Verification of TRAN-I or TRAN-II forms have been or may be carried out by the department. During the process, they may come across cases where allegedly wrong transitional credits could have been claimed. One striking example can be the transitional credits in respect of cess (KKC) which was permitted prior to retrospective amendment to Section 140(1) of the CGST Act, 2017 vide CGST (Amendment) Act, 2018. Interesting question will, hence, come to our mind as to whether and how will the department adjudicate and then recover such allegedly wrongly claimed transitional credit. Also, what shall be rights of the taxpayer to contest such stand by way of appellate mechanism? There are indeed many gaps (six in total) in the concerned legal provisions. Present article seeks to throw light on such gaps and attempts to suggest the way forward.
Transitional credits have been chiefly claimed u/s 140 of the CGST Act, 2017 (or SGST Act, 2017). Perusal of the said provisions will clearly show that it does not provide for adjudication and recovery of any such transitional credit which might have been claimed wrongly. This brings us to Section 73(1) of the CGST Act, 2017 (parallel provisions under SGST Act) which enables the determination of tax (i.e. adjudication) in certain cases not involving fraud. Said provisions are reproduced below for ready reference :
“SECTION 73. Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any wilful misstatement or suppression of facts. -
(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilized for any reason, other than the reason of fraud or any wilful misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.”
Parallel provisions are also contained under Section 74 to provide for adjudication of tax not paid on account of fraud or wilful misstatement or suppression.
Further, Rule 121 of the CGST Rules, 2017, has been enacted in this regard which reads as under :
“RULE 121 : Recovery of credit wrongly availed. - The amount credited under sub-rule (3) of rule 117 may be verified and proceedings under section 73 or, as the case may be, section 74 shall be initiated in respect of any credit wrongly availed, whether wholly or partly.”
Hence an attempt has been made by connecting the Rule with the Act to provide for some solution to enable the adjudication and recovery of the wrongly availed transitional credit.
Now where are the gaps in the above provisions? On close reading, one may notice the following gaps :
Gaps in the legal provisions -
Perusal of Section 73(1) supra will entail that the proper officer has the power to only determine any tax which has not been paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason. Similar provisions are also contained u/s 74(1) which permits determination of tax in cases involving fraud or wilful misstatement or suppression of facts.
Now the adjudication of allegedly wrongly claimed transitional credit is clearly not the case of the determination of tax not paid or short paid (as it relates to output tax) or the tax erroneously refunded. Hence only question to answer then is whether such determination of the wrongly claimed transitional credit can be said to be “input tax credit” wrongly availed which can be determined u/s 73(1).
The term “input tax credit” is defined u/s 2(63) read with Section 2(62) of the CGST Act, 2017. It only includes the tax which has been charged on the supply of goods or services or both. Said definitions are reproduced below for ready reference :
“Section 2(62) : “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes -“
“Section 2(63) : “input tax credit” means the credit of input tax”
Thus, the transitional credit cannot be considered as the “input tax credit” since the same is not the tax charged on any supply of goods or services. Even in respect of refund of transitional credit, Circular No. 37/11/2018-GST [2018 (10) G.S.T.L. C50] has been issued stating that since the transitional credit is not input tax credit, no refund can be claimed thereof.
Hence, it clearly emerges that the adjudication of the allegedly wrongly availed transitional credit cannot be carried out u/s 73(1) or 74(1) of the CGST Act, 2017.
This now brings us to Rule 121 of the CGST Rules, 2017 referred above. Said Rule merely seeks to provide that the proceedings stipulated u/s 73 or 74 should be initiated in respect of such allegedly wrongly availed transitional credit. Same is reproduced below for ready reference :
“RULE 121. Recovery of credit wrongly availed. - The amount credited under sub-rule (3) of rule 117 may be verified and proceedings under section 73 or, as the case may be, section 74 shall be initiated in respect of any credit wrongly availed, whether wholly or partly.”
Hence, the first gap to be noticed is that Section 73 or 74 do not provide for adjudication of transitional credit. Therefore, Rule 121 seeking the application of said provisions is clearly out of order and hence adjudication of allegedly wrongly availed transitional credit cannot be carried out.
Curiously the title to the said Rule provides for “Recovery of credit wrongly availed”. It may be noted that Sections 73 and 74 referred in the said rule deals with the determination of the tax amount to be demanded and not the recovery thereof. It is Section 79 of the CGST Act, 2017 which deals with the recovery of the tax (including wrongly availed input tax credit) once the same is determined u/s 73 or 74. Hence, the second gap is the difference between the title of the Rule and the actual provisions of the Rule relating to what it seeks to achieve.
Assuming that the above gaps can be overlooked and Rule 121 providing for the adjudication of allegedly wrongly availed transitional credits can be considered to be valid, we have much greater gaps when seen in light of other provisions.
Rule 121 has been formulated by exercising the powers granted by Section 164 of the CGST Act, 2017. Said provisions are summarised below for ready reference :
Section 164(1) provides for the power to make rules “for carrying out the provisions of this Act”. It thus follows that there must first be some provision in the Act to enable the adjudication of the allegedly wrongly claimed transitional credit. Hence, only if such provisions are there, that the rules can be formulated to stipulate the procedural aspects related to such adjudication process.
Section 164(2) further permits the Government to formulate rules when called for by a specific provision in the Act. As discussed supra there is no provision in Act which permits adjudication of the allegedly wrongly availed transitional credit.
Section 164(3) as well as Section 164(4) deals with the power to give retrospective effect or to impose penalty, both of which we are not concerned at present.
Hence, the third gap is that Section 164 does not seem to grant power to the Government to formulate the Rules seeking adjudication of the allegedly wrongly availed transitional credit. Thus, it can be submitted that Rule 121 is ultra vires the provisions of the Act.
The issue can also be looked at from yet another perspective. Rule 121 merely seeks to enable the initiation of the proceedings referred u/s 73 or 74 if transitional credit is found to be claimed in excess of the eligibility. However since Section 73 or 74 do not expressly provide for initiation of the proceedings in respect of transitional credit (as it is not ITC), the proceedings initiated under Rule 121 would remain to be the proceedings under the said Rule and cannot be regarded as proceedings under Section 73 or 74.
Having concluded above, the fourth gap to be noticed is that Rule 121 on one hand permits initiation of proceedings u/s 73 or 74 to determine the wrongly availed transitional credit but on the other hand do not provide any remedy by way of appellate mechanism if the supplier in question intends to challenge the order passed under Rule 121. In other words the appeal mechanism provided Chapter XVIII of the CGST Act, 2017 are not applied to the proceedings undertaken under Rule 121. It may be noted that Section 107 permits filing of appeal only against the decision or order under the Act and not the orders given under the Rules (as is the present case).
In Commissioners of Customs and Excise v. Cure and Deeley Ltd. (1961) 3 WLR 788 (QB), the regulation framed to determine, assess and demand tax was struck down on the ground that it travels beyond the provisions of the Act. One of the chief reasons for the said conclusion was that the regulation ousted the jurisdiction of the Courts by not providing for any appeal. Said ruling has been followed by the Hon’ble Delhi High Court as well as the Hon’ble Supreme Court (while rejecting the appeal against the Delhi High Court ruling) in the case of Intercontinental Consultants and Technocrats P. Ltd. reported in 2013 (29) S.T.R. 9 (Del.) and 2018 (10) G.S.T.L. 401 (S.C.) respectively wherein the Rule providing for inclusion of reimbursement expenses in the value of taxable service was held to be ultra vires.
It is, thus, submitted that similar to the above case, in the present issue, Rule 121 does not provide for any appeal mechanism. Hence Rule 121 has to be held ultra vires the provisions of the Act.
It may also be noted that the defect in the Act cannot be supplemented by the Rules. The fifth gap deals with the scope of delegated legislation. The scope of delegated legislation (in the present case CGST Rules, 2017) was clearly outlined by Supreme Court in the case of General Officer Commanding-in-Chief v. Dr. Subhash Chandra Yadav (supra) the following principles were elucidated :
“14. ....It is well settled that rules framed under the provisions of a statute form part of the statute. In other words, rules have statutory force. But before a rule can have the effect of a statutory provision, two conditions must be fulfilled, namely, (1) it must conform to the provisions of the statute under which it is framed; and (2) it must also come within the scope and purview of the rule making power of the authority framing the rule. If either of these two conditions is not fulfilled, the rule so framed would be void.”
Tested on the above legal principles it is submitted that Rule 121 has not been formulated to give effect to any statutory provision of the parent Act namely, CGST Act, 2017, as there is none in the Act which provides for adjudication of allegedly wrongly availed transitional credit. Thus, it is submitted that the Rule has been formulated in excess of the delegated powers granted by the Act and hence, the same is ultra vires the Act.
We may also point out that the provisions related to adjudication are part of the levy provisions as it crystallizes the amount of tax to be imposed. One may refer to the following decisions in support of the above proposition :
(a) Asst. Collector of C. Ex. v. National Tobacco of India [1978 (2) E.L.T. J416 (S.C.)]
(b) Somaiya Organics v. State of Uttar Pradesh [2001 (130) E.L.T. 3 (S.C.)]
(c) CCE v. Allied Photographics India Ltd. [2004 (166) E.L.T. 3 (S.C.)]
(d) CCE v. Smithkline Becham Consumr Health Care Ltd. [2003 (151) E.L.T. 5 (S.C.)]
Hence, enactment of such provisions cannot be delegated to the executive, being substantive in nature.
Even if we assume that the adjudication provisions are not substantive but machinery in nature and hence should be liberally construed and made workable (Re : The Commissioner of Income-Tax v. Mahaliram Ramjidas (1940) 42 BOMLR 997), the same is not possible in the present case. This is the sixth gap.
This is because Section 73(10) or 74(10) provides for the time limits for carrying out the adjudication and issuance of order with reference to the annual return “for the financial year to which tax not paid or short paid or input tax credit wrongly availed or utilized relates to”. Transitional credit claimed on implementation of GST actually relates to past periods (under the erstwhile regime) wherein it could/would have been claimed. Hence, there cannot be a financial year (after implementation of GST) to which it could be said to relate to. In fact Circular No. 37/11/2018-GST reiterates the said proposition when it holds that the transitional credit cannot be said to have been availed in the GST regime so as to permit refund of the same. Rule 121 fails to address the said issue of specifying the time-limits within which the adjudication of transitional credits must happen.
Another instance would be that Section 73 or 74 provides for determination of tax along with interest payable thereon u/s 50. Now reference to Section 50(3) of the CGST Act, 2017 would lead to the conclusion that the same cannot be applied to transitional credits as it is not input tax credit. Section 50(1) on the other hand deals with delay in payment of tax and not on claiming wrong transitional credit. Hence, Rule 121 also fails to address the said issue when it seeks to apply the provisions of Section 73 or 74 to adjudicate the transitional credit.
Above discussions will clearly show that there are many gaps when it comes to adjudication of the allegedly wrongly availed transitional credits. Unless the same are not cured, the adjudication of such credit will be in jeopardy.
Before we end, we may also point out to the two decisions of Delhi High Court in the case of Mega Cabs Pvt. Ltd. v. Union of India - 2016 (43) S.T.R. 67 (Del.) & Travelite (India) v. Union of India - 2014 (35) S.T.R. 653 (Del.) wherein Rule providing for audit by the department was struck down in absence of any provision in the law enabling such audits. Although both the decisions have been stayed by the Supreme Court, the Supreme Court is yet to decide on the merits of the case. However, the ratio of both the decisions can also be applied to the present issue since if the audit powers given in rules but not in Act are held ultra vires, then, on the same footing, even adjudication powers with respect to transitional credit given in rules but not in the Act should be held ultra vires.
Hence we can conclude by opining that there are visible gaps in the provisions related to the adjudication of transitional credits. Unless the same are bridged by legislative amendments, we are of the view that the issue remains unresolved for some more time.
Article by - Mr. Abhay Desai, Chartered Accountant