Facts of the Case

M/s Biesse Manufacturing Co. Pvt. Ltd. filed a writ petition before the High Court of Karnataka challenging the validity and enforceability of Section 140(3)(iv) of the Central Goods and Services Tax Act, 2017 insofar as it governed transitional input tax credit available to a First Stage Dealer.

The petitioner questioned the statutory condition affecting transitional credit on goods lying in stock as on 30 June 2017 where the relevant invoice or prescribed document had been issued more than one year before the appointed day.

The petitioner sought a declaration that Section 140(3)(iv) of the CGST Act, 2017 and the related transitional provisions applicable to a First Stage Dealer were unreasonable, arbitrary, discriminatory and disproportionate. According to the petitioner, the impugned condition violated Articles 14 and 19(1)(g) of the Constitution of India and was also confiscatory and violative of Article 300A.

The petitioner further challenged Question No. 24 of the “GST: Frequently Asked Questions (FAQs) for Traders” issued on 16 August 2017, along with its answer, to the extent it referred to the condition contained in Section 140(3)(iv) and denied credit on goods lying in stock as on 30 June 2017 where the invoice or prescribed document was earlier than one year preceding the appointed day.

In the alternative, the petitioner sought striking down or reading down of Section 140(3)(iv) so that the provision would not affect the alleged vested right to pass on credit already accrued as on 1 July 2017. The petitioner also sought a direction to the respondents to grant credit irrespective of the time limitation prescribed under the provision.

During the pendency of the writ petition, the Supreme Court passed significant orders in Union of India and Another vs Filco Trade Centre Pvt. Ltd. and Another concerning the filing and revision of TRAN-1 and TRAN-2 forms for availing transitional credit.

Issues Involved

  1. Whether Section 140(3)(iv) of the CGST Act, 2017, insofar as it imposes a one-year invoice or prescribed-document condition for transitional input tax credit available to a First Stage Dealer, is unreasonable, arbitrary, discriminatory or disproportionate.
  2. Whether Section 140(3)(iv) violates Articles 14 and 19(1)(g) of the Constitution of India.
  3. Whether the restriction under Section 140(3)(iv) is confiscatory and violative of Article 300A of the Constitution of India.
  4. Whether Question No. 24 of the “GST: Frequently Asked Questions (FAQs) for Traders” dated 16 August 2017, along with its answer, was liable to be quashed insofar as it referred to Section 140(3)(iv) and denied transitional credit in respect of goods lying in stock as on 30 June 2017 where the invoice or prescribed document was older than one year preceding the appointed day.
  5. Whether Section 140(3)(iv) should alternatively be struck down or read down so as not to affect the claimed vested right to pass on credit accrued as on 1 July 2017.
  6. Whether the petitioner was entitled to transitional credit irrespective of the statutory time limitation.
  7. What effect the Supreme Court’s directions in Union of India vs Filco Trade Centre Pvt. Ltd. had on the pending writ petition.

Petitioner’s Arguments

The petitioner challenged Section 140(3)(iv) of the CGST Act, 2017 and the connected transitional provisions on the ground that, insofar as they related to transitional input tax credit for a First Stage Dealer, they were unreasonable, arbitrary, discriminatory and disproportionate.

The petitioner contended that the impugned restriction violated Article 14 of the Constitution of India and adversely affected the right to carry on business protected under Article 19(1)(g).

It was further contended that the restriction was confiscatory in nature and violated Article 300A of the Constitution of India.

The petitioner specifically challenged the denial of credit in respect of goods lying in stock as on 30 June 2017 merely because the relevant invoice or prescribed document had been issued more than one year before the appointed day.

The petitioner also sought quashing of Question No. 24 of the “GST: Frequently Asked Questions (FAQs) for Traders” issued on 16 August 2017, together with its answer, to the extent it incorporated or referred to the condition contained in Section 140(3)(iv) and resulted in denial of credit.

Alternatively, the petitioner prayed that Section 140(3)(iv) be struck down or read down so that the provision would not affect the claimed vested right to pass on credit already accrued as on 1 July 2017.

The petitioner further sought a direction requiring the respondents to grant transitional credit irrespective of the time limitation prescribed under the provision.

Respondents’ Arguments

The respondents opposed the writ petition and urged contentions in support of their position.

The High Court recorded that several contentions had been urged by both sides in support of their respective claims. However, in view of subsequent developments during the pendency of the writ petition, particularly the orders passed by the Supreme Court in Union of India and Another vs Filco Trade Centre Pvt. Ltd. and Another, the Court considered those directions relevant for disposal of the petition.

The judgment does not separately set out a detailed proposition-by-proposition summary of every argument advanced by the respondents. Therefore, no additional or expanded contention beyond what is recorded in the judicial order should be attributed to them.

Court Order / Findings

The High Court heard the learned Senior Counsel appearing for the petitioner and the learned counsel appearing for the respondents and perused the material on record.

The Court noted that although several contentions had been urged by both sides, during the pendency of the writ petition the Supreme Court had issued important directions in Union of India and Another vs Filco Trade Centre Pvt. Ltd. and Another, reported as (2022) 142 Taxmann.com 89 (SC).

The Supreme Court had directed the Goods and Services Tax Network to open the common portal for filing the relevant forms for availing transitional credit through TRAN-1 and TRAN-2.

The directions noticed by the High Court included the following:

  1. GSTN was directed to open the common portal for filing the relevant forms for availing transitional credit through TRAN-1 and TRAN-2 for the specified period.
  2. Any aggrieved registered assessee was permitted to file the relevant form or revise an already filed form irrespective of whether the taxpayer had filed a writ petition before a High Court or whether the taxpayer’s case had been decided by the Information Technology Grievance Redressal Committee.
  3. GSTN was required to ensure that there was no technical glitch during the relevant period.
  4. The concerned officers were granted 90 days thereafter to verify the veracity of the transitional-credit claim and pass appropriate orders on merits after granting a reasonable opportunity to the concerned parties.
  5. Allowed transitional credit was thereafter required to be reflected in the Electronic Credit Ledger.
  6. If required, the GST Council could issue appropriate guidelines to field formations for scrutiny of the claims.

The High Court further noted that the Supreme Court subsequently issued additional directions extending the time for opening the GST Common Portal for a further period up to 30 November 2022.

Important Clarification by the Supreme Court

A particularly important aspect noticed by the High Court was the Supreme Court’s clarification that all questions of law decided by the respective High Courts concerning Section 140 of the CGST Act, 2017, read with the corresponding Rules, Notifications or directions, were kept open.

The Karnataka High Court observed that the Supreme Court’s orders indicated that all questions of law decided by the respective High Courts concerning Section 140 of the CGST Act, 2017 read with corresponding Rules, Notifications or directions had been kept open and that no opinion had been expressed on those questions.

Accordingly, the disposal of the petition in terms of the Filco Trade Centre directions should not be understood as a final adjudication by the Karnataka High Court on every constitutional question raised against Section 140(3)(iv).

Sections and Constitutional Provisions Involved

·         Section 140(3)(iv), Central Goods and Services Tax Act, 2017

·         Section 140, Central Goods and Services Tax Act, 2017

·         Article 14, Constitution of India

·         Article 19(1)(g), Constitution of India

·         Article 300A, Constitution of India

·         Articles 226 and 227, Constitution of India

Link to download the order - https://www.mytaxexpert.co.in/uploads/1783407242_1195compressed.pdf

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