Avantor Performance Materials India ... vs Union Of India, Through Secretary And ... on 20 March, 2018

Judgment Summary: Avantor Performance Materials India Ltd. & Ors. vs. Union of India

Date of Judgment: 20 March, 2018
Court: High Court of Judicature at Bombay
Bench: S.C. Dharmadhikari, J. & Prakash D. Naik, J.

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), thereby denying the petitioners' claim for transitional input tax credit on stock for which the supporting invoices were more than twelve months old as of the GST implementation date.

2. Core Issue

The central legal question was whether the condition stipulated in Section 140(3)(iv) of the CGST Act, 2017, is constitutionally valid. This clause restricts the eligibility for transitional input tax credit on duty-paid stock to only those goods that are covered by invoices or other prescribed documents issued not earlier than twelve months immediately preceding the appointed day (July 1, 2017). The petitioners challenged this time limit as being arbitrary, discriminatory, and violative of their fundamental rights under Articles 14 and 19(1)(g) of the Constitution of India.

3. Key Facts

• The petitioners were a diverse group of entities, including manufacturers with depots, traders, and first-stage dealers, who were registered under the erstwhile Central Excise or State VAT laws.
• On the date of transition to GST (July 1, 2017), they held stock of goods (inputs, semi-finished, and finished goods) on which Central Excise Duty had already been paid.
• The petitioners possessed valid duty-paying documents (e.g., excise invoices) for this stock.
• However, some of these documents were dated more than twelve months prior to the GST rollout (i.e., issued before July 1, 2016).
• Due to the restriction in Section 140(3)(iv), they were barred from availing transitional credit of the excise duty paid on this older stock.
• This denial of credit would result in a cascading tax effect, as they would have to pay GST on the supply of these goods without being able to set off the excise duty already paid, effectively leading to double taxation.
• Petitioners cited legitimate business reasons for holding old stock, such as long sales cycles for demonstration machines or economic recession slowing down sales.

4. Arguments

Petitioners' Arguments:
1. Violation of Article 14 (Arbitrariness & Discrimination): The 12-month cut-off is arbitrary and lacks a rational nexus to the objective of ensuring a seamless flow of credit. It creates an artificial and discriminatory classification between stock purchased within one year and stock purchased earlier, despite both being duty-paid.
2. Accrued and Vested Right: The right to avail and pass on CENVAT credit was an accrued and vested right under the previous tax regime. Section 174 of the CGST Act saves such rights. The impugned provision unlawfully divests the petitioners of this vested right, which is also violative of Article 300A.
3. Violation of Article 19(1)(g) (Right to Trade): The denial of credit imposes an unreasonable restriction on the right to carry on business, as it increases the cost of goods and makes their business uncompetitive due to double taxation.
4. Defeats the Object of GST: The primary goal of GST is to eliminate the cascading effect of taxes. This provision does the opposite by blocking legitimate, duty-paid credit.
5. Promissory Estoppel: The government cannot go back on the implicit promise of allowing credit for all duty-paid goods held in stock.

Respondents' (Union of India) Arguments:
1. ITC is a Concession, Not a Vested Right: Input tax credit is not an inherent right but a statutory concession. The legislature is fully competent to impose conditions and restrictions for availing such a concession.
2. Legislative Policy: The 12-month limit is a conscious policy decision embedded in an economic legislation. Courts have limited jurisdiction to scrutinize the wisdom of such fiscal policies.
3. Reasonable Safeguard: The time limit is a reasonable measure to prevent the misuse of credit based on old and potentially unverifiable documents during the transitional period.
4. No Arbitrariness: The legislature must draw a line somewhere for practical administration. Providing a one-year window is reasonable and not arbitrary.
5. Precedent for Time Limits: Similar time restrictions on availing credit existed in the erstwhile CENVAT Credit Rules, 2004 (e.g., Rule 4(7) for input services), making the concept of a time limit for availing credit neither new nor alien to the tax system.

5. Court’s Reasoning

• ITC is a Conditional Concession: The Court held that CENVAT credit (and by extension, ITC) is not an absolute or vested right but a concession granted by the statute. This concession was always subject to conditions, even under the previous regime (referring to the CENVAT Credit Rules, 2004).
• No Divesting of Vested Rights: Since the right to credit under the old law was itself conditional, Section 174 of the CGST Act saves this right along with its pre-existing limitations. The petitioners never possessed an unconditional right to credit that could be claimed at any point in time. Therefore, the argument of a vested right being taken away is incorrect.
• Transitional Provisions are Permissible: The impugned clause is part of a transitional arrangement designed to move from an old tax regime to a new one. The legislature is empowered to frame provisions to ensure this transition is smooth and to prevent misuse.
• Nexus with Object: The condition of a 12-month old invoice has a clear nexus with the objective of ensuring the genuineness and verifiability of credit claims during the critical transition period. This makes it a rational and non-arbitrary policy choice.
• Judicial Restraint in Fiscal Matters: The Court reiterated the principle of judicial restraint in matters of economic and fiscal policy. The legislature has wide latitude in choosing methods and setting limits for taxation and related concessions.
• Distinguishing Precedents: The Court distinguished the petitioners' reliance on the Eicher Motors case, noting that it dealt with the complete lapsing of unutilized credit, which is different from imposing a condition on availing transitional credit. Conversely, it cited the Jayam & Co. case to reinforce that ITC is a form of concession.
• No Promissory Estoppel: The doctrine of promissory estoppel cannot be invoked against a statute, especially when the "promise" of credit was never unconditional from its inception.

6. Statutory References

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

7. Precedents Cited

• Eicher Motors Ltd. v. Union of India (1999): Relied upon by petitioners for the "vested right" argument. The Court distinguished it on facts.
• Jayam & Company v. Assistant Commissioner (2016): Cited by the Court to affirm that input tax credit is a statutory concession and not a vested right.
• Shayara Bano v. Union of India (2017): Cited by petitioners on the point that arbitrariness is a ground to strike down legislation under Article 14. The Court found the provision was not arbitrary.
• Kasinka Trading and Anr. vs. Union of India (1995): Referred to by the Court to explain the limitations of the doctrine of promissory estoppel.
• Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh (1979): Cited by petitioners on promissory estoppel, but the principle was held to be inapplicable.
• P. M. Ashwathanarayana Setty v. State of Karnataka (1989) & Kerala Hotel and Restaurant Association v. State of Kerala (1990): Cited by the Court on the principle that legislatures have wide latitude in economic and fiscal matters.