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TMI Blog2018 (9) TMI 885X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be utilised for payment of tax. According to the petitioners, the company has to maintain sufficient stock of different kinds of such bearings, many of which items may not be immediately sold. The petitioners would therefore, have longer cycle of such goods remaining with the petitioners after purchasing from the manufacturer before they are sold. 3. Before introduction of Goods and Service Tax regime ("GST" for short), the petitioners' transactions of purchase and sale of goods were covered under the Central Excise Act 1944, Central Excise Tariff Act 1985 and CENVAT Credit Rules, 2004 ("the Rules of 2004" for short). Under such statutes, a manufacturer would not bear the burden of excise duty on the product manufactured by him. If the petitioners and other similarly situated first stage dealers were not granted similar benefits in some form or the other, the petitioners' business would become wholly unviable. If the petitioners were loaded with the burden of excise duty, the petitioners' sales to its ultimate consumers or second stage dealers would be commercially non viable. Instead, the purchasers would be made directly from the manufacturer. The law existing pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the excise duty paid on the purchases and this was without any restriction on time during which the goods must be sold. In earlier regime, the first stage dealers were put at part with manufacturers. A registered manufacturer could avail CENVAT credit of tax paid on purchases which could be utilized towards duty liability of goods manufactured by him. As against this, a first stage dealer or an importer could pass on the credit of tax paid on their purchases to the customers who could utilize such credit against their duty liability on product manufactured by them. Clause(iv) of sub-section(3) of section 140 of the CGST Act has now imposed a condition for availing of such a benefit which not only acts harshly and unjustly to the petitioners and other similarly situated first stage dealers but acts retrospectively. It is also arbitrary and discriminatory. 6. The respondents have appeared and filed the reply in which it is contended that there is a reasonable classification. Such classification need not be scientifically perfect. The wisdom of legislature in imposing such a condition cannot be questioned. Distinction is sought to be drawn between the manufacturers and the deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he vested right. Under the old regime, the duty borne by the petitioners on the goods purchased from the manufacturer or paid in the form of CVD on imports were granted CENVAT credit which could be utilised for discharge of duty liabilities. Such benefit is withdrawn in respect of goods which are purchased or imported one year before. The law thus acts with retrospective effect. There is no plausible reason or logic provided for making such retrospective tax legislation. 5) In support of his contentions, counsel relied on the following judgments : i) Decisions in case of Eicher Motors Ltd. v. Union of India reported in 1999 (106) ELT 3 (SC) and in case of Collector of Central Excise, Pune v. Daiichi Karkaria Ltd. reported in 1999 (112) ELT 353 (SC) were cited to contend that CENVAT credit is form of a duty paid by the concerned person and therefore, such benefit cannot be withdrawn with retrospective effect. For the same purpose, reference was also made to the decisions of Supreme Court in case of Jayaswal Neco Ltd. v. Commissioner of Central Excise, Raipur reported in 2015 (322) ELT 587 (SC) and in case of Commissioner of Central Excise, Patna v. New Swadeshi Sugar Mills reporte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchases were made not prior to one year. 5) In support of the contentions, counsel relied on the following judgments : i) Heavy reliance was place on the decision of Division Bench of Bombay High Court in case of JCB India Limited and others v. Union of India and others, judgment dated 20.3.2018 in Writ Petition No. 3142/2017 and connected matters, in which this very provision came to be challenged. The High Court dismissed the petition upholding the vires of the provisions. ii) Following judgements were cited in support of the contention that legal incidence of sales tax falls on the dealer, he may, if the law permits, pass it on to the purchaser, however, it is not necessary that the taxing statute must permit it and the tax cannot be declared invalid merely because the provision does not permit the dealer to pass it on purchaser: a) M/s.J.K. Jute Mills Co. Ltd. v. State of Uttar Pradesh and another reported in AIR 1961 Supreme Court1534. b) Konduri Buchirajalingam v. The State of Hyderabad and others reported in AIR 1958 Supreme Court 756. c) Associated Cement Co. Ltd. Tamil Nadu v. State of Tamil Nadu and another reported in (1974) 4 Supreme Court Cases 422. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions made before us the following questions arise for our consideration : 1) Whether the impugned provision makes an impermissible distinction between similarly situated persons forming a homogenus class? 2) Whether the provision in question without proper justification takes away the vested right of the petitioners and thus acts with retrospective effect? Question can be re-framed as to whether the legislation in question imposes a burden with retrospective effect and in absence of any justification for the same, is not a valid statute? 3) On any of the grounds above, whether clause(iv) of subsection (3) of section 140 of the CGST Act is required to be declared unconstitutional? 10. Before taking up these questions for consideration, we may peruse the statutory provisions applicable more minutely. 11. As is well known in the tax structure existing prior to introduction of GST regime, a manufacturer or producer of a specified product or a provider of input service was allowed to take credit of the excise duties paid by him. Clause (ij) of Rule 2 of the Rules of 2004 define the term "first stage dealer" as under : (ij) "first stage dealer" means a dealer, who purchases the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident of duty on manufactured goods was not to be borne by first stage dealer. 05.09.2018 14.With the introduction of GST replacing several taxing statutes, it became necessary to make provisions for switching over from the old to the new regime which, in legal parlance, often times, is referred to as transitional provisions. Such transitional provisions are contained in Chapter XX of CGST Act. As noted, as per sub-section (1) of section 139 from the appointed day, every person registered under any of the existing laws and having a valid Permanent Account Number would be issued a certificate of registration on provisional basis subject to conditions. Under sub-section (2) of section 139 final certificate of registration would be granted in prescribed format subject to fulfillment of conditions which may be prescribed. Section 140 also contained in said Chapter XX is of considerable importance for us and carries caption note Transitional arrangement for input tax credit. Sub-section (3) of section 140 reads as under: "140. Transitional arrangements for input tax credit. (3 ) A registered person, who was not liable to be registered under the existing law, or who was engaged in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchased from the manufacturers prior to twelve months of the appointed day. 16.While considering the rival contentions with respect to the constitutionality of this provision, we may broadly refer to the contours of the Court's powers in holding a law made by the legislation as unconstitutional and the limits of such powers. In case of Budhan Choudhry and ors vs. State of Bihar reported in AIR 1955 Supreme Court 191, seven Judge Bench of the Supreme Court held and observed that when Article 14 forbids class legislation, it does not forbid reasonable classification. However, for the classification to be reasonable, two conditions must be fulfilled viz. (i)that the classification must be founded on a intelligible differentia which distinguishes persons or things that are grouped together from this legal difference of the credit and (ii) that the differentia must have a rational relation to the object sought to be achieved by the statute in question. 17. In case of The State of Jammu & Kashmir vs. Triloki Nath Khosa and ors reported in AIR 1974 SC 1 the Constitution Bench of the Supreme Court upheld the legislation classifying Assistant Engineers into Degree-holders and Diploma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be struck down on the ground that the Court thinks it unjustified. Parliament and legislatures, composed as they are of the representatives of the people and supposed to know and be aware of the need of the people and every what is good and bad for them. The Court cannot sit on the judgement over their wisdom. 19.In the recent judgement of the Supreme Court in case of Shayra Bano vs. Union of India and ors reported in (2017) 9 SCC 1, Rohinton Fali Nariman, J., however, expressed a somewhat different view. It was observed that a statute can also be struck down if it is manifested arbitrary. It was observed as under: "101. It will be noticed that a Constitution Bench of this Court in Indian Express Newspapers v. Union of India, (1985) 1 SCC 641, stated that it was settled law that subordinate legislation can be challenged on any of the grounds available for challenge against plenary legislation. This being the case, there is no rational distinction between the two types of legislation when it comes to this ground of challenge under Article 14. The test of manifest arbitrariness, therefore, as laid down in the aforesaid judgments would apply to invalidate legislation as well as subo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events-self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability. The court must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry" that exact wisdom and nice adoption of remedy are not always possible and that "judgment is largely a prophecy based on meagre and un-interpreted experience". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There, may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward. As was observed in Phillips vs. Eyre[3], a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law. 32. The obvious basis of the principle against retrospectivity is the principle of 'fairness', which must be the basis of every legal rule as was observed in the decision reported in L'Office Cherifien des Phosphates v. Yamashita-Shinnihon St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt stated broad legal principles while testing a retrospective statute, in the following manner: "(i) A law cannot be held to be unreasonable merely because it operates retrospectively; (ii) The unreasonability must lie in some other additional factors; (iii) The retrospective operation of a fiscal statute would have to be found to be unduly oppressive and confiscatory before it can be held to be unreasonable as to violate constitutional norms; (iv) Where taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy of tax or that is confiscatory, courts will be justified in striking down the impugned statute as unconstitutional; (v) The other factors being period of retrospectivity and degree of unforeseen or unforeseeable financial burden imposed for the past period; (vi) Length of time is not by itself decisive to affect retrospectivity." 25.We may now come to the nature of the right enjoyed by the petitioner as a first stage dealer prior to introduction of GST and the changes made by the new law concerning the petitioner's right to enjoy such benefits. As already recorded, the statutory provisions till enactment of goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessee defaults in payment of duty beyond thirty days from the date prescribed under subrule (1) then notwithstanding anything contained in the sub-rule(1), the assessee shall pay excise duty for each consignment at the time of removal without utilizing the CENVAT credit till the assessee pays the outstanding amount including interest. The Court while striking down such Rule unconstitutional observed as under: "31.This extreme hardship is not the only element of unreasonableness of this provision. It essentially prevents an assessee from availing cenvat credit of the duty already paid and thereby suspends, if not withdraws, his right to take credit of the duty already paid to the Government. It is true that such a provision is made because of peculiar circumstances the assessee lands himself in. However, when such provision makes no distinction between a willful defaulter and the rest, we must view its reasonableness in the background of an ordinary assessee who would be hit and targeted by such a provision. As held by the Supreme Court in the case of Eicher Motors Ltd (supra) an assessee would be entitled to take credit of input already used by the manufacturer in the final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ST Act. The legislature also recognized such existing rights and largely protected the same by allowing migration thereof in the new regime. In the process, however, a condition was imposed to enable the assessees in the nature of first stage dealer such as the present petitioner-company viz. that the invoices or other prescribed documents on the basis of which credit was claimed were issued not earlier than twelve months immediately preceding the appointed day. In effective terms, this condition restricted the enjoyment of existing credit in respect of goods purchased not prior to one year of the appointed day. In relation to all goods purchased prior to such day, no credit would be available under the credit ledger to be maintained under the CGST Act. Such credit would be lost. Undoubtedly, therefore, this condition has retrospective operation and takes away an existing right. This by itself may not be sufficient to hold the provision as ultra vires or unconstitutional. However, in addition to these findings, we also find that no just reasonable or plausible reason is shown for making such retrospective provision taking away the vested rights. Had the statutory provision given a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlier. In other words, from the date of introduction of the proviso, the benefit of utilization of CENVAT credit under certain circumstances would be restricted to a period of six months. This provision thus, did not act with retrospective effect. 29. We are conscious that the Bombay High Court in case of JCB India Limited and others v. Union of India and others(supra) has taken a different view. We have given our detailed reasons for the view that we have adopted. Needless to record, we are unable to adopt the line chosen by the Bombay High Court in case of JCB India Limited and others v. Union of India and others(supra). 30. To sum up we are of the opinion that the benefit of credit of eligible duties on the purchases made by the first stage dealer as per the then existing CENVAT credit rules was a vested right. By virtue of clause (iv) of sub-section (3) of section 140A such right has been taken away with retrospective effect in relation to goods which were purchased prior to one year from the appointed day. This retrospectivity given to the provision has no rational or reasonable basis for imposition of the condition. The reasons cited in limiting the exercise of rights have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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