Delhi High Court holds transitional CENVAT credit a vested right and permits availment beyond prescribed time

In an unprecedented decision, the Delhi High Court in the case of Brand Equity Treaties Limited v Union of India and Another (Writ Petition Civil No 11040 of 2018) has held the credit of taxes paid on inputs to be a vested right. In the lead petition (which was argued by us), the Court has concluded that the time limit prescribed under Rule 117 of Central Goods and Services Tax Rules, 2017 (CGST Rules) is directory and not mandatory. In absence of any specific statutory limitation under the Central Goods and Service Tax Act 2017 (CGST Act), the Court has read down the above provision of the CGST Rules and pragmatically declared that the time limit of 3 years under the residuary provisions of the Limitation Act 1963 (Limitation Act) would apply.

Background

The indirect tax regime in India witnessed a paradigm shift with introduction of the goods and services tax (GST). Plethora of central and state levies including the Central excise, Service tax and value added taxes were subsumed and replaced with a unified levy. To enable smooth transition, the new regime entitled the taxpayers to carry forward the amount of CENVAT credit accrued till 30 June 2017, i.e. the last day before the introduction of GST, in the manner prescribed by filing a declaration in form GST TRAN-1 (TRAN-1). The CGST Rules prescribed a time limit of 90 days for such transition, which was extended only in case of technical glitches. Several taxpayers, including the Petitioner (in the present case), could not file the TRAN-1 declaration and did not fall within the category of system fault or technical glitches. The Petitioner approached the Delhi High Court under its writ jurisdiction to impugn the arbitrary time limit imposed under Rule 117 for carrying forward the transitional credits due to missing the deadline prescribed under Rule 117. 

Decision of the Court

The Petitioner primarily contended Rule 117 to be in contravention to Section 174(2)(c) of the CGST Act, since it curtailed the right of the Petitioner for claiming credits legitimately availed under the erstwhile law. It was contended that it had fulfilled all conditions mentioned under the CENVAT Credit Rules 2004 for availing the credit and had duly reflected the credit in the statutory returns filed on time. Hence, the transitional credit became a vested right which was absolute.

The Petitioners further contended that the accumulated CENVAT credit was a property protected by Article 300A of the Constitution. Thus, the credit which had legitimately accrued to the Petitioner cannot be denied by framing incongruous rules without there being a substantive provision in this regard under the CGST Act.

While evaluating the facts and circumstances, the Court observed that:

In view of the above, the Court accepted the contentions of the Petitioners and held as under:

Comments

The present decision is significant for taxpayers across the length and breadth of the nation as it entitles them the benefit from legitimately acquired property. It has come at an opportune time when all taxpayers are struggling from the economic crisis on account of Covid-19 lockdown and are facing liquidity crunch. While the Court has extended the benefit of this judgement to all taxpayers facing TRAN-1 filing issues, its availability to those who are registered outside Delhi or even those whose plea were rejected in past by jurisdictional High Courts will need to be evaluated as the GST authorities in other jurisdictions may seek to deny this benefit. Finally, the decision attains immense significance as it is for the first time that the limitation period prescribed under the Limitation Act is made applicable to the GST provisions. It is hoped that the taxpayers who missed the benefit will get the desired credit, based on this landmark decision.

-      Abhishek A Rastogi (Partner), Ayush A. Mehrotra (Partner) and Ankit A. Shah (Principal Associate)

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