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By: Senguttuvan Kuppusamy
February 28, 2020
All Articles by: Senguttuvan Kuppusamy       View Profile
  • Contents

Need for A Pragmatic Based Approach

Effective from 1st July 2017 all the taxes prevailed under erstwhile indirect tax regime subsumed into GST and transition provisions under GST Provisions allowed to carry forward unutilized credit of duties/taxes  as per returns for the period ending 30.06.2017 and also allowed credit on stock held as on 30.06.2017 for which no tax on resale under erstwhile regime but under GST regime, taxable

Section 140(3), (4) & (5) of CGST Act r/w Rule 117 of the CGST Rules prescribed time to file return called Tran-1 claiming closing balance as per returns and fresh credit based on the availability of stock & availability of original copy of duty/tax paid documents

Originally 28th Sep 2017 was the due date and later the same was extended to 27th December 2017. Since the Act does not provide for extending time for filing Tran-1 beyond 90 days, the Government couldn’t extend beyond 90 days. For doing that, it required parliament approval.

However, many taxpayers couldn’t file TRAN-01 due to poor connectivity and various technical glitches on the common portal and various other reasons which were beyond their control. When there were many WRIT petitions filed before the HCs in various States, the CBIC by virtue of Sub Rule 1A of Rule 117 enabled by extending time till 31st May 2019 and later this date was extended to 31st December 2019, to file Tran-1 for the taxpayers who had proof of technical glitches as on 27th Dec 2017.

However, expecting the Tax payers to record proof of technical glitches while they were struggling to file return in time to protect their money is something like expecting the driver to take photo or video of an accident he is going to make on road.

Thus, the taxpayers have landed into multiple situations:

    1. Taxpayers – didn’t even attempt to file TRAN-01
    2. Taxpayers - who attempted and unsuccessful in filing TRAN-01, but having proof of technical glitches
    3. Taxpayers - who attempted and unsuccessful in filing TRAN-01, but NOT having proof of technical glitches

The Government has considered the situation of the taxpayers in the second case and granted them extension by virtue of Sub-rule 1A of Rule 117 of CGST Rules, 2017. But the taxpayers in the other two situations are left with no remedy.

The taxpayers across the India have resorted to Judicial Review of the State action and have sought relief from Courts in India. The sole question before the Courts which revolves around the present TRAN-01 issue is that by virtue of Rule which provides a prescribed time limit, “can a substantive right provided by the corresponding Statute be taken away from the taxpayer”.

Most of the HCs have categorically held that the answer to this question is ‘NO’ and ordered directing the Nodal Officer to consider or directed the GSTN to re-open or GoI to find appropriate solutions.

Now let us discuss about the findings and the rationale considered by HCs behind the answer in the above stated situation:

  1. Vested Right

The HC of Gujarat[1]  and the P&H[2]  have categorically laid down that, “The entitlement of credit of eligible duties on the purchases made in the pre-GST regime as per the then existing CENVAT credit rules is a vested right and, therefore, it cannot be taken away by virtue of Rule 117 of the Central GST Rules, 2017, with retrospective effect for failure to file the form GST TRAN-01 within the due date, i.e. 27.12.2017”. The subsequent judgments have followed the above ruling.

The HC of Gujarat supplied emphasis by relying on Filco Trade Centre Pvt. Ltd. v. UoI[3] and said that the provision for facility of credit is as good as the tax paid till the tax is adjusted and therefore, the right to the credit had become absolute under the erstwhile tax statutes and therefore, the credit is indefeasible and the same cannot be taken away.

It is worth mentioning that in the erstwhile regime the Apex Court[4], held that for the proposition that a right accrued to the taxpayer on the date when it paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. Thus, the Apex Court held that substantive input credits cannot be denied or altered on account of procedural grounds.

Therefore from the above we can infer that it is a settled legal position that right to carry forward tax credit is a vested substantive right which cannot change by the new tax laws.

  1. Arbitrariness

Section 16 of the CGST Act, 2017 allows the entitlement to take input tax credit in respect of the post-GST purchase of goods or services within return to be filed under Section 39 for the month of September following the end of financial year to such purchase or furnishing of the relevant annual return, whichever is earlier. Whereas, Rule 117 allows time-limit only up to 27th December 2017 to claim transitional credit on pre-GST purchases. Therefore, the above discrimination between the time limit to allow availment of the input tax credit with respect to goods and services made in the pre-GST regime and post-GST regime is arbitrary and unreasonable. This discrimination does not have any rationale and, therefore, it is in transgression of Article 14 of the Constitution.[5]

  1. Right to Property:

The HC held that ‘tax credit’ is a property which is protected by the constitution under Article 300A. Article 300A provides that no person shall be deprived of property saved by authority of law. The CENVAT credit earned under the erstwhile Central Excise Law is the property of the taxpayers and it cannot be denied for merely failing to file a declaration in the absence of Law in this respect. The Court held that the abovementioned state action of denial of credit is in violation of constitutional right enshrined under Article 300A of the Constitution of India. [6]

  1. Lack of evidence of technical errors cannot lead to denial of credit:

With respect to the pertaining situation where the taxpayers attempted to file TRAN-01 and failed due to a technical glitch but does not have evidence to prove the existence of the technical glitch, the HCs have held that , the mere fact that the taxpayers cannot establish that the inability to upload the required details or revise the same was on account of a system error that was occasioned by the GST Authorities, cannot be a reason for denying him the substantive benefit of carrying forward the credit earned by him under the erstwhile regime.[7] When the taxpayers made an attempt to upload the necessary details in the system maintained by the GST Authorities which can be established on perusal of the system log, the substantive right cannot be denied. [8]

A practical rationale is given by the Courts that it is unreasonable to expect that each person who may not have been able to upload the Form GST TRAN-01 should have preserved some evidence of it – such as, by taking a screen shot. Many of the registered dealers/traders come from rural/semiliterate background. They may not have had the presence of mind to create any record of their having tried, and failed, to upload the Form GST TRAN-01[9].

Moreover, when the entire system of GST is in trial and error phase it will be too much of a burden to place on the assesse to expect them to comply with the requirement of law where they are unable to even connect to the system on account of network failures and other failures[10]. The above observation has been made by Andhra Pradesh HC relying on ratio laid down by Delhi HC[11], but the Revenue has appealed before the SC[12] against this order.

Therefore, if it is established that the taxpayer has attempted to upload necessary details, the requirement of production of evidence is completely irrational and unreasonable. It is germane to understand the fact that the taxpayers in India are still not conversant with technology newly introduced to them. It is difficult for them to understand a whole new technological tax payment system in a very short span of time and be accurate after following a manual system of paying taxes for ages and that too when it is in a trial and error phase

  1. Rules cannot override the Act:

It is a trite but important observation that how a rule could override or whittle down the substantive right and impair the right. It is a settled law that a procedure should not run contrary to the substantive right in the policy. If the procedural norms are in conflict with the policy, then the policy will prevail and the procedural norms to the extent they are in conflict with the policy, are liable to be held bad in law.[13]

The Apex Court of India has also laid down that procedure cannot be a tyrant but only a servant. It is not an obstruction in the implementation of the provisions of the Act, but an aid. The procedures are handmaid and not the mistress. It is a lubricant and not a resistance. A procedural law should not ordinarily be construed as mandatory; the procedural law is always subservient to and is in aid to justice.[14]

In the erstwhile tax regime the similar issue was discussed in the light of MODVAT. The HC and Supreme Court in various cases held that when power is exercised under Rule 57G of the CER, 2002 Government is not empowered to curtail any right conferred by the substantive provision of Rule 57A which enables the manufacturer to take credit for the specified duty paid on the inputs. Therefore, the notification issued under Rule 57G prescribing the time limit for taking the credit was held to be ultra vires and not sustainable.[15] From this it is inferred that a rule cannot override another rule from which the right to the taxpayer emanates and the principle was prevailing since the erstwhile regime.

Therefore, the HC of Gujarat[16] has discussed the above issue at length and has come to the conclusion that the entitlement of credit of eligible duties on the purchases made in the pre-GST regime as per the then existing CENVAT credit rules is a vested right and, therefore, it cannot be taken away by virtue of Rule 117 of the CGST Rules, 2017, with retrospective effect for failure to file the form TRAN-01 within the due date, i.e. 27.12.2017.

In this regard the Delhi HC[17] also held in the similar lines that the legitimate rights of the petitioners to carry forward of unutilized credit of duty/ tax already paid cannot be denied on technicalities i.e., on the ground of limitation by framing the Rules in the absence of law in the Act as the GST regime is a new tax regime that too in the transitional period. It could have been appropriated by the government by providing for the same in the CGST Act but it cannot be taken away by virtue of merely framing Rules in this regard[18]

  1. Cascading of Taxes

The liability to pay GST on sale of stock carried forward from the previous tax regime without corresponding tax credit leads to double taxation on the same subject matter. Hence, it leads to cascading of taxes which hereby offends the policy of the Government to remove the cascading effect of tax by allowing the input tax credit as mentioned in the Objects and Reasons of the Constitution 122nd Amendment Bill 2014[19]

Apart from the above, the orders passed by the court are bereft of one crucial aspect which requires immediate consideration.

In all the above orders made by various HCs, the implementation is lacking. Most of the HC’s have passed the order directing the respondents to open the portal and in the event they do not do so, they should entertain the GST TRAN-01 of the petitioner manually and pass orders on it after due verification of the credits.[20]

In the backdrop, there is Jammu and Kashmir HC which has passed a more implementation-based approach. It says “the authorities shall entertain the application of the petitioner manually and it was further observed that the authorities shall also ensure that the petitioner is allowed to pay the tax vide the credit carried forward through TRAN-01”.[21]

To the utmost surprise the GST Authorities have not opened the e-portal pursuant to any HC order. And in order to pay the taxes through credit, it is paramount that the credit should flow into the electronic ledger. Thus, alternatively even though the Court has directed the Authorities to allow the taxpayers to file TRAN-01 manually and allow them to pay taxes by adjusting the credit, it is still not practically possible to pay taxes without the credit flowing into the electronic ledger.

For your perusal, technology has been added to the system for the benefit and convenience of the tax payers but it should not be subservient to the purpose and hence impediments should not make the assesse servants of the technology.

Therefore, in this legal quagmire the author of this article suggests a pragmatic based approach shall be, allowing the taxpayer to avail credit of the same under the head of others in GSTR 3B and simultaneously file  TRAN-01 manually. A similar approach has been taken by a taxpayer in the case BHEL Trichy and the same was questioned by the Department through SCN; however the matter is pending before Hon’ble HC of Madras awaiting decision. 

Hence, this will ensure the seamless flow of credit into the electronic ledger which will enable the taxpayer to pay taxes through input credit.


Taxpayers have two options:

  1. Taxpayers, who are yet to file TRAN-01 as well approach HC, can avail credit in 3B and handle litigation; as an abundant precaution, may maintain balance equivalent to disputed credit to avoid interest in case the Apex Court reverses the decision of Telengana HC
  2. Taxpayers, who have already approached HC should amend the prayer requesting for direction to avail credit in 3B

[20] Adfert Technologies Pvt. Ltd. Versus Union of India And Ors. - 2019 (11) TMI 282 - Punjab And Haryana HC; Vishnu Iron Corporation v.Union of India, 2019 (3) TMI 489 - ALLAHABAD HIGH COURT; M/s Jay Bee Industries Versus Union Of India And Others; 2019 (11) TMI 1245 - Himachal Pradesh HC; Larsen And Toubro Limited Versus Union Of India, The Commissioner, State Goods And Services Tax Dept, Government Of Kerala, The Gst Council, Central Board Of Indirect Taxes And Customs, The Principal Commissioner, Central Tax And Central Excise, Central Revenue, Goods And Services Tax Network, The Nodal Officer, Goods And Services Tax Network, The Joint Commissioner, Principal Nodal Officer, Central Tax And Central Excise, Superintendent Office Of The Central Tax And Central Excise, The Assistant Commissioner, Office Of The Principal Commissioner, Central Tax And Central Excise, The Assistant Commissioner (Tech) 2019 (12) TMI 1084- Kerala HC; Siddharth Enterprises v. Nodal Officer 2019 (9) TMI 319 - GUJARAT HIGH COURT


By: Senguttuvan Kuppusamy - February 28, 2020



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