispatched on 30.06.2017 cannot be received on the same day, but the same is received within 30 days i.e. 04.07.2017 which is substantiated by the weighbridge receipt dated 04.07.2017.
Along with that with regard to the declaration required as per provision to Rule 117(2)(c) of the CGST Rules 2017 , it was held that procedure adopted by the appellant was not in strict conformity with the prescribed provisions. However, the situation is found to be revenue neutral in as much as the appellant had claimed the transitional credit on the goods which was received after the appointed day. Consequently, no loss of revenue has been caused to the respondent. Further that the procedural irregularities, particularly during the initial implementation of the GST regime, are liable to be condoned where there is neither any apparent loss of revenue nor any undue benefit accrued to the appellant as is evident in the present case.

Thus, it was held that the order passed by the adjudicating authority is set aside.

AUTHOR’s COMMENT:

This judgement re-enforces the settled principle of law that ITC should be allowed seamlessly and taxpayers cannot be denied such genuine and allowable ITC merely on procedural defects or non-production of invoices where such production of documentary evidence is an impossible task. Further, this judgement re-ensures the legal Maxim- lex non cogit ad impossibilia that taxpayers cant be forced to do the impossible task. The decision is significant in emphasizing that tax authorities must undertake a substantive and objective examination of the statutory provisions and evidence, rather than disallowing credit on mere assumptions, conjectures, or by imposing additional requirements not contemplated under the law.
Further, in cases involving the transitional phase of GST implementation, particularly where there is no loss of revenue or undue benefit to the taxpayer, procedural irregularities deserve a liberal and pragmatic approach. Most importantly, the judgment underscores that where the taxpayer furnishes sufficient documentary evidence and cogent explanations, the department is duty-bound to examine the same objectively and drop the demand in the absence of any contrary evidence. This reinstates the trust of the taxpayers in the appellate remedy available with the taxpayers.

CA Pradeep Jain_

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PJ case law/2026-27/09