In a case of unlawful expropriation of Input Tax Credit, the Delhi High Court last week made serious observations on "the procedural fallibility and shortcomings" of the GST system, even stating that the case demonstrates "how the tax department has miserably fallen short of the expectation".
The issue raised by the Petitioner was that an attempt was made to transition the available credit under the indirect tax structure, as prevailing in India prior to 1st July, 2017 (comprising multifarious duties and taxes imposed by the Centre as well as States), by filing Form TRAN-1. But the electronic credit ledger under the GST laws does not reflect the entire credit. In the words of the bench, "The ITC seems to have vanished in the rigmarole of the statutory GST Forms"
"We have time and again made adverse remarks on the procedural working of the GST system in several decisions. We may just add that we do not derive any pleasure when we make such observations, as comments of the Court affect the reputation of the administration in the country. Such remarks are made only when we are constrained to do so. The case before us is one where there is a complete lack of understanding and fairness on the part of the Tax Department. The fact that Respondents have done nothing to solve the problem faced by the Petitioner, fueled with the adamant stand before us, contributes to skepticism of GST technical infrastructure, which we feel should and can be easily avoided. Only if Respondents were to engage with the taxpayers with a genuine intention to solve the problems, confidence in the system can be built up and such matters would not reach courts", noted the bench of Justices Manmohan and Sanjeev Narula
"Since GST law is a major tax reform in indirect taxation, the difficulties faced in filing of the statutory forms is understandable. In this process, human errors cannot be ruled out and if they occur, the solution is not to criticize the taxpayer for the fault, but instead, the Government should endeavour to find a resolution", noted the Delhi High Court.
The division bench proceeded to state, "We cannot ignore the fact that the necessary Forms under GST are difficult to identify and the Government had to put efforts to assist the citizens in understanding the procedures. Till date, GST awareness campaigns and citizen outreach programmes are in place to acquaint the taxpayers with the GST filing procedures. Particularly, with the entire system being online, the interface between the taxpayers and authorities is entirely electronic. This requires some basic fundamental knowledge for using the technology".
The Court expressed its regret that the tax department failed to address the basic and fundamental problem faced by the Petitioner that occurred while filing a Form, seemingly on account of a bona fide or inadvertent mistake- "Instead of offering a restitutive solution they have stonewalled all the attempts made by the Petitioner The injustice and prejudice caused to the Petitioner is profound and it's disillusionment and despair is evident"
The bench proceeded to state that GST laws required taxpayers to embrace transformative new ways, and that the use of technology can be daunting for many taxpayers who hitherto before, were largely dependent on conventional manual filings of returns. "In order to overcome the resistance to change and encourage transformation and remodeling of the entire accounting structure at taxpayers' end, the electronic mode should be user friendly", it said.
The Division bench continued to observe that Tax laws, as it is, are complex and hard to interpret. Moreover, no matter how well conversant the taxpayers may be with the tax provisions, errors are bound to occur. Therefore, if the tax filing procedures do not provide for an appropriate avenue to correct a bona fide mistake, the same would lead to the taxpayers avoiding compliances.
The Court opined that "the government should support its citizens by making the burden of compliance and payment as simple as possible". It said that the intent and efforts of the Government should be to extend proper assistance, information and education to taxpayers so that they fulfil their obligations, that this should be the critical area of focus in the area of tax administration which would ensure compliance with tax laws and also build confidence amongst taxpayers. It continued to reflect that "Indeed, by explaining the significance of payment of taxes, and the role that a taxpayer plays in building the nation, the Government endeavors to encourage and motivate the citizens to be tax compliant", and that "If we strive to achieve this goal, it is necessary that we must also provide appropriate channels for resolution of their genuine problems". The Court was of the view that A successful resolution, a positive response and an effective, time bound redressal mechanism is crucial for building confidence amongst the taxpayers and for successful tax administration.
The Petitioner, before the Division Bench, asserted that it is entitled to transitional credit of Rs. 6,52,58,081/- comprising of Central Excise Cenvat credit of Rs. 3,86,54,605/-, Service Tax Cenvat credit of Rs. 1,64,79,081/- and Input MVAT credit of Rs. 1,01,24,382/-. In order to avail the credit in the electronic credit ledger under the GST laws, on 27th August, 2017, much before the last date specified by the Central Government, the Petitioner filed a Form prescribed for this purpose, known as 'GST TRAN-1'. However, on submission of the said Form, Petitioner realized that as against the total credit of Rs. 6,52,58,081/-, only Rs. 1,01,24,382/- was reflected on the common GST portal. The CENVAT credit of Rs. 55,13,36,991/- comprising of Central Excise and Service Tax of Rs. 3,86,54,605/- and Rs. 16,47,90,811/- respectively was not displayed in the electronic credit ledger.
Besides, despite incessant correspondences with the respondent authorities, and even with the intervention of the Bombay High Court, the grievance was not resolved.
"When we make a comparison of the figures reflected in the screenshot with those in the statutory returns, it is revealed that the credit which was reflected in Form 231 under the Maharashtra VAT Act of Rs. 10,124,382/- instead of being added to the remaining amount reflected in the tax returns under the Excise Act (ER-1) and Service Tax Act (ST-3), was instead erroneously reflected under the heading "CENVAT Credit admissible as ITC". Thus, for this clerical mistake, there has been short transitioning of the credit, as a result whereof, Petitioner stands to lose huge amount of ITC, totaling to Rs. 5,51,33,699/- that stood vested in it's favour under the erstwhile regime", noted the bench
The Court pointed out the incredulity of the arguments advanced on behalf of the Tax Department- to deny the Petitioner relief sought by them, only explanation alluded to in the counter affidavit is that benefit of the May 5 judgment of this Court in Brand Equity Treaties Limited and Ors. vs. The Union of India and Ors. is no longer available.
"We have no hesitation in reading down the said provision [Rule 117 of CGST Rules, 2017] as being directory in nature, insofar as it prescribes the time-limit for transitioning of credit and therefore, the same would not result in the forfeiture of the rights, in case the credit is not availed within the period prescribed. This however, does not mean that the availing of CENVAT credit can be in perpetuity. Transitory provisions, as the word indicates, have to be given its due meaning. Transition from pre-GST Regime to GST Regime has not been smooth and therefore, what was reasonable in ideal circumstances is not in the current situation. In absence of any specific provisions under the Act, we would have to hold that in terms of the residuary provisions of the Limitation Act, the period of three years should be the guiding principle and thus a period of three years from the appointed date would be the maximum period for availing of such credit", the Court had ruled in the said case.
In the present case, It was argued on behalf of the tax authorities that in view of retrospective amendment to Section 140 of the CGST Act, 2017, introduced by the Finance (Amendment) Act, 2020, there has been a relevant change in circumstances and thus the above-said decision is no longer valid. The power to prescribe a time limit for filing TRAN-1 has been provided by the insertion of words "within such time" in Section 140 with retrospective effect from 1st July, 2017. It has been argued that now that the amendment specifically provides for prescribing a time limit for filing TRAN-1 Form, the period so provided under Rule 117 would have legal sanctity and therefore the factor which weighed with this Court to hold that the limitation period provided under Rule 117 for filing TRAN-1 is merely directory and not mandatory, no longer holds good.
The bench acknowledged that The GST laws framed by the parliament and the state legislatures, recognize the fact that taxpayers had ITC under the existing laws, and provide for elaborate transitional arrangements to save the pending as well future claims relating to existing law made before, on or after the appointed day. In order to achieve this objective, GST laws permit the registered persons to migrate the amount of CENVAT Credit that was carried forward in the returns under the existing laws in the electronic credit ledger under GST laws.
"The stand of the Respondent, in a nutshell, is that since Petitioner has committed this mistake, it ought to suffer for the same. Let us assume that indeed the mistake happened purely on account of a human error, for which Petitioner alone is worthy of blame. Does it mean that for this blunder, the law will provide no restitution and it is a fait accompli for the Petitioner? In our view, that should never be the case and law should provide for a remedial avenue", asserted the bench, employing harsh terminology to say that "the stand of Central Government, focusing on condemning the Petitioner for the clerical mistake and not redressing the grievance, is unsavory and censurable".
The Court iterated that the exactness required in compliance of tax provisions should not be construed so rigidly that permissible flexibility is completely disregarded. "In effect, the ITC has been expropriated without any lawful sanction. The ITC that was shown in the returns under the existing laws were taxes that stood paid to the respective Governments for goods or services and were available for adjustment or utilization in accordance with law. Now, on account of a clerical mistake the said taxes paid are being appropriated, without cause, putting the Petitioner in serious jeopardy by subjecting it to further taxation under GST without the benefit of ITC. Sadly, the Respondents have not helped the situation, despite all the good intentions they may have. They have further compounded the problems for the taxpayers by being adamant about their stand and exhibited no flexibility in approach", commented the bench.
Observations of the bench
Rule 117, as it stands upon amended, provides that Every registered person entitled to take credit of input tax under section 140 shall, within ninety days of the appointed day (July 1, 2017), submit a declaration electronically in FORM GST TRAN-1, duly signed, on the common portal specifying therein, separately, the amount of input tax credit of eligible duties and taxes, as defined in Explanation 2 to section 140, to which he is entitled under the provisions of the said section.
The bench appreciated that the first proviso of Rule 117(1), stipulates that the Commissioner on the recommendations of the GST Council can extend the period of ninety days for filing TRAN-1, by a further period, not exceeding ninety days. "The Government amended the rules and introduced Sub-rule (1A) empowering the Commissioner to extend the date for submitting the declaration electronically in Form GST TRAN-I by a further period (not beyond 31.12.2019). This sub-rule is applicable to registered persons who could not submit the said declaration by the due date on account of technical difficulties on the common portal and in respect of whom the GST Council had made a recommendation for such extension. This Sub-rule (1A) begins with a non-obstante clause-'notwithstanding anything contained in Sub Rule (1)'. Thus, by introducing the said provision, notwithstanding the embargo introduced under Rule 117 (1) of the CGST Rules, the Government opened a narrow window for registered persons who faced technical difficulties on the common portal while filing Form TRAN-1", reflected the bench.
The Court was alive to the fact that the Central Government has been consistently extending the time period for filing the Form TRAN-1 even beyond 31.12.2019 for those taxpayers who are covered by Rule 117 (1A). Recently in view of the order dated 7th February, 2020 issued by Government of India, Ministry of Finance, the period was extended upto 31st March 2020. "Thus, when we contrast the time limit stipulated under Rule 117 (1) and Rule 117(1A), we find that the time limit of 90 days is not sacrosanct", concluded the bench.
Additionally, the Court observed that the rule suffers from the vice of vagueness and concept of "technical difficulty on common portal" and its applicability has not been adequately defined anywhere. Because of absence of any defining words, there is no predictability about the application of this Rule for the class of cases to which it would apply, as is demonstrated in the case in hand. In absence of a criteria, the application of the provision would suffer from arbitrariness. The Court noted that the GST Council in its 32nd meeting expanded the mandate of IT Grievance Redressal Committee to include those cases where the taxpayers who had been victims of the system failure, whether technical or otherwise.
"This indicates that the GST Council recognized that there could be errors apparent on the face of the record that could be non-technical in nature and merit leniency. In line with the spirit of the decision of the GST Council and the blurring thin line between technical and non-technical difficulty, keeping in view that entire filing is electronic, we find the restrictive applicability of Rule 117 (1A) to be arbitrary, as is demonstrated in the facts of the present case", ruled the bench.
Concept of ITC and its significance; Whether procedural timelines for TRAN-1 are directory and mandatory?
"We must not lose sight of the real intention of the Legislature that emerges by reading the scheme of the CGST, especially the transitional provisions and those dealing with ITC. GST seeks to consolidate multiple taxes into one, and thus it is imperative to have provisions to ensure that the transition to the GST regime is very smooth and hassle-free and no ITC (Input Tax Credit)/benefits earned in the existing regime are lost. In fact, an uninterrupted and seamless chain of ITC is the heart and soul of Goods and Services Tax. This mechanism is built-in to avoid cascading of taxes", the bench opined.
It noted that the Respondents themselves claim 'one of the most important features of the GST system is that the entire supply chain would be subject to GST to be levied by Central and State Government concurrently, and as the tax charged by the Central or the State Governments would be part of the same tax regime, credit of tax paid at every stage would be available as set-off for payment of tax at every subsequent stage.'
The bench was of the view that Significantly, for the cases covered under Section 140 (1) of the CGST act, ITC under the existing laws is a vested right. This credit stood vested in favour of the taxpayer and would have been utilized for payment of outgoing taxes under the respective legislations, but for the repeal of the existing laws. In order to claim this credit, declaration in form GST TRAN-1 is required to be furnished on the common portal within ninety days from the appointed day i.e. 1st July, 2017 or within such extended time. Thus, the closing balance of the CENVAT credit/VAT in the last returns filed under the existing law can be taken as credit in electronic credit ledger. Such credit would be available only when returns for the previous last six months have been filed under the existing laws.
"Thus, on analysis of the provisions of Central Goods and Service Tax Act and the Rules framed thereunder, the mind of the legislature on input tax credit becomes clear. The transitional provisions and the language of section 140 of the Act in particular, even after amendment, manifests the intention behind the said provision is to save the accrued and vested ITC under the existing law. If the legislature has provided for saving the same by allowing a migration under the new tax regime, we have to interpret the rules keeping this objective in focus. This is the reason courts have held that CENVAT credit which stood accrued to the Petitioner is a vested right and is protected under Article 300A of the Constitution of India and could not be taken away by the Respondents, without authority of law, on frivolous grounds which are untenable", the Court ruled.
Examining the timelines framed by the Central Government, the bench was of the view that the purpose of the timelines prescribed is just to hasten the migration of taxes from the erstwhile regime to the new GST laws and for swift streamlining of the ITC. The timeline introduced by Rule 117 is purely procedural and the same was not treated as sacrosanct- "The Central Government has continuously extended the same, by carving out an exception under Rule 117 (1A). Moreover, under none of the provisions of the Act, we can infer the intention of the legislature to create this distinction by way of subordinate legislation"
Not deciphering any intent to deny extension of time to deserving cases where delay in filing was on account of human error, the bench said that such interpretation would run counter to the object sought to be achieved under Section 140 of the Act which is the governing provision and exhibits the true legislative intent.
"The situation before us is not where the statute fixes any timelines for transitioning of credit. After the retrospective amendment of Section 140, we can interpret that the power to fix the timeline and its extension has been prescribed to the Central Government which was done vide Rule 117. This Rule provides for a time period of 90 days and also stipulates that the same can be extended for a further period not exceeding 90 days. However, under Rule 117 (1A), multiple extensions beyond 180 days have been granted for taxpayers who faced "technical difficulties on common portal". Yet, deserving 'non-technical' cases like the present one have been ignored and this exclusion is arbitrary and irrational", asserted the Court.
Moreover, the bench declared that if they were to look for a provision in the statute that would stipulate a consequence for failure to adhere to the timelines, they would find none. Rule 117 of the CGST rules also does not indicate any consequence for non-compliance of the condition. Both the Act and Rules do not provide any specific consequence on failure to adhere to the timelines. Since the consequences for non-consequence are not indicated, the provision has to be seen as directory.
Noting that Pertinently, non-observance of the timelines would prejudice only one party-the registered person/taxpayer, the bench was of the view that "If we interpret the timelines to be mandatory, the failure to fulfil the obligation of filing TRAN-1 within the stipulated period, would seriously prejudice the taxpayers, for whose benefit section 140 has been provided by the legislature".
Accordingly, it concluded that interpreting the procedural timelines to be mandatory would run counter to the intention of the legislature and defeat the purpose for which the transitionary provisions have been provided and have to be construed as directory and not mandatory.
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