When GST was introduced in 2017, no assessee would have imagined the extent of litigation pertaining to transitioning of credit into GST three years down the line. Whether the time limit imposed on transitioning the credit into GST from the erstwhile regime is sacrosanct has now been decided by various High Courts and interestingly, not all of them have taken the same view.
Rule 117 of the Central Goods and Services Tax Rules, 2017 (‘Rules’), imposed certain conditions for transitioning the unutilized credit from the previous regime, including a time limit within which the form TRAN-1 is to be filed. Issues arose since assessees were not able to file the form within the prescribed time limit due to problems in the GST portal. The timeline was then extended by the Government acknowledging issues in the portal. After multiple extensions, the last date for filing the TRAN-1 was fixed as 27-12-2017. However, in many cases, there were still problems and credit could not be transitioned.
Since the issue could not be resolved even after repeated follow up with the department, the assessees were forced to approach the High Courts to redress their grievance. The assessees challenged the Rule imposing time limit as being merely directory in nature and contended that the unutilized credit of the previous regime, being a vested right, cannot be taken away merely because a procedural requirement of filing a form within the prescribed time limit was not fulfilled.
While the Delhi High Court and Punjab & Haryana High Court had taken a liberal view and held Rule 117 to be procedural and directory, the Bombay High Court had held Rule 117 to be mandatory in nature. The Bombay High Court also held Rule 117 to be within the ambit of the Act.
Recently, this issue came up before the Madras High Court in the case of P.R. Mani Electronics (‘Petitioner’), wherein the Petitioner had also challenged the vires of Rule 117. The Madras HC held that the provision imposing time limit is intra vires the Act and mandatory in nature, like the Bombay High Court. This Article analyses this decision and certain aspects of the same.
Background of the issue
Section 140 of the Act deals with Transitional Credit and Rule 117 of the Rules imposes time limit for filing TRAN-1 form.
Section 140, as originally enacted, stated that Transitional Credit can be availed ‘in such manner as may be prescribed’. Assessees contended that this phrase excluded the power to impose time limits for transitioning the credit and consequently, Rule 117 is ultra vires Section 140 and is merely directory in nature.
Consequently, Section 140 was amended by Finance Act 2020, with retrospective effect from 01-07-2017, inserting the phrase ‘within such time’ thereby giving statutory power for enacting Rule 117 and with the intent to make the time limit mandatory in nature. Prior to this amendment, various High Court decisions, without dealing with the vires of Rule 117, had held the Rule imposing time limit to be merely directory and not mandatory, the most notable being the decision of the Delhi High Court in the case of Brand Equity. The Bombay High Court, on the other hand, in the case of Nelco was of the view that Rule 117 is within the ambit of the Act and held that the Transitional credit is to be availed within the prescribed time limit.
Subsequent to the amendment, the Delhi High Court again had an instance to examine the nature of Rule 117 in the case of SKH Sheet Metals Components. The Court held the Rule to be directory in nature post amendment as well and fortified the findings of Brand Equity. Both decisions of the Delhi High Court held that the credit, which stood accrued and vested on 30-06-2017, was the property of the assessee and is a constitutional right under Article 300A of the Constitution.
The ruling by Madras HC explained
The Petitioner in this case had challenged the vires of Rule 117 and also contended that the time limit is only directory and not mandatory.
The Madras HC, relying upon the decision of the Supreme Court in the case of Jayam and Co. held that the Transitional credit is merely a concession and not a vested right in the hands of the assessee. The Court held that prior to the amendment to Section 140, the power to enact Rule 117 is traceable to Section 164 which deals with the general power to make Rules. Post the amendment, the Rule is clearly traceable to Section 140 and thus, the distinction made in the case of SKH Sheet Metals Components was incorrect.
As regards the contention of the Petitioner that the time limit is directory, the Court negated the same and observed that the Rule uses the phrase ‘shall file within the prescribed time’ which means that the time limit is intended to be mandatory.
The Madras HC, thus agreed to the findings of the Bombay High Court in the case of Nelco and held that Rule 117 is intra vires Section 140 of the Act and that the time limit under Rule 117 is mandatory in nature.
Some unconsidered aspects in the decision
While the Madras HC has proceeded on similar lines as in the case of Nelco, the following aspects are however debatable:
- Appreciating the difference between availment and transition: The decision of the Supreme Court in the case of Jayam and Co. was in the context of ITC which was yet to be availed by the assessee. In such a scenario, the Supreme Court held there was no right enjoyed by the assessee in respect of the ITC. On the other hand, in the present case, the credit has been validly availed within the time limit thereby becoming the property of the assessee and the delay was only on transitioning the credit. This subtle difference was noted by the Delhi HC in Brand Equity but has not been appreciated by the Madras HC.
- Reliance placed on Nelco disputable: The Madras HC has placed reliance on the decision in the case of Nelco. The Bombay High Court had held that Transitional credit is a concession and not a right on the basis that what is saved from the earlier regime is a conditional credit and such conditional credit cannot be treated as a right. However, it is to be pointed out that the credit which is saved is the credit appearing in the credit ledger of the assessee after fulfilment of all conditions and therefore at the time of transitioning, is an ‘unconditional credit’ for the assessee. The conditions in GST are not for ‘availment’ of any new credit, but for ‘transitioning’ the already availed right into GST.
- Holistic/liberal view vis-a-vis Narrow/strict view: The Madras HC in the present case seems to have proceeded strictly on the wordings of Section 140 post amendment and the usage of the words ‘shall’ in Rule 117 while distinguishing the decision in the case of SKH Sheet Metals Components. The decisions in the case of Brand Equity and SKH Sheet Metals Components, on the other hand, seem to have adopted a lenient approach whereby the intent of the legislature for transitioning credit from earlier regime was given more weightage than the mechanism to avail the same in GST regime by filing the form within the prescribed time period. The decisions placed appropriate weight to the repeated time extensions granted by the Government which indicated that the time limit was only directory and not mandatory. Following such a strict approach seems to be hard on the assessees especially when Transitional credit could be regarded as a right of the assessee.
Will this decision affect any past transitional claims filed by the assessees on specific relief granted to them by the Department? Also, can the assessees liaise with the Department to provide relief post this decision?
A question may arise as to whether this decision would affect transitional claims pending as on date, which were filed by the assessees on the basis of any relief granted by the Department earlier. Also, if the assessees approach the Department now for providing any relief does this decision estop the Department from grating any relief to the assessees?
In this regard, the Madras HC has specifically stated that this decision shall not affect dispensations granted by the Department to transition the credit, whether by allowing filing of TRAN-1 form or otherwise. This could be interpreted to cover both the existing Transitional claims as well as future claims for which dispensations may have been already been granted or could be granted in the future by the Department respectively.
Some decisions in favour and some decisions against. What now for the assessee?
Since different High Courts have taken different views on this issue we now examine their applicability from the assessee’s standpoint.
The Supreme Court, in the case of Valliamma Champaka Pillai, had held that the decision of one High Court is not binding on other High Courts and can at best have persuasive value. If the Jurisdictional High Court has not decided the issue, the assessees in that jurisdiction are in a neutral position, whereby the said High Court can take an independent decision. Thus, the situs of the assessee plays an important role.
The dispute on whether the time limit for filing TRAN-1 is sacrosanct is far from over. At present, this issue is sub judice with the Supreme Court staying the operation of the Delhi HC decision in Brand Equity.
As things stand, assessees in Maharashtra and Tamil Nadu are most affected both by COVID-19 and TRAN-1!
[The authors are Principal Associate and Associate, respectively, in GST practice at Lakshmikumaran & Sridharan, Chennai]
 Brand Equity Treaties Limited v. Union of India [Judgement dated 05-05-2020 in W.P.(C) 11040/2018 and Ors., Delhi High Court]
 Adfert Technologies v. Union of India [2019-VIL-437-P&H]
 Nelco Limited v. Union of India [2020 SCC Online Bom 437]
 P.R. Mani Electronics v. Union of India [Judgment dated 13-07-2020 in WP. No. 8890 of 2020 and WMP No. 10803 of 2020, Madras High Court]
 SKH Sheet Metals Components v. Union of India [2020 SCC online Del 650]
 Jayam and company v. Assistant Commissioner and another [(2016) 15 SCC 125]
 Valliamma Champaka Pillai v. Sivathanu Pillai and others [1979(8) TMI 210-SUPREME COURT]