2018 (9) TMI 885 - HC - GST

Court strikes down unconstitutional CGST Act provision; petitions allowed

The court found that clause (iv) of subsection (3) of section 140 of the CGST Act was unconstitutional as it imposed a retrospective burden without ... Reasonableness of classification under Article 14 - retrospective withdrawal of vested tax credit - transitional input tax credit under section 140(3) - legislative competence in fiscal statutes and latitude in economic regulationReasonableness of classification under Article 14 - transitional input tax credit under section 140(3) - Impugned condition does not constitute hostile discrimination between similarly situated persons forming a homogeneous class. - HELD THAT: - The court applied the established two fold test for reasonable classification - existence of an intelligible differentia and a rational nexus to the statute's object - and noted the presumption of constitutionality of fiscal legislation. Having considered submissions that first stage dealers form a distinct class and that taxing statutes admit greater legislative latitude, the court held that clause (iv) of sub section (3) of section 140 does not amount to hostile or unconstitutional classification. The court therefore rejected the contention that the provision violates Article 14 by discriminatory classification. [Paras 16, 17, 18, 31]The provision does not make an impermissible distinction or hostile discrimination; classification is constitutionally permissible.Retrospective withdrawal of vested tax credit - transitional input tax credit under section 140(3) - legislative competence in fiscal statutes and latitude in economic regulation - Clause (iv) of sub section (3) of section 140 effects retrospective withdrawal of a vested right to CENVAT/input tax credit and is without reasonable justification, rendering it unconstitutional. - HELD THAT: - The court examined precedent recognizing that credits under earlier regimes acquired the character of vested rights (citing Eicher, Daiichi Karkaria and related decisions) and observed that the impugned clause limits entitlement to invoices issued within twelve months prior to the appointed day, thereby extinguishing pre existing credit in respect of older purchases. While acknowledging Parliament's power to enact retrospective fiscal measures and the special deference owed to economic legislation, the court found no plausible or rational basis for imposing the twelve month cut off with retrospective effect. The stated administrative conveniences and concerns of physical identification were held insufficient because similar concerns existed under the prior regime where no such time limit was imposed, and because the proviso permitting limited relief where invoices are absent contains no comparable temporal restriction. Consequently the restriction was treated as retrospectively taking away an accrued right and lacking reasonable justification. [Paras 26, 27, 28, 30, 32]Clause (iv) of sub section (3) of section 140 is ultra vires to the extent it retrospectively withdraws vested input tax/CENVAT credit and is struck down.Final Conclusion: Clause (iv) of sub section (3) of section 140 of the CGST Act, insofar as it bars credit in respect of invoices issued earlier than twelve months immediately preceding the appointed day and thus extinguishes pre existing CENVAT/input tax credits with retrospective effect, is unconstitutional and is struck down; the provision does not, however, constitute hostile discrimination under Article 14. Issues Involved:1. Whether the impugned provision makes an impermissible distinction between similarly situated persons forming a homogeneous class.2. Whether the provision in question without proper justification takes away the vested right of the petitioners and thus acts with retrospective effect.3. Whether clause (iv) of subsection (3) of section 140 of the CGST Act is required to be declared unconstitutional.Issue-wise Detailed Analysis:1. Impermissible Distinction Between Similarly Situated Persons:The petitioners argued that under the old regime, first stage dealers were treated similarly to manufacturers concerning excise duty credit. The new regime under the CGST Act, specifically clause (iv) of subsection (3) of section 140, imposes a condition that invoices or documents must not be older than twelve months preceding the appointed day, which disadvantages first stage dealers compared to manufacturers. The respondents contended that the classification was reasonable, emphasizing the necessity for physical identification of goods and administrative convenience. The court noted that while reasonable classification is permissible, the classification must have a rational relation to the object sought to be achieved, which was not sufficiently demonstrated by the respondents.2. Retrospective Effect and Vested Rights:The petitioners contended that the new provision acts retrospectively, taking away vested rights without justification. They cited several judgments, including Eicher Motors Ltd. v. Union of India, asserting that CENVAT credit is akin to a duty paid and cannot be withdrawn retrospectively. The respondents argued that the legislature has the competence to impose conditions on CENVAT credit and that the provision was not unduly oppressive. The court observed that the right to pass on the credit of excise duty paid on goods was a vested right under the old regime. The new provision, by imposing a twelve-month limit retrospectively, takes away this right without a reasonable basis, which is unjustified.3. Constitutionality of Clause (iv) of Subsection (3) of Section 140:The court examined the statutory provisions and the principles of judicial review concerning legislative competence and violation of fundamental rights. It referenced several judgments, including Budhan Choudhry v. State of Bihar and Shayra Bano v. Union of India, highlighting that a statute can be struck down if it is manifestly arbitrary. The court concluded that clause (iv) of subsection (3) of section 140 imposes a retrospective burden without any rational or reasonable basis. The reasons cited for the restriction, such as administrative convenience and preventing undue advantage, were not convincing, especially since no such restriction existed under the old regime.Conclusion:The court held that clause (iv) of subsection (3) of section 140 of the CGST Act is unconstitutional as it imposes a retrospective burden without justification. The provision was struck down, and the petitions were allowed. The judgment was stayed until 31.10.2018 at the request of the Revenue counsel.