2025 (12) TMI 865 - HC - GST

Technical glitch cannot deny ISD transitional ITC credit u/s 140(7) CGST Act and Rule 39(1)(a)

HC held that the petitioner, an Input Service Distributor, could not be denied transitional CENVAT credit as ITC solely due to a technical glitch on the ... Seeking transferring of the CENVAT credit admissible as Input Tax Credit (ITC) - Petitioner could not file the form TRAN-01 in time due to technical glitch - HELD THAT:- A perusal of Section 140(7) of the CGST Act would show that the ITC which was available on account of any services received prior to the appointed date by the ISD shall be eligible for distribution as credit within the time and manner as may be prescribed. It is not in dispute that after the GST regime came into effect, no specific timeline has been prescribed till date for distribution of this credit. Insofar as Section 39(1)(a) of the CGST Rules is concerned, the said provision of distribution within one month came into effect from 1st April, 2025. However, the unamended Rule 39(1)(a) of the CGST Rules also required distribution within a month. Similar cases involving non-grant of credit have also been considered by various Courts. One of the early cases was a decision of the Co-ordinate Bench of this Court in Vision Distribution Pvt. Ltd. v. Commissioner, State Goods & Services Tax & Ors [2019 (12) TMI 1048 - DELHI HIGH COURT]. In the said case, an exporter was unable to avail of ITC as the amount was not reflected in the ITC ledger. The Co-ordinate Bench of this Court held 'The software systems adopted by the Respondents have to be in tune with the law, and not vice versa. The system limitations cannot be a justification to deny the relief, to which the Petitioner is legally entitled. We, therefore, reject the hyper technical objections sought to be raised by the Respondents - to the effect, that no refund can be granted, because the system did not reflect any credit lying in the ITC ledger of the Petitioner for the months of July and August, 2017. If that is so, it is entirely the Respondents making. In fact, to permit the Respondents to get away with such an argument would be putting premium on inefficiency. We therefore, reject the submission.' In the present case, due to a glitch in the GST portal, the Petitioner could not file the form TRAN-01 and since the form could not be filed in time, the distribution could not take place as per Rule 39(1)(a) of the CGST Rules within one month. Hence, the Petitioner cannot be deprived of the benefit of the ITC due to mere technical glitches or transitional creases which were ironed out subsequently. Under these circumstances, the Court is of the opinion that the legitimate ITC which the Petitioner is entitled to distribute to its sub-offices cannot be held back due to such technical objections. The ITC which is clearly reflected in TRAN-1 would be liable to be reflected on the Electronic Credit Ledger (hereinafter, ‘ECL’) of the Petitioner for distribution within a period of three months - let the Delhi GST Department reflect the amount of Rs. 99,18,972/- on the ECL of the Petitioner. If the same is to be done with the co-operation of the GST Network (hereinafter, ‘GSTN’), the GSTN shall also give effect to this order within a period of three months. From the date when the ECL reflects the said amount, upon intimation to the Petitioner, the Petitioner would have one month to distribute the credit to its sub-offices. Petition disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether input tax credit pertaining to services received prior to the appointed day and held by an Input Service Distributor can be transitioned and distributed under Section 140(7) of the CGST Act despite the absence of a prescribed modality and the system design of the GST portal (including non-availability of TRAN-1 filing and ECL for ISDs). 1.2 Whether non-distribution of such credit within the one-month period contemplated by Rule 39(1)(a) of the CGST Rules, owing to portal / system constraints during transition to GST, can justify permanent denial of the legitimately available transitional credit. 1.3 Consequentially, whether the tax authorities are obligated to ensure reflection of such transitional credit in the electronic credit ledger and permit its distribution by the ISD. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Eligibility and modality for transition and distribution of pre-GST ISD credit under Section 140(7) of the CGST Act (a) Legal framework as discussed 2.1 The Court noted the definition of 'Input Service Distributor' in Section 2(61) of the CGST Act as an office of the supplier receiving invoices for input services on behalf of distinct persons under Section 25, and liable to distribute input tax credit in the manner provided in Section 20. 2.2 The Court referred to Section 20 of the CGST Act detailing the manner and conditions for distribution of credit by an ISD, including pro rata distribution based on turnover and the concept of 'recipient of credit'. For the present case, the unamended provision (pre-1 April 2025 amendment) was held applicable. 2.3 Section 140(7) of the CGST Act was extracted and emphasized: input tax credit on account of services received prior to the appointed day by an ISD 'shall be eligible for distribution as credit under this Act, within such time and in such manner as may be prescribed, whether the invoices relating to such services are received prior to, on or after, the appointed day'. 2.4 Rule 39(1)(a) of the CGST Rules, in both its unamended and amended forms, was referred to, which requires that input tax credit available for distribution in a month shall be distributed in the same month and reported in FORM GSTR-6. (b) Interpretation and reasoning 2.5 The Court observed that Section 140(7) expressly recognizes the eligibility of ISDs to distribute input tax credit pertaining to services received prior to the appointed day as credit under the CGST Act, subject to time and manner as may be prescribed. It was noted that even after the GST regime came into effect, no specific timeline has been prescribed till date for such distribution of pre-appointed day ITC by ISDs. 2.6 The stand of the department, as reflected in the counter affidavit, was that: (i) ISDs under the GST regime do not have an electronic credit ledger, (ii) law does not envisage maintenance of ITC electronic ledger or filing of TRAN-1 by ISDs, and (iii) any ITC available with an ISD ought to have been distributed in the same month before 1 July 2017, with the transferee units then filing TRAN-1. On this basis, it was contended that filing of TRAN-1 by an ISD is prohibited and the relief sought is not permissible. 2.7 The Court, on perusal of Section 140(7), took the view that the provision itself contemplates that pre-appointed day services received by an ISD shall be eligible for distribution as credit under the CGST Act. Thus, the statute substantively entitles an ISD to distribute such transitional credit. The difficulty lies only in the absence of a prescribed modality and portal design, not in the entitlement itself. 2.8 The Court relied upon the reasoning of the Bombay High Court in the Siemens batch of matters, particularly orders dated 24 August 2023 and 29 February 2024, where it was observed that there can hardly be any dispute that Section 140(7) recognizes such benefit for bona fide ISDs and that the GST Council ought to address the modalities so that such legitimate credit is not lost merely due to lack of procedural mechanism. The Bombay High Court had highlighted that permanent loss of legitimately available ITC, owing only to the machinery's failure to create an effective procedure to transfer such credit to the ECL, could not be presumed to be the legislative intent. 2.9 The Court noted that although the Bombay High Court had referred the question of modalities under Section 140(7) to the GST Council, no decision of the Council had been placed before this Court, and the counter affidavits were silent on any such decision. (c) Conclusions 2.10 The Court concluded that, under Section 140(7), the ITC on services received prior to the appointed day and held by the Petitioner as ISD is substantively eligible for distribution as credit under the CGST Act. 2.11 The Court rejected the stance that filing of TRAN-1 by an ISD, or reflection of such credit in an electronic credit ledger for purposes of distribution, is impermissible merely because the law or portal design did not expressly provide an electronic credit ledger for ISDs; the absence of a prescribed modality or portal functionality cannot defeat the substantive statutory entitlement. 2.12 Accordingly, the Court held that the transitional ITC of Rs. 99,18,972/-, duly reflected in the Petitioner's TRAN-1, must be recognized and enabled to be distributed by the Petitioner-ISD under Section 140(7), through appropriate reflection in the electronic credit ledger. Issue 2: Effect of Rule 39(1)(a) time requirement and portal / system glitches on the right to transitional ITC (a) Legal framework as discussed 2.13 Rule 39(1)(a) of the CGST Rules requires that input tax credit available for distribution in a month shall be distributed in the same month and furnished in Form GSTR-6. Both the unamended and amended versions (effective from 1 April 2025) impose the same 'same month' distribution requirement. 2.14 The Court referred to transitional period difficulties and precedent decisions addressing denial or impracticality of availing ITC due to system / portal constraints, namely: * A decision of the same High Court in Vision Distribution Pvt. Ltd. v. Commissioner, State Goods & Services Tax & Ors., where the exporter's accumulated ITC was not reflected in its ledger, causing cash outflow; the Court there held that taxpayers cannot be made to suffer for the respondents' failure to put in place a workable GST system, and system limitations cannot override legal entitlements. * A decision of the Madras High Court in Dell International Services India Pvt. Ltd. v. Union of India & Ors., where transitional ITC could not be transitioned due to non-operational systems; the High Court held that parties cannot be put at a disadvantage because the GST system was not fully operational, and if the system had been enabled, the taxpayer could have used transitional ITC to discharge tax liabilities. (b) Interpretation and reasoning 2.15 The relevant period in the present case is March 2017 to June 2017, with GST coming into effect from 1 July 2017. The Petitioner filed TRAN-1 on 15 August 2017, but the GST portal allegedly did not permit ISDs to file TRAN-1 at the relevant point in time, and consequently the transitional credit did not reflect on the Petitioner's portal / ledger. 2.16 The Court identified that the only difficulty faced by the Petitioner is non-distribution of credit within the same month as required by Rule 39(1)(a), which was directly attributable to the inability to file TRAN-1 and the absence of portal functionality for ISDs during the transitional phase. 2.17 Relying on the principles laid down in Vision Distribution and Dell International, the Court emphasized that taxpayers cannot be deprived of lawfully available input tax credit on account of technical glitches, transitional issues, or deficiencies in the electronic system. The Court reiterated that rights under the statute cannot be subjugated to software limitations; systems must conform to law and not the reverse. 2.18 The Court therefore treated the one-month distribution requirement in Rule 39(1)(a), in the peculiar factual context of systemic glitches and transitional creases, as a procedural condition that cannot defeat substantive entitlement to credit clearly established under Section 140(7) and evidenced by TRAN-1. (c) Conclusions 2.19 The Court held that failure to distribute the ISD credit within one month, in terms of Rule 39(1)(a), due to portal / system constraints and transitional glitches, cannot result in permanent denial or lapse of legitimately available ITC. 2.20 The Court concluded that the Petitioner cannot be deprived of its ITC entitlement by reliance on technical or procedural objections when the underlying credit is legitimate, duly disclosed in TRAN-1, and the non-compliance with timing requirements arose from systemic impediments during the transition to GST. Issue 3: Direction to authorities regarding reflection and utilization of transitional ITC (a) Interpretation and reasoning 2.21 Having accepted the Petitioner's substantive entitlement and rejected portal-based objections, the Court held that the legitimate ITC must be made available in a manner that permits its distribution to the Petitioner's sub-offices. The Court considered that this requires appropriate intervention by the tax authorities and GSTN, despite the structural design of the ISD registration and absence of an ECL for ISDs under the current system. 2.22 The Court noted that the ISD credit in question is clearly reflected in the Petitioner's TRAN-1. On this basis, and following the approach in earlier transitional credit cases, the Court considered it appropriate to direct a practical solution by ensuring reflection of the ITC in the Petitioner's electronic credit ledger for subsequent distribution. (b) Conclusions and operative directions 2.23 The Court directed that the legitimate ITC of Rs. 99,18,972/-, as reflected in TRAN-1, shall be reflected in the Petitioner's Electronic Credit Ledger for the purpose of distribution. 2.24 The Court ordered the Delhi GST Department to ensure such reflection of Rs. 99,18,972/- in the ECL of the Petitioner, and if required, GSTN shall also give effect to this direction within a period of three months. 2.25 From the date the amount is reflected in the ECL, and upon intimation to the Petitioner, the Petitioner shall have one month to distribute the credit to its sub-offices. 2.26 Counsel for the concerned Respondents was directed to communicate the order to GSTN so that the credit is duly reflected, and the writ petition was disposed of on these terms.