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2018 (9) TMI 885

s made by the First Stage Dealer - As per law existing prior to introduction of GST, the first stage dealers like the petitioners are not burdened with the excise duty component, and no time restrictions existed - petitioner is aggrieved by the provisions contained in Clause(iv) of sub-section(3) of section 140 of the CGST Act which provides that such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day. This condition would limit the eligibility of a first stage dealer to claim credit of the eligible duties in respect of goods which were purchased from the manufacturers prior to twelve months of the appointed day. - Whether the impugned provision makes an impermissible distinction between similarly situated persons forming a homogenus class? - Whether the provision in question without proper justification takes away the vested right of the petitioners and thus acts with retrospective effect? - Whether clause(iv) of subsection (3) of section 140 of the CGST Act is required to be declared unconstitutional? - Held that:- It is well settled that as long as the legislation has necessary competence to f .....

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n the prior regime. - The present condition however without any basis limits the scope of a dealer to enjoy existing tax credits in relation to purchases made prior to one year from the appointed day. No such restriction existed in the prior regime. Merely the stated grounds in the affidavit in reply that the provision is introduced since physical identification of goods is necessary so as to ensure that the first stage dealers do not take any undue advantage of such benefit and also to accommodate the administrative convenience would not be sufficient. - 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 no co-relation with the advent of GST regime. Same factors, parameters and considerations of “in order .....

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lar 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 prior to introduction of GST therefore, made suitable provisions to ensure that the first stage dealers like the petitioners are not burdened with the excise duty component. We would advert to these provisions in detail at a later stage. Suffice it to record at this stage that as long as the petitioners fulfill the necessary conditions provided in the said Rules of 2004, the petitioners could pass on the credit of the duty paid on the purchases to their purchasers-manufacturers. 4. The Union legislature framed different laws to usher in the GST regime in substitution of the existing Central Excise and Value Added tax provisions and certain other taxing statutes. The Central Goods and Services Tax Act, 2017 ( CGST Act for short) was brought into effect from 1.7.2017. Section 9 thereof is a charging section providing for levy and .....

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lso 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 dealers by pointing out that in case of manufactures claiming credit co-relation of tax paid goods and the goods sold was not necessary, unlike in case of dealers where such co-relation is essential. In case of dealers, in earlier law, they were entitled to pass on CENVAT credit of the duty paid to the manufacturer to the purchaser. This required co-relation of the goods and the duty paid. In such background, it is contended that since the physical identification of goods is necessary for the same, so as to ensure that the first stage dealers do not take any undue advantage of such benefit and so as to accommodate the administrative convenience, the stature has provided for the restriction of 12 months. The petitioners' case was also distinguished from the case of an unregistered dealer by pointing out that under section 140 of .....

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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 reported in (2016) 1 Supreme Court Cases 614. ii) Decisions of Supreme Court in case of Thermax Private Ltd. v. Collector of Customs reported in 1992 (61) ELT 352 (SC) and in case of Hyderabad Industries Ltd. v. Union of India reported in 1999 (108) ELT 321 (SC) were cited to highlight the nature of CVD and purpose of imposition of the same. iii) Following decisions were cited to contend that even the taxing statutes must be in conformity with Article 14 of the Constitution : a) The State of AP and another v. Nalla Raja Reddy and others reported in AIR 1967 Supreme Court 1458. b) John Vallamattom and another v. Union of India reported in AIR 2003 Supreme Court 2902. c) Kunnathat Thathunni Moopil Nair etc. v. State of Kerala and another reported in AIR 1961 Supreme Court 552. Certain other decisions were cited in the context of testing a taxing .....

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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. iii) In support of the contention that merely because the classification leads to disadvantage to the petitioners itself is not a ground to invalidate the statute, reliance was placed on the decision of Supreme Court in case of State of Bihar and others v. Sachchidanand Kishore Prasad Sinha and others reported in (1995) 3 Supreme Court Cases 86. iv) In support of the contention that a taxing statute cannot be challenged on the ground that it is unjust or acts harshly against some, decision of Supreme Court in case of Union of India and others v. Nitdip Textile Processors Private Limited and another reported in (2012) 1 Supreme Court Cases 226. v) Decision in case of State of W.B and another v. E.I.T.A. India Ltd. and others reported in (2003) 5 Supreme Court Cases 239 was cited in support of the contention that in taxing statute, the legislature enjoys greater la .....

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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 goods directly from,- (i) the manufacturer under the cover of an invoice issued in terms of the provisions of Central Excise Rules, 2002 or from the depot of the said manufacturer, or from premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer, under cover of an invoice; or (ii) an importer or from the depot of an importer or from the premises of the consignment agent of the importer, under cover of an invoice; 12. Sub-rule(1) of Rule 3 of the Rules of 2004 empowered a manufacturer or producer of final products or a provider of input service to take CENVAT credit of the excise duty and other duties specified therein. Rule 9 inter-alia provided that CENVAT credit shall be taken by the manufacturer on the basis of documents mentioned therein. Sub-clause(iv) of clause (a) of sub-rule(1) of .....

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or 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 the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012-Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer, shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:- (i) such inputs or goods are used or intended to be used for making taxable supplies under this Act; (ii) the said registered person is eligible for input tax credit on such inputs under this Act; (iii) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in .....

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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-holders for the purpose of promotion. It was observed that classification on the basis of educational qualifications made with a view to achieving administrative efficiency cannot be said to rest on any fortuitous circumstances and one has always to bear in mind the facts and circumstances in order to judge the validity of a classification. It was observed that there is a presumption of constitutionality of a statute. The burden is on one who canvasses that certain statute is unconstitutional to set out facts necessary to sustain the plea of discrimination and to adduce cogent and convincing evidence to prove those facts. In order to establish that the protection of the equal opportunity clause has been denied to them, it is not enough for the petitioners to say that they have been treated differently from others, not even enough that a differential treatment has been accorded to them in comparison with other s .....

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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 subordinate legislation under Article 14. Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary. We are, therefore, of the view that arbitrariness in the sense of manifest arbitrariness as pointed out by us above would apply to negate legislation as well under Article 14." 20. It is well settled that as long as the legislation has necessary competence to frame a law and the law so framed is not violative of the fundamental rights enshrined in the constitution or any of the constitutional provision, the Court would not strike down the statute merely on the perception that the same is harsh or unjust. Particularly, in taxing statutes the Courts have recognized much greater latitude in the legislation in fra .....

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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 pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Reig Refining Company 94 Lawyers Edition 381 be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possib .....

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n 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 Steamship Co.Ltd[4]. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this legal position was conceded by the counsel for the parties. In any case, we shall refer to few judgments containing this dicta, a little later. 33. We would also like to point out, for the sake of completeness, that where a benefit is conferred by a legislation, the rule against a retrospective construction is different. If a legislation confers a benefit on some .....

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y 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 and service tax statutes recognized the right of the petitioner to pass on credit of the duty on manufactured goods purchased from manufacturers. In some form or the other the burden of duty element of the goods so purchased or the CVD value of the imported goods would be shifted from the petitioner-company as first stage dealer. Duty element suffered on the goods purchased from manufacturers would be neutralized at the time of sale of such goods by the dealer. In case of Eicher Motors Ltd vs. Union of India (supra), the Supreme Court considered the nature of Modvat credit and observed that if on the inputs the assessee had already paid the taxes on the basis that when the goods are utilized in the manufacture of further products as inputs thereto, then the tax on these goods get adjusted which are finished subsequently. The Court therefore held that a right accrued to the assessee on the date when the .....

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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 product. In the said case, the Supreme Court was dealing with rule 57F which was introduced in the Central Excise Rules, 1944 under which credit lying unutilized in the Modvat credit account of an assessee on 16th March 1995 would lapse. Such provision was questioned. The Supreme Court held that since excess credit could not have been utilized for payment of the excise duty on any other product, the unutilised credit was getting accumulated. For the utilization of the credit, all vestitive facts or necessary incidents thereto had taken place prior to 16.3.1995. Thus the assessees became entitled to take the credit of the input instantaneously once the input is received in the factory of the manufacturer of the final product and the final product which had been cleared from the factory was sought to be lapsed. The Supreme Court struck down the rule further observing that if on the inputs the assessee had a .....

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ficient 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 time limit from the appointed day for utilization of such credit, the issue would stand on an entirely different footing. Such a provision could be seen as a sunset clause permitting the dealers to manage their affairs for which reasonable time frame is provided. The present condition however without any basis limits the scope of a dealer to enjoy existing tax credits in relation to purchases made prior to one year from the appointed day. No such restriction existed in the prior regime. Merely the stated grounds in the affidavit in reply that the provision is introduced since physical identification of goods is necessary so as to ensure that the first stage dealers do not take any undue advantage of such benefit and also to accommodate the administrative convenience would not be sufficient. Firstly, as noted, there was no such restriction in the CENVAT Credit Rules or analogous provisions of similar rules in .....

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