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Indirect Tax Alert: GST - Madras High Court - Carried forward and utilisation of unutilised Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess under pre-GST to GSTĀ 

21 October 2020

Facts of the case

M/s Sutherland Global Services Private Limited (‘Taxpayer), engaged in providing technical and call centre services all over the country, claimed that accumulated unutilised amount of Education Cess (EC), Secondary and Higher Education Cess (SHEC) and Krishi Kalyan Cess (KKC), all jointly referred to as the "Cess" as per the balances lying in the electronic credit ledger, is a vested and indefeasible right accrued even after the levies were abolished.

The tax authority denied the said claim and mandated to reverse the CENVAT credit in the form of Cess. Aggrieved by the said order, the taxpayer filed a Writ petition (W.P.No.4773 of 2018) before the Madras High Court to carry forward and set-off accumulated unutilised amount of Cess against the output GST tax liability.

Single Member Bench of the High Court allowed the Writ vide order dated 09 September 2019 and held that it was entitled to adjust such unutilised CENVAT credit carried forward in its ‘Electronic Ledger’, which was so lying unutilised as on 30 June 2017, to be adjusted against the output GST liability with effect from 01 July 2017 in terms of Section 140 of the CGST Act, 2017.

Aggrieved by the said order, the tax authorities preferred further appeal before the Larger Bench contesting the carry forward and utilisation of ‘Cess’ against GST liability.

Arguments of the tax authorities and the High Court’s decision

The tax authorities submitted that all the aforesaid three types of Cess were imposed by different Finance Acts and Education Cess and Secondary and Higher Education Cess were also abolished much before the enforcement of GST regime with effect from 01 July 2017. During the contemporary period of  the levy of the Cess, they were allowed to be set off or adjusted under CENVAT Credit Rules against the Output Cess Liability only and no cross utilisation of the Cess was allowed to be set off against the normal excise duty or customs duty payable by the taxpayer, even though the Cess imposed under the Finance Act were collected in the form of duty or tax, as the case may be, by reading mutatis mutandis the provisions of those parent enactments.

Cess is collected from the person on whom such liability is fixed to meet a particular kind of expenditure incurred by the government and its collection and expenditure is dedicated to that particular object or purpose of imposition of Cess. While tax is a general revenue, which can be spent by the government for general public purposes and duty is imposed on manufactures in the form of Excise Duty or Customs Duty on imports, under those specified laws, which also go to the general revenue of the state. Fees is yet another impost which has the basis of quid pro quo at its back.

Tax authorities also referred to the provisions of Section 140 of CGST Act, 2017 read with Rule 117 of CGST Rules, 2017 and CBIC Circular No.87/06/2019-GST on 02 January 2019.

The tax authorities also stated that the unutilised amount of Cess which could not be set off by the taxpayer during the contemporary period prior to 30 June 2017, cannot be allowed to be carried forward under the transitory provisions of Section 140 of the CGST Act, because it became a dead claim of the taxpayer and since the levy of Cess was not continued after 2015 nor such levy was subsumed in the listed 16 taxes which were subsumed under the GST law, the credit in respect of such Cess could not be claimed against the Output GST liability.

The unutilised Cess could not stand at parity with unutilised Input credit of specified excise duty. The dead claim cannot be revived after a time-gap of two years. In other words, the enactment of CGST Act, 2017 with effect from 01 July 2017 cannot be treated as revival or extension of limitation when the claim itself becomes a dead claim. The tax authorities also relied on the observations of the Hon’ble Supreme Court in the case of UOI v. Uttam Steels Ltd. (2015) 13 STC 209.

It was also argued that ‘Cess’ may have the colour of duty or tax at first blush per-se, but is not tax or excise duty per-se. It is submitted that the term duty does not include additional duties such as Education Cess, Secondary and Higher Education Cess NCCD etc. Thus, unless there is specific notification or provision which specifically provides for any benefit with regard to additional duty, the benefit that is applicable to basic duty or tax cannot be extended to the additional duty. In this connection the tax authority placed reliance on the decision of the larger bench of the Hon’ble Apex Court in UOI v Modi Rubber (1986 25 ELT 849 SC).

On a harmonious construction of entire section 140 which deals with transitioning of only the subsumed duties and taxes, a literal interpretation by the taxpayer to make subsection (8) as a standalone provision will only lead to absurdity.

It is submitted that as all the other subsections using the phrase CENVAT Credit “of eligible duties” or CENVAT credit “of eligible duties and taxes”, the absence of the phrase “eligible duties” in subsection (8) is nothing but an unintentional oversight by the draftsman and not intentional.

Apart from various decisions, the tax authorities also relied on the decision of the Hon’ble Supreme Court in Dilip S.Dhanukar Vs. Kotak Mahindra Co. Ltd. and Ors.[MANU/SC/8289/2007] wherein the ‘Doctrine of Purposive Interpretation’ has been explained with reference to Bennion’s Statutory Interpretation. Hence, the purpose of section 140 was to transition only the subsumed duty and taxes which were in existence as on 01 July 2017 and it was never the intention to transition the Cesses which have been abolished much prior 01 July 2017.

The purpose of section 140 was to transition only the subsumed duty and taxes which were in existence as on 01 July 2017 and it was never the intention to transition the Cesses which have been abolished much prior to 01 July 2017.

Carry forward in electronic ledger and filing of Form TRAN-1 will not confer any such right on the taxpayer. Mere accounting practice and accounting entries do not confer a right on the taxpayer in the taxation laws much less a vested right which cannot be undone or curtailed by statutory provisions.

The Court also referred the decision of Hon’ble Supreme Court in the case of Jayam and Co. v. Assistant Commissioner and Others [(2016) 15 SCC 125] in a case under Tamil Nadu Value Added Tax Act, 2006, held that  “it is trite law that whenever concession is given by a statute or notification etc., the conditions thereof are to be strictly complied with in order to avail such concession. Thus, it is not the right of the dealers to get benefit of input tax credit, but it is a concession granted by virtue of Section 19 and therefore, the conditions for availing such Input Tax Credit have to be fulfilled.”

The Court distinguished various case laws relied upon by the taxpayer and held it not applicable to the present case.

Finally, the Court held that the three types of Cess were not subsumed in the new GST Laws, either by the Parliament or by the States. Therefore, the question of transitioning them into the GST Regime and giving them credit under against Output GST Liability cannot arise. The plain scheme and object of GST Law cannot be defeated or interjected by allowing such Input Credits in respect of Cess, whether collected as tax or duty under the then existing laws and therefore, such set off cannot be allowed.

The Court held that the order passed by the single member bench is not correct due to the following reasons:

(a) The character of levy in the form of Cess like Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess was distinct and standalone levies and their input credit even under the Cenvat Rules which were applicable mutatis mutandis did not permit any such cross Input Tax Credit, much less conferred a vested right, especially after the levy of these Cesses itself was dropped.

(b) Explanation 3 to Section 140 could not be applied in a restricted manner only to the specified sub-sections of Section 140 of the Act mentioned in the Explanations 1 and 2 and as a tool of interpretation, Explanation 3 would apply to the entire Section 140 of the Act and since it excluded the Cess of any kind for the purpose of Section 140 of the Act, which is not specified therein, the transition, carry forward or adjustment of unutilised Cess of any kind other than specified Cess, viz. National Calamity Contingent Duty (NCCD), against Output GST liability could not arise.

 [ Sutherland Global Services Private Limited- Madras High Court- Writ Appeal no: 53/ 2020 dated October 16, 2020]