Tax Vista

Your weekly tax recap

Edn. 295 - 26th October 2026

Dr. G. Gokul Kishore

Capital goods credit - Transition of 100% credit valid

GSTAT Benches have been passing certain orders which interpret the provisions keeping in view both the letter and spirit of GST as a reformist and progressive law. One of the disputes that arose on transitional credit was whether Cenvat credit not availed on capital goods which were received after 1 July, 2017 can be availed through TRAN-1 form as transitional credit. Section 140 of CGST Act provides for transitioning unavailed credit in respect of capital goods. Because capital goods credit was to be availed in two instalments in Central Excise regime, the tax officers took the position that 50% credit ought to have been availed in Central Excise returns and balance of 50% alone can be transitioned through TRAN-1 form to GST regime. This means, if for some reason, credit was not availed on capital goods just before GST was introduced, and if someone tries to avail 100% credit through TRAN-1 form, then GST authorities were ordained to issue SCN.

GSTAT, Chandigarh Bench has rejected such stand. It has clearly held that whether 50% or 100% - unavailed credit on capital goods can well be transitioned through TRAN-1 form. Credit not carried forward in return and which is unavailed, can be transitioned and the provision does not specify that only 50% can be transitioned through TRAN-1 form. In the case before it, GSTAT said that the attendant conditions have been fulfilled by the appellant-taxpayer and therefore, availing / transitioning 100% credit on capital goods which were imported through bill of entry carrying date before 1 July, 2017 and which were received in the factory after implementation of GST, was correct and as per law. This order will help similarly placed taxpayers as this issue is widely prevalent. An amendment to Section 140 to settle permanently such eternal disputes on transitional credit can be considered.

The order is well-reasoned as it rejects taxpayer's plea for transitional credit on a strange transaction. Central Excise duty was paid before GST and the goods were exported after implementation of GST and hence, IGST was again paid. Instead of claiming rebate / refund, the taxpayer transitioned such duty / tax through TRAN-1 form as credit. The Tribunal said there is no provision in GST law to cover such situation and could not have used Section 140 as a residuary provision to avail credit which is not admissible. Contention on protection of right accrued under Section 174 of CGST Act was negatived by the Tribunal on the ground that no right accrued under the Central Excise Act ("existing law") and Section 174 was not applicable. TRAN-1 form was seen as panacea for all things perceived as lost by certain taxpayers and the Tribunal in this case has clearly drawn the line. Judgments relied on by the taxpayer have been distinguished with decent discussion which can hardly be seen in the orders of adjudicating and appellate authorities [2026-VIL-231-GSTAT-CHD].

SCN and order using different provisions - GSTAT thrashes with earful

Show cause notice said what all other SCNs in the country say on this issue - suppliers did not file GSTR-3B returns and therefore, ITC availed by the recipient was ineligible. The only mistake committed in this case was quoting the wrong provision - Section 16(2)(aa) of CGST Act. There was no allegation that tax was unpaid by such suppliers and there was no whisper on any subsequent payment by them. The case is not one of non-referral of a provision but of wrong referral, as per the order. As the order of GSTAT notes - "The SCN did not set out the actual charge nor establish the facts to allege a non-payment of tax under Section 16(2)(c)." The adjudication order, as usual, said tax was not credited to government account and credit was disallowed under Section 16(2)(c). The Appellate Authority is the second line of defence for the department - he proceeded to hold that quoting Section 16(2)(aa) was a "patent error" but confirmed the demand invoices were not reflecting in GSTR-2A. The department tried to put a brave face to argue that mere mention of wrong provision does not render SCN invalid.

The GSTAT uses choice terms to script an order that rips apart the disguise of the department. It says the OIO had "artfully dodged / side stepped the above vital question" referring to SCN using one provision and OIO taking refuge under a different provision. The order says - "On perusal of the SCN we find that nowhere has the tax payer been put to notice regarding any such infraction of the said section 16(2)(c). As such we find that this a last-ditch attempt by the department to confirm the demand in question (which was raised on inapplicable sections of the law) through an insinuation / improvisation which was never part of the original show cause notice..It was the bounden duty of the appellate authority to see through this smoke screen and hold that the demand which has been raised on anachronous statutory grounds has no leg to stand on."

The Tribunal relied on the Apex Court ruling in Armour Security [2025-VIL-63-SC] and highlighted Section 75(7) specifically bars confirmation of a demand on grounds other than those specified in the notice. The ratio is - mere recital of a provision in the SCN without stating how it was contravened, would not amount to a charge made [2026-VIL-235-GSTAT-ERN].

Remand power of Appellate Authority - Issue gets fresh lease of life in GST

The issue as to whether Appellate Authority is empowered to remand a case for de novo decision by the adjudicating authority had its run in the Central Excise regime with good number of judgments. Having learnt such a lesson, draftsmen ensured a specific provision in the form of Section 107(11) of CGST Act was brought. This provision expressly states that the Appellate Authority shall pass order confirming, modifying or annulling the order appealed against but shall not refer the case back to the adjudicating authority. Whether such prohibition applies even for a routine verification gets answered by the first part of this provision which states "The Appellate Authority shall, after making such further enquiry as may be necessary.". Therefore, the Appellate Authority can conduct verification but, in any case, shall not send the case back for fresh decision.

In a case before GSTAT Ernakulam Bench, the order of the Appellate Authority directing the adjudicating authority to examine the correctness of reconciliation statement furnished by the taxpayer was assailed by the GST department on this ground of absence of power to remand the case back. The departmental representative specifically argued on this point and the Tribunal noted that on merits regarding the need to verify, there was no dispute. It held that the Appellate Authority had embarked on a course of action expressly forbidden even though statute provides enough powers to make enquiry. The order being in violation of the said provision was set aside.

This issue will come up in a good number of cases before GSTAT. Appellate Authorities in certain cases have tried to distinguish the provision on the ground that it does not place an absolute ban on giving direction to verify. The rationale is that, in principle, the authority has agreed with the appellant but for quantum of benefit to be extended, verification is required which is better done by jurisdictional / adjudicating authority. GSTAT does not agree as it perceives remand as no-go for the Appellate Authority and whatever original work like reconciliation, calling for documents and excel sheets, etc., are required, they have to be done by him alone. Section 75(3) of CGST Act states "Where any order is required to be issued in pursuance of the direction of the Appellate Authority or Appellate Tribunal or a court, such order shall be issued within two years from the date of communication of the said direction." This is being interpreted in certain quarters as empowering the Appellate Authority to give direction to adjudicating authority though this provision has not been discussed in the GSTAT order. It is time a circular is issued so that reading of Section 75(3) in conflict with Section 107(11) is avoided [2026-VIL-237-GSTAT-ERN].

Compensation cess - Tribunal seeks to compensate for revenue loss

Tax laws live for ages long after they have gone through the litigation they create. Compensation cess was paid at 20% while the department argued it should have been paid at 22% as per Notification No. 05/2017-Compensation Cess (Rate). This is on SUV type vehicles which satisfy the conditions like engine capacity exceeding1500 cc, length exceeding 4000 mm and ground clearance above 170 mm. The crux was ground clearance or rather how it should be reckoned - Creta having 169 mm in laden condition or 170 mm in unladen condition.

As per internet, ground clearance is measured as the vertical distance between the ground and the lowest structural point of the car (excluding tyres) - higher this number, lesser are the chances of hitting bumps etc. Laden indicates measuring such height when the vehicle is with passengers and fuel tank is full and unladen, when the vehicle is empty.

GSTAT took note of the amendment made in 2023 whereby ground clearance was defined as meaning ground clearance in unladen condition. CBIC Circular No. 247/04/2025-GST dated 14-2-2025 was also taken note of which clarified that the amendment was applicable from 26-7-2023 i.e., prospectively. This effectively meant that, for the period before amendment, ground clearance definition was not applicable. The Tribunal drew the line stating that such amendment did not separately declare that every pre-amendment vehicle must be measured in the laden condition. Even if the technical documents point otherwise, the manner of marketing and common parlance were highlighted to hold the vehicles as covered under "SUVs".

A rather perilous path adopted by GSTAT is distinguishing Bombay High Court judgment in Mercedes-Benz India Pvt. Ltd. [2025-VIL-452-BOM] on this issue - first on territoriality and second on interpretation. It expressed open disagreement and refused to read "laden condition" in the notification for the period before amendment. By labouring to author a pro-revenue order in express terms by using observations like "it is legally impermissible for courts or taxpayers to augment the text to facilitate a lower tax rate.", this Tribunal order seems to have rendered itself vulnerable in terms of judicial scrutiny. If taken to High Court, the appeal by taxpayer is bound to succeed because except a very cryptic two sentences, the order is deafeningly silent on sustainability of suppression and invocation of Section 74 in this case involving so much of interpretation [2026-VIL-242-GSTAT-LCK].

Delay of 175 days in passing order under Section 129 - High Court restores vehicles to owner

Section 129 of CGST Act on detention of vehicles and goods is one of the most obnoxiously abused provisions. In this column, omission of this rule is emphasized considering the fact it has become a tool to throw taxpayers out of business. It specifies time limit of seven days to issue notice and another seven days to pass order. In a case before Calcutta High Court, the vehicle owner argued that his vehicles were detained and order was passed after delay. The Court noted the delay of 175 days and held that the order was barred by limitation and issued without jurisdiction. The justification for delay was pendency of writ petition filed by supplier before Gauhati High Court. The Calcutta High Court said that the supplier's petition was against cancellation of registration and proceedings under Section 129 were not stayed by Gauhati High Court. The ratio will be helpful to taxpayers as the Court said - "A pending proceeding elsewhere does not stop a statutory period from running unless a competent court has ordered so." Release of vehicles without insisting on payment of tax was ordered.

GST Council in the recent meeting has recommended amendment to Section 129 - vehicle can be intercepted only based on specific intelligence and with authorization of Joint Commissioner, no interception in in-transit States, etc. Earlier, it was delinked from Section 130 on confiscation and now it is recommended that Section 130 itself will not be applicable in respect of goods and conveyances in transit. The confusion over the real intent behind drafting Section 129 is so palpable and the sooner it goes, the better for businesses. As noted in Tax Vista earlier, the department has Section 122 and Section 74A which can take care of the imagined revenue loss due to "rampant evasion" by vehicles on the road with no or expired e-way bills [2026-VIL-1201-CAL].

[Read previous edition dated 19.10.2026]

[The author is an Advocate. The views expressed are strictly personal.]