Siddharth Auto Engineers Pvt. Ltd vs Union Of India And 2 Ors on 20 March, 2018

1. Outcome

The writ petitions were dismissed. The Bombay High Court upheld the constitutional validity of Section 140(3)(iv) of the Central Goods and Services Tax Act, 2017 (CGST Act), rejecting the challenge that it was arbitrary, discriminatory, and unconstitutional.

2. Core Issue

The central legal question was whether the condition imposed by Section 140(3)(iv) of the CGST Act is unconstitutional. This provision restricts the eligibility of transitional input tax credit on stock held as of July 1, 2017, to only those goods for which the duty-paying invoices were issued within the preceding twelve months (i.e., on or after July 1, 2016).

3. Key Facts

• The petitioners were manufacturers, depots of manufacturers, first-stage dealers, and traders who had a stock of excise duty-paid goods as on June 30, 2017.
• Under the pre-GST regime (Central Excise Act, 1944 and CENVAT Credit Rules, 2004), they were entitled to take or pass on the CENVAT credit of excise duty paid on these goods without any time restriction based on the age of the stock.
• With the implementation of GST from July 1, 2017, the supply of these goods became liable to GST.
• The transitional provisions under Section 140 of the CGST Act were introduced to allow a seamless flow of credit from the old regime to the new one.
• However, Section 140(3)(iv) restricted this benefit for dealers, depots, etc., by stipulating that the credit could only be claimed if the invoices for the stock were dated within 12 months prior to the GST implementation date.
• The petitioners held stock for which invoices were more than 12 months old, and were thus denied the transitional credit for the excise duty already paid, leading to a situation of double taxation and business disadvantage.

4. Arguments

Petitioners' Arguments:

• Violation of Article 14 (Right to Equality): The 12-month cut-off is arbitrary and creates an unreasonable classification between goods procured within 12 months and those procured earlier, despite both being duty-paid. It also discriminates against dealers/traders vis-à-vis manufacturers, who were allowed to carry forward their entire CENVAT credit balance without such a time limit under Section 140(1).
• Vested Right: The right to avail and pass on CENVAT credit was an accrued and vested right under the old law, which is protected by the savings clause in Section 174 of the CGST Act. The new law cannot retrospectively take away this vested right.
• Violation of Article 19(1)(g) (Right to Trade): The restriction is unreasonable as it imposes a significant financial burden (double taxation), making their older stock uncompetitive and adversely affecting their right to carry on business.
• Promissory Estoppel: The government, by its past conduct under the old regime, had made a promise of allowing credit without a time limit on the age of stock. Petitioners had arranged their business affairs based on this premise, and the government is now estopped from going back on it.

Respondents' (Union of India) Arguments:

• ITC is a Concession, Not a Vested Right: Input Tax Credit is a form of concession or benefit granted by the legislature, not an inherent or vested right. The legislature is free to impose conditions and restrictions on the availment of such a concession.
• Legislative Policy: The 12-month time limit is a conscious policy decision to create a safeguard against potential misuse of transitional credit using very old and unverifiable documents. Courts should not interfere with fiscal policy decisions.
• Reasonableness of Restriction: A period of 12 months is reasonable. Similar time-based restrictions existed even under the old CENVAT Credit Rules, 2004 (e.g., Rule 4(7) for input services), proving that such conditions are not alien to the credit mechanism.
• No Estoppel Against Statute: The doctrine of promissory estoppel cannot be invoked to compel the government to act contrary to a statute.

5. Court’s Reasoning

• ITC as a Concession: The Court held that CENVAT credit is not an absolute or indefeasible right but a concession granted by the statute. This concession has always been subject to conditions. Even under the old law, the right to credit was not unconditional.
• No Vested Right was Taken Away: Since the right under the old law was itself conditional, what is saved by Section 174 of the CGST Act is this conditional right, not an absolute one. Therefore, the argument that a vested right has been extinguished is flawed.
• Distinguishing Precedents: The Court distinguished the case of Eicher Motors, stating that it dealt with a situation where already availed and unutilized credit was made to lapse entirely, which is different from imposing a condition for availing transitional credit. The Court instead relied on the principles laid down in Jayam & Co., which firmly establishes ITC as a legislative concession.
• Rational Nexus and Legislative Wisdom: In matters of economic and fiscal policy, the legislature enjoys wide latitude. The 12-month condition has a clear nexus with the objective of ensuring a smooth and verifiable transition to GST while preventing fraud. The wisdom of this policy choice is not for the court to question.
• Rejection of Promissory Estoppel: The Court rejected the promissory estoppel argument, affirming the settled principle that there can be no estoppel against a statute. The "promise" of credit was never unconditional from its inception.

6. Statutory References

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

7. Precedents Cited

• Jayam & Company v. Assistant Commissioner & Another (2016): Heavily relied upon by the Court to hold that Input Tax Credit is a concession and the legislature can impose conditions for its availment.
• Eicher Motors Ltd. v. Union of India (1999): Cited by the petitioners but distinguished by the Court as it dealt with the lapsing of already availed credit, not a condition on transitional credit.
• Kasinka Trading v. Union of India (1995): Relied upon to dismiss the argument of promissory estoppel against a statute or a change in public policy.
• Shayara Bano v. Union of India (2017): Cited by petitioners on arbitrariness under Article 14, but the Court found the provision was not arbitrary.
• P. M. Ashwathanarayana Setty v. State of Karnataka (1989): Cited for the principle that the legislature enjoys wide latitude in economic and fiscal matters.