'Transition Of Unitilized Input Tax Credit Only For Taxes And Duties Subsumed By GST' : Madras HC Disallows Credit For 3 Cesses [Read Judgment]

In an important judgment that can have pan-India implications, the Madras High Court on Friday held that the cesses that have not been subsumed by the Goods and Service Tax laws cannot be carried forward to claim set off against output tax credit.

A division bench of the High Court was considering the issue relating to Education Cess (EC), Secondary and Higher Education Cess (SHEC) and Krishi Kalyan Cess (KKC) in the case Assistant Commissioner of CGST and Central Excise and others v. Sutherland Global Services Ltd and others.

The bench comprising Justices Dr.Vineet Kothari and Justice Krishnan Ramaswamy held that the assessee in the case, Sutherland Global Services Ltd, was not entitled to utilize and set off the accumulated unutilized amount of Education Cess (EC), Secondary and Higher Education Cess (SHEC) and Krishi Kalyan Cess (KKC) against the Output GST Tax Liability after the switch over of Indirect Taxation System to GST Regime with effect from 01.07.2017.

The division bench allowed the appeal filed by the Revenue to set aside the single bench judgment of September 2019 which had allowed the assessee to utilize and set off the accumulated unutilized amount of these cesses against the output GST tax liability.

The bench relied on Section 140 of the Central Goods and Services Tax Act which specifies the "Transitional arrangements for input tax credit".

Explanation 3 to the said Section clarified that the expression "eligible duties and taxes" excludes any cess which has not been specified in Explanation 1 or Explanation 2. The three cesses involved in the case were not specified in Explanation 1 or 2 of the Section.

The levy of Education Cess and Secondary and Higher Education Cess - introduced in 2007 - was dropped and deleted by the Finance Act, 2015.

The Krishi Kalyan Cess, introduced in 2016, was repealed with effect from 01.07.2017  by the Taxation Laws (Amendment) Act, 2017.

The Revenue argued that with the levy of Cesses having been dropped , the unutilized amount of the Cesses which could not be set off by the Assessee during the contemporary period prior to 30th June 2017, cannot be allowed to be carried forward under the transitory provisions of Section 140 of the  CGST Act, because it became a dead claim of the Assessee and since the levy of Cess was not continued after 2015 nor such levy was subsumed in the listed 16 taxes which were subsumed under the GST law, the credit in respect of such Cess could not be claimed against the Output GST liability.

Revenue's counsel, Ms.Aparna Nandakumar, further submitted that the cess was collected for a specific and dedicated purpose by the Central Government and their transition into GST regime cannot be allowed after their abolition. 

Mr.Raghavan Ramabadran, the counsel for the assessse, urged that as per CENVAT Rules, 2004, the Assessee had already taken or availed the credit of the Education Cess and Secondary and Higher Education Cess paid by him on the inputs and therefore, the right to utilise the same against the Output Tax Liability was a vested and indefeasible right of the Assessee and could not be taken away by the Legislature when a switch over was made to GST Regime with effect from 01.07.2017.

The single bench had held that mere abolition of Cesses did not result in the lapse of their credit in the absence of any statutory provision.

Disagreeing with the single bench reasoning, the division bench held that Explanation 3 to Section 140 was clear in its intent to not allow transition for unspecified cesses.

"Only the seven specified duties as "Eligible Duties" in respect of inputs held in stock and inputs contained in semi finished or finished goods held in stock on the appointed date i.e. 01.07.2017 will be eligible to be carried forward and adjusted against GST Output Tax Liability with reference to Explanation 1. Apparently, Education Cess and Secondary and Higher Education Cess or Krishi Kalyan Cess are absent from the seven categories in Explanation 1. Therefore, on a plain meaning, such three Cesses in question cannot be  inserted in Explanation 1 to cover them for being carried forward with reference to Explanation 1 which applies for specified four Sub-sections of Section 140 of the Act".

"The imposition or levy of Education Cess and Secondary and Higher Education Cess and Krishi Kalyan Cess did not operate after 01.07.2017. Explanation 3, in our opinion, specifying that any kind of Cess will be excluded for the purpose of Section 140", said the judgment authored by Justice Kothari.

The Court said that it found considerable force in the contention raised on behalf of the Revenue that credit of such Education Cess and Secondary and Higher Education Cess which could not be utilized against the Output Education Cess and Secondary and Higher Education Cess 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 with effect from 01.07.2017.

"The transition of unutilised Input Tax Credit could be allowed only in respect of taxes and duties which were subsumed in the new GST Law. Admittedly, the three types of Cess involved before use namely Education Cess, Secondary & Higher Education Cess and Krishi Kalyan Cess were not subsumed in the new GST Laws, either by the Parliament or by the States. Therefore the question of transitioning them into the GST regime and giving them credit under against output GST Liability cannot arise," the division bench stated.

The division bench stated that the main pitfalls in the reasoning given by the learned Single Judge are

(a) the character of levy in the form of Cess like Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess was distinct and stand alone levies and their input credit even under the Cenvat Rules which were applicable mutatis mutandis did not permit any such cross Input Tax Credit, much less conferred a vested right, especially after the levy of these Cesses itself was dropped;

(b) Explanation 3 to Section 140 could not be applied in a restricted manner only to the specified Sub-sections of Section 140 of the Act mentioned in the Explanations 1 and 2 and as a tool of interpretation, Explanation 3 would apply to the entire Section 140 of the Act and since it excluded the Cess of any kind for the purpose of Section 140 of the Act, which is not specified therein, the transition, carry forward or adjustment of unutilised Cess of any kind other than specified Cess, viz. National Calamity Contingent Duty (NCCD), against Output GST liability could not arise.

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