Tax Experts react to Division Bench ruling in 'Sutherland Global' case

In a much awaited ruling, the Division bench of the Madras High Court has reversed the order of the Single Judge and held that the taxpayer is not entitled to transition the accumulated balance of cesses as input tax credit and utilize the same against any output liability under the GST.

Some of the key observations of the Court which formed the basis of the decision include (i) cross utilization between cesses and normal duties/taxes was not permitted even prior to July 1, 2017; (ii) cesses were not specified in the list of duties/taxes subsumed into GST; (iii) unutilized credit of Cesses is a dead claim after its discontinuation in 2015, which cannot be revived by GST; and (iv) Credit is not a vested right but only a concession available on fulfillment of specified conditions. 

While many industry players have recognized these credits as a realizable asset and were hoping for a positive outcome, this decision has upset the expectations. The issue is pending in various stages in audits and adjudication and many taxpayers have also reversed the credit under protest, hoping to get it reinstated later. 

The decision has extensively analysed the background and nature of the levy of cess, the principle of vested right and the object and purpose of the transition provisions. However, the Court has not commented on the validity of the retrospective amendments to section 140 with effect from 1 July 2017 and the failure to make the amendment specifically applicable to cases covered by Centralised registration [section 140(8)] under the erstwhile regime, leaving scope for further debate. The absence of a specific lapsing provision is also not discussed, leaving the question open now as to whether a taxpayer can claim refund of the cess balances. The Court does not seem to have taken cognizance of the subsuming of cess into excise duty rates in 2015 (when they were abolished) and the hike in rate to 12.50 percent (0.50 percent increase). The industry is still hopeful that this issue may find a favourable interpretation by other High Courts/ Apex Court.

This judgment is likely to come as a setback to the industry. Arguments such as credit of unutilized cess is a vested right and hence, even in case of omission in mentioning transition of such cesses under Section 140, machinery provisions are required to be interpreted liberally to make the scheme of law workable, could not hold good.

Given the stakes involved it is likely that the matter would travel to the Apex Court and hence some more time before the dust settles.

Also, inability to utilize validly availed credit made it a ‘dead claim’ in 2015 itself, is an interesting observation, which is likely to ignite the debate further.

Fine combing through Section 140, the Madras HC has clarified that the non-inclusion of cesses such as EC, HEC and KKC in the ‘Eligible Duties’ would transpire into a reading that cesses cannot be carried forward for set-off in GST regime. The same has been reinforced by way of explanation 3 to Section 140.

The Madras HC deep dived into the distinction between taxes, duties, cesses to conclude that cesses are different from taxes and duties; they are meant for specified purposes and are spent exclusively on those purposes. EC and SHEC were opined as dead claims in light of the fact that the same got discontinued in 2015. Further, KKC was also not subsumed into GST. Hence, the question of carrying forward these three cesses does not arise as per the Court.

5 years ago, the EC and SHEC were subsumed under Excise duty and Service Tax. While this amendment was proposed, the Finance Minister in his budget speech said:

“118. As part of the movement towards GST, I propose to subsume the Education Cess and the Secondary and Higher Education Cess in Central Excise Duty. In effect, the general rate of Central Excise Duty of 12.36% including the cesses is being rounded off to 12.5%.

121. Introduction of GST is eagerly awaited by Trade and Industry. To facilitate a smooth transition to levy of tax on services by both the Centre and the States, it is proposed to increase the present rate of service tax plus education cesses from 12.36% to a consolidated rate of 14%.”

Hence, the subsuming of EC and SHEC were steps taken towards a smoother transition to GST. What seems ironic is that now under GST, the Court seems to have ignored this fact and has held that the cesses to have been dead much before GST arrived.

The judgement comes as a blow to the trade who were hoping to utilise the credit of cesses to pay off their output tax liability. This judgement also gives rise to an important question – the fate of taxpayers who may have availed and utilised the credit of such cesses – Is there a litigation waiting to happen? One cannot ignore the interest liability that may arise on reversals. While this is almost certain to reach the Supreme Court, a finale can be expected to be intense.

The decision may not be to the liking of the industry, but personally I feel it is a good judgment which has brought finality to the controversy brewing for the past several years. The judgment basically upheld the CBIC Circular as well as the Delhi HC judgment in the matter of Cellular operators while bringing in the specific distinction made in respect of NCCD Vs E. Cess. The plea from revenue end has put forth their points in a systematic manner in order to get the clarity in the judgment. On the other side, the defence counsel has articulated the industry concerns with supported case laws. As acknowledged in the judgment, it was a well drafted arguments resulted in a well-reasoned judgment though not in good taste for all those with huge cess accumulations. With this judgment on hand, now there will be no more claims for filing the revised Tran-1 applications and atleast industry has certainty on this issue.

“GST Law subsumed 17 indirect taxes which were applicable prior to July 1, 2017. The transition of unutilised ITC could be allowed only in respect of taxes and duties which were subsumed in the new GST Law. Admittedly, the three types of Cess, namely Education Cess (EC), Secondary and Higher Education Cess (SHEC) and Krishi Kalyan Cess (KKC) were not subsumed in the new GST Laws, either by the Parliament or by the States. Credit of such EC and SHEC which could not be utilised against the output EC and SHEC liability, while the said impost was in force prior to Finance Act, 2015, became a dead claim in the year 2015 itself and therefore, there was no question of allowing a carry forward and set off after a gap of two years against the output GST Liability w.e.f. July 1, 2017 – This is the observation of the Hon’ble Madras HC (Division Bench) in Assistant Commissioner of CGST and Central Excise and Ors. v. Sutherland Global Services Pvt. Ltd. & 2 Ors. [TS-878-HC-2020(MAD)-NT], while setting-aside the judgment of Ld. Single Judge in Sutherland Global and thus, disallowing transition of cesses into GST. 

Earlier, the decision of the Ld. Single Judge of Madras High Court was based on the principles of vested rights accruing to a taxpayer to avail credit and seamless flow of credit, as envisaged under GST, in the absence of specific provisions providing for lapse of credit. In addition, since the amendment to Section 140(1) of the CGST Act, 2017 did not extend to Section 140(8) [i.e. centralised registration], an exception was drawn for service providers with a centralised registration. But now the Ld. Division Bench has reversed this view to held that CENVAT credit or ITC under the GST Regime is a concession and a facility and not a vested right by relying on SC judgment in Uttam Steel and Jayam & Co., also relies upon SC ruling in Unicorn Industries which has held earlier two judgments of the Supreme Court by two Judges Bench as per incuriam.

It may also be noted that GST Policy Wing of CBIC has given its inputs/ comments on several policy matters in the writ petitions / PILS / appeals filed on issues pertaining to transitional credit vide F. No. CBEC-20/10/11/2019-GST/1001 dated 22.06.2020, to help jurisdictional tax offices to safeguard the interest of revenue. Amongst, other points, one of the comments states the Cenvat credits or input tax credits are not absolute/ vested rights over and above the statue and are subject to statutory provisions and rule under which they exists. It seems that the otherwise proclaimed universal concept of ‘vested right of ITC’ has now to be applied judicially.”

The controversy with respect to whether credits and cesses are vested rights will have to be addressed pragmatically at the apex court now. We have seen decision of Delhi High Court in Brand Equity Vs UOI & others which emphasised that credit remains a vested right. While the equity jurisdiction cannot be imposed in the tax matters, the objectives of GST that there cannot be any tax cascading impact in the transition phase cannot be overlooked. The courts will have to address the retrospective amendment in tax laws as well. It is a settled law that retrospective amendments would be applicable only in certain cases and this aspect must be argued to prove that the benefit cannot be curtailed at a later stage.