Evergreen Scamless Pipes And Tubes Pvt. ... vs Union Of India, Through The Secretary ... on 20 March, 2018

Judgment Summary

Title: Evergreen Scamless Pipes And Tubes Pvt. Ltd. & Ors. vs Union Of India & Ors.
Date of Judgment: 20 March, 2018
Bench: S.C. Dharmadhikari, Prakash D. Naik, JJ.
Court: High Court of Judicature at Bombay

1. Outcome

The writ petitions were dismissed. The Court upheld the constitutional validity of Section 140(3)(iv) of the Central Goods and Services Tax Act, 2017 (CGST Act). The rule in each petition was discharged.

2. Core Issue

The core issue was the constitutional validity of Section 140(3)(iv) of the CGST Act, 2017. This provision imposes a condition that to claim transitional input tax credit on stock held as of the GST implementation date (July 1, 2017), the supporting invoices or duty-paying documents must not be dated earlier than twelve months preceding that date. The petitioners challenged this one-year time limit as being arbitrary, unreasonable, discriminatory, and violative of Articles 14 and 19(1)(g) of the Constitution of India.

3. Key Facts

• The petitioners were manufacturers' depots, traders, and first-stage dealers registered under the erstwhile indirect tax laws (Central Excise Act, 1944, and state VAT laws).
• On the appointed day of GST implementation (July 1, 2017), they held stock of goods on which Central Excise duty had already been paid.
• For a portion of this stock, the duty-paying documents (invoices) were more than 12 months old (i.e., issued before July 1, 2016).
• Under the pre-GST regime, the petitioners, particularly first-stage dealers, could pass on the CENVAT credit to their customers irrespective of the age of the stock, as long as they possessed valid duty-paying documents.
• Section 140(3)(iv) of the new CGST Act restricted their ability to transition this credit into the GST regime, denying them credit on stock older than one year.
• This denial of credit would result in double taxation, as the goods had already suffered Excise Duty, and GST would be payable on their future supply without the benefit of the input tax credit.

4. Arguments

Petitioners' Arguments:

• Violation of Article 14: The one-year condition is arbitrary and discriminatory. It creates an unfair distinction between manufacturers (who could carry forward their entire CENVAT credit balance without a time limit under Section 140(1)) and traders/dealers.
• Violation of Article 19(1)(g): The restriction is an unreasonable impediment on the freedom to carry on trade and business, particularly for businesses with slow-moving inventory or longer sales cycles (e.g., demo machines).
• Defeats GST's Object: The core purpose of GST is to eliminate the cascading effect of taxes. Denying legitimate, duty-paid credit reintroduces this cascading effect.
• Accrued and Vested Right: The right to CENVAT credit on duty-paid stock was a vested right acquired under the old law. Section 174 of the CGST Act (the repeal and savings clause) protects such accrued rights, which cannot be extinguished by a transitional provision.
• Promissory Estoppel: The government is estopped from denying a credit that was implicitly promised under the erstwhile regime, which formed the basis of the petitioners' business decisions.

Respondents' (Union of India) Arguments:

• Policy Decision: The condition is a conscious policy decision of the legislature in an economic matter, granting it wide latitude and immunity from judicial interference on grounds of wisdom.
• Credit is a Concession: CENVAT credit or Input Tax Credit (ITC) is not a vested or indefeasible right but a concession granted by the statute. The legislature is well within its powers to impose conditions and restrictions on such a concession.
• Reasonable Safeguard: The 12-month limit is a reasonable safeguard to prevent potential misuse and fraudulent claims based on very old or unverifiable documents during the transitional period.
• Precedent in Old Law: Similar time restrictions on availing credit existed under the erstwhile CENVAT Credit Rules, 2004 (specifically, the fifth proviso to Rule 4(7)). Therefore, the concept of a time limit for credit is not new or arbitrary.
• No Absolute Right: The right to credit under the old law was itself conditional. Therefore, there was no absolute right that could have "vested" in the petitioners.

5. Court’s Reasoning

The High Court rejected the petitioners' challenge based on the following reasoning:

• ITC is a Concession, Not a Vested Right: The Court held that CENVAT credit is a concession, not an absolute right. Its availability has always been subject to the conditions prescribed in the governing statute and rules. The right was never unconditional.
• Existing Conditions in Old Law: The Court noted that even under the erstwhile CENVAT Credit Rules, 2004, there were conditions and time limits for availing credit (e.g., Rule 4(7)). This demonstrates that the right to credit was never absolute and was always subject to legislative restrictions.
• Transitional Provisions are Conditional: The impugned clause is part of transitional arrangements designed for a smooth shift from one tax regime to another. Since the credit under the old law was itself conditional, the argument that a vested right is being taken away is untenable. The right is saved by Section 174 of the CGST Act along with its pre-existing conditions, not as an absolute entitlement.
• Nexus with Object: The 12-month condition has a clear nexus with the object of facilitating a smooth transition while preventing potential misuse. It is a policy matter within the legislature's domain.
• Distinguishing Precedents: The Court distinguished the Elcher Motors case, stating it dealt with the complete lapsing of unutilized credit, which is different from imposing a condition on transitional credit. It found that the Jayam & Co. case actually supported the government's position that ITC is a concession that can be regulated by the legislature.
• No Arbitrariness: Given that credit is a concession and time limits are a standard feature of tax law (including the new CGST Act's substantive provisions like Sections 16(4) and 18(2)), the condition cannot be termed arbitrary or violative of Article 14.
• No Promissory Estoppel: The doctrine of promissory estoppel cannot be invoked against a statute. Furthermore, the "promise" of credit was never unconditional, so there was no breach of an absolute promise.

6. Statutory References

• Constitution of India: Articles 14, 19(1)(g), 300A.
• Central Goods and Services Tax Act, 2017 (CGST Act): Sections 16, 18, 140 (specifically 140(3) and 140(3)(iv)), and 174.
• Erstwhile Laws: Central Excise Act, 1944; CENVAT Credit Rules, 2004 (specifically Rule 4(7)); Central Excise Rules, 2002.

7. Precedents Cited

• Shayara Bano v. Union of India & Others (2017) 9 SCC 1
• Elcher Motors Ltd. v. Union of India 1999 (106) E.L.T. 3 (SC)
• Jayam & Company v. Assistant Commissioner & Another (2016) 15 SCC 125
• Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh & Others (1979) 2 SCC 409
• Kasinka Trading and Anr. vs. Union of India and Anr. AIR 1995 SC 874
• P. M. Ashwathanarayana Setty and Others vs. State of Karnataka and Others AIR 1989 SC 100
• Kerala Hotel and Restaurant Association and Ors. vs. State of Kerala and Ors. AIR 1990 SC 913
• Howrah Municipal Corporation & Others v. Ganges Rope Co. Ltd. & Others (2004) 1 SCC 663