Transitional Credit under GST: Delhi High Court comes to the rescue of Input Service Distributors

 

CA Tushar Aggarwal, Co-Founder, Tattvam Group & CA Chetan Agrawal, Executive Partner, Tattvam Advisors

 

Introduction

The Hon'ble Delhi High Court, recently in the matter of Hero Motocorp Ltd. v. Union of India,[1] has cleared out the ambiguity on a long-standing disputed issue between the department and the taxpayers regarding availment of transitional credit under GST by an Input Service Distributor ("ISD"). Vide its order dated 10.10.2022, the Hon'ble Court has quashed the Departmental Instruction issued in July, 2018 ("Clarification") whereby the Department had clarified that ISDs are not eligible to carry forward balance CENVAT credit to GST regime.

 

The Dispute

The provisions for availing credit of input tax pertaining to pre-GST levies lying undistributed with an ISD, as transitional credit under GST, has been a debatable matter, and many taxpayers have faced demand and recovery proceedings from the department for transitioning such credit in FORM GST TRAN-1.

 

An ISD is an office of a supplier of goods or services or both which receives tax invoices towards the receipt of input services and issues a prescribed document for distributing the credit of tax paid on the said services to a supplier having the same Permanent Account Number as that of the said office.[2]

 

The provision essentially caters to a business with GST registrations in different states which receive some common input services in the course of their business. Accordingly, the input tax credit towards the common input services is availed by the ISD and distributed to each of these registrations.

 

Now, Section 140 of the Central Goods and Services Tax Act, 2017 ("CGST Act") lays down the provisions for transitional arrangements of input tax credit. Under these provisions, inter alia, a taxpayer having unutilised credit of eligible duties under the pre-GST laws is entitled to take such credit in its GST electronic credit ledger.

 

However, the Department has time and again challenged the transitioning of such pre-GST credit by an ISD registered under existing law, alleging that it is not eligible to carry forward the transitional credit under Section 140 of the CGST Act and that the said credit is not eligible for distribution. Further, the amount of balance CENVAT credit lying with the ISD automatically lapses after 01.07.2017 as the same is not covered by FORM GST TRAN-1. The said understanding of the Department get support from the Clarification issued by the Department.

 

On the other hand, in such disputes, the taxpayers have been contending that all the conditions laid down in Section 140(1) for taking the transitional credit are satisfied for ISD as well, and accordingly the credit should be allowed to be transitioned and distributed. Further, the taxpayers have also drawn strength from Section 140(7), which expressly provides that ITC on account of any services received prior to the appointed day by an ISD shall be eligible for distribution as credit under the CGST Act, within the prescribed time and in the prescribed manner, even if the invoices relating to such services are received on or after the appointed day.

 

Therefore, the CGST Act does not have any restricting provisions with respect to the availment of transitional credit by ISD. On the contrary, the Act provides for enabling provisions in this regard. Nevertheless, the Department has maintained the position as clarified in the Clarification.

 

It is pertinent to note that, in reference to the above issue, the Hon'ble CESTAT Bangalore has emphasised on the principle of 'revenue neutrality' and ITC being a substantive right of the assessees. In Maini Precision Products Ltd. v. Commissioner of Central Tax,[3] the Tribunal has observed that once the Department has not disputed the eligibility or entitlement of credit, then the failure of the appellant to distribute the same and transition to GST after coming into force of GST is only a procedural lapse and it will not affect the substantive right of the appellant. The Tribunal further observed that the subject demand results into revenue neutral situation because even if the appellant had distributed the credit, it would have flown back into common Electronic Credit Ledger and would have been available for utilization by appellant post GST regime in terms of Section 25 of the CGST Act.

 

Further, the Hon'ble Kerala High Court in the matter of South Indian Bank v. Union of India,[4] held that since CENVAT credit was validly taken by the assessee in the pre-GST period in complete compliance with the prescribed procedures, it should be allowed to carry forward and distribute the same notwithstanding any procedural shortcomings with respect to the filing of GST TRAN-1. A similar view was endorsed by the Hon'ble Gujarat High Court in Bodal Chemicals Ltd. v. Union of India.[5] Further, also in the case of Colgate Palmolive (I) Limited [6] the Hon'ble Bombay High Court has allowed transition and distribution of accumulated CENVAT credit balance in the ISD registration under the erstwhile service tax regime with the direction to file revised declaration in Form GST TRAN-1.

 

Decision of the Delhi High Court

More recently, the Hon'ble Delhi High Court in Hero Motocorp Ltd. (supra), has quashed the instruction issued by the department in July, 2018, and restrained the Department from enforcing the recovery of accumulated credit transitioned by the petitioner in terms of Section 140 of the CGST Act concerning ISD registration granted to it by the respondents.

 

Therefore, the issue appears to have attained finality within the jurisdiction of the Delhi High Court, as the above decision will be squarely applicable to all matters wherein the Department has issued notices for recovery of such credit.

 

Way Forward

It needs to be seen whether the Department will prefer an appeal against the said decision or refrain from issuing any fresh inquiries/notices in this regard for the time being.

 

For the assessees the question that merits deliberation is whether they should formulate their litigation strategy by placing reliance on the above decisions, or look to avail the beneficial window to file/rectify FORM TRAN-1 which has been reopened pursuant to the decision of the Hon'ble Supreme Court in Union of India v. Filco Trade Centre.[7]

 

[Date: 27/10/2022]

 

(The views expressed in this article are strictly personal.)