Claiming Transitional Credit – Validity of Brand Equity Judgement in light of amendment by Finance Act, 2020

Post the verdict of the Hon’ble Delhi High Court in the case of Brand Equity v. Union of India [1],retrospective effect to the amendment in Section 140 of the CGST Act was enforced. In view of the said amendment, apprehensions were raised by the industry as to whether the judgement in Brand Equity(supra) still holds good.

Recently the Hon’ble Delhi High Court in the case of SKH Sheet Metals Component v. Union of India and Ors.[2]has again ruled in favour of the Petitioner holding that the amendment by the Finance Act, 2020 in Section 140 of the CGST Act, has no effect on the ruling pronounced in the case Brand Equity v. Union of India (supra).

The main contention which was put forth by the Counsel of the Respondent before the Hon’ble Delhi High Court in SKH Sheet Metals Corporation was that in the case of Brand Equity (Supra), the Hon’ble Court while holding that the limitation period under Rule 117 for filing TRAN-1 is merely directory and not mandatory, considered the absenceof power to prescribe a time limit for filing TRAN-1 being a critical factor. Therefore, with retrospective effect to amendment in Section 140CGST in force, i.e. the insertion of the term “within such time”, circumstances have been changed and the benefit of the judgment in the Case of Brand Equity is no longer available to the assessees.

The Hon’ble High Court in its latest judgment has stated that the judgment of Brand Equity (Supra) was not entirely rested on the fact that the statute did not prescribe for any time limit for availing the transition of Input Tax Credit. The Court stated that the judgment has been decided based upon various other principles and grounds which are unaffected by the retrospective effect to the amendment. The grounds on which the judgement was based are:

1. Arbitrary distinction of timelines under Rules 117 & 117 (1A)

The Court in Brand Equity judgment had held that the classification created by the legislature by way of delegation vide sub rule 1A of Rule 117 is arbitrary, vague and unreasonable and against Article 14 of the Constitution of India.

The Court in present judgment reiterated that the government has not ascribed any meaning to the words “technical difficulties” on the common portal and it cannot be interpreted in a restrictive manner therefore the Rule suffers from the vice of vagueness. In the absence of the defining words, the class or criteria to which such Rule shall apply suffers from arbitrariness and therefore violative of Article 14 of the Constitution of India.

2. Input Tax Credit is a vested right of the Petitioner and it is protect under Article 300A of the Constitution of India.

The Court while analysing the real intention of the legislature noticed that the intent of the legislature while introducing the provision of GST is to ensure that the transition to the GST regime is very smooth and hassle-free and no ITC/benefits earned in the existing regime are lost. The Court also highlighted the language of the transitional provision and Section 140 to be in particular, from which it is clear that even after amendment, the true intention of the legislature of providing the ITC to the assessees is not lost. Therefore, the Court held that the ITC accrued to the assessees is vested right and protected under Article 300A of the Constitution of India.

3. Procedural timeline for TRAN-1 are directory and not mandatory

The Court held that the Statute does not fix any time line to avail the transitional credit. Vide amendment though the legislature have delegated the power to the Government to prescribe for time line vide Rules, however, the timeline has been extended on various occasion for a particular class of assessees. Therefore, the time line is not sacrosanct.

The Court also noted that the Statute though have delegated the power to the Government to prescribe for time line vide Rules, however, neither the Act nor the Rules provide any specific consequence on failure to adhere to the timelines.

Therefore, on absence of consequences for adhering to timeline and the timeline not being sacrosanct, the provision is directory and not mandatory.

Effect of the Judgement

Though judgment in Brand Equity(Supra) provided great relief to the all the assessees who have been denied the transitional credit on the ground that their case doesn’t fit in the criteria of “technical difficulties” and therefore they are not eligible to file and claim the transitional credit. However, considering the retrospective effect to the amendment in Section 140 of the CGST Act, there were apprehensions and confusions in the industry on the applicability of the ruling of Brand Equity (Supra), which has  now been cleared out by the Hon’ble High Court that the amendment in Section 140 of CGST Act has no effect on the Brand Equity (Supra) Ruling.