2018 (9) TMI 885 - HC - GST

Constitutional validity - Transitional Credit - Restriction on migration of Cenvat Credit to GST - Vires of clause(iv) of subsection (3) of section 140 of the CGST Act - CENVAT Credit - purchases 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 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 framing suitable laws. It is equally well settled that wherever the parliament has the power to frame a statute it also includes the power to make the law retrospective. In other words, the parliament also has wide powers to frame the laws including taxing statutes with retrospective effect. However, the Courts have recognized certain inherent limitations in framing retrospective tax legislations. The legislature (after transition to GST Regime) recognized the existing rights and largely protected the same by allowing migration thereof in the new regime. In the process, however, a condition was imposed to enable the assessees in the nature of first stage dealer such as the present petitioner-company viz. that the invoices or other prescribed documents on the basis of which credit was claimed were issued not earlier than twelve months immediately preceding the appointed day. In effective terms, this condition restricted the enjoyment of existing credit in respect of goods purchased not prior to one year of the appointed day. In relation to all goods purchased prior to such day, no credit would be available under the credit ledger to be maintained under the CGST Act. Such credit would be lost. Undoubtedly, therefore, this condition has retrospective operation and takes away an existing right. This by itself may not be sufficient to hold the provision as ultra vires or unconstitutional - 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. 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 to co-relate the goods or administrative convenience prevailed even under the Central Excise Act and the CENVAT Credit Rules when no such restriction was imposed on enjoyment of CENVAT credit in relation to goods purchased prior to one year. Though the impugned provision does not make hostile discrimination between similarly situated persons, the same does impose a burden with retrospective effect without any justification - clause (iv) of subsection (3) of section 140 is unconstitutional, and the same is struck down. Petition allowed.

Summary

Issues Involved:
1. Whether the impugned provision makes an impermissible distinction between similarly situated persons forming a homogeneous class.
2. Whether the provision in question without proper justification takes away the vested right of the petitioners and thus acts with retrospective effect.
3. Whether clause (iv) of subsection (3) of section 140 of the CGST Act is required to be declared unconstitutional.

Issue-wise Detailed Analysis:

1. Impermissible Distinction Between Similarly Situated Persons:
The petitioners argued that under the old regime, first stage dealers were treated similarly to manufacturers concerning excise duty credit. The new regime under the CGST Act, specifically clause (iv) of subsection (3) of section 140, imposes a condition that invoices or documents must not be older than twelve months preceding the appointed day, which disadvantages first stage dealers compared to manufacturers. The respondents contended that the classification was reasonable, emphasizing the necessity for physical identification of goods and administrative convenience. The court noted that while reasonable classification is permissible, the classification must have a rational relation to the object sought to be achieved, which was not sufficiently demonstrated by the respondents.

2. Retrospective Effect and Vested Rights:
The petitioners contended that the new provision acts retrospectively, taking away vested rights without justification. They cited several judgments, including Eicher Motors Ltd. v. Union of India, asserting that CENVAT credit is akin to a duty paid and cannot be withdrawn retrospectively. The respondents argued that the legislature has the competence to impose conditions on CENVAT credit and that the provision was not unduly oppressive. The court observed that the right to pass on the credit of excise duty paid on goods was a vested right under the old regime. The new provision, by imposing a twelve-month limit retrospectively, takes away this right without a reasonable basis, which is unjustified.

3. Constitutionality of Clause (iv) of Subsection (3) of Section 140:
The court examined the statutory provisions and the principles of judicial review concerning legislative competence and violation of fundamental rights. It referenced several judgments, including Budhan Choudhry v. State of Bihar and Shayra Bano v. Union of India, highlighting that a statute can be struck down if it is manifestly arbitrary. The court concluded that clause (iv) of subsection (3) of section 140 imposes a retrospective burden without any rational or reasonable basis. The reasons cited for the restriction, such as administrative convenience and preventing undue advantage, were not convincing, especially since no such restriction existed under the old regime.

Conclusion:
The court held that clause (iv) of subsection (3) of section 140 of the CGST Act is unconstitutional as it imposes a retrospective burden without justification. The provision was struck down, and the petitions were allowed. The judgment was stayed until 31.10.2018 at the request of the Revenue counsel.