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Sutherland 'take two' and the Transition of Cess
By K Srinivasan (IRS)
Oct 22, 2020

GOVERNMENT Vide Finance Act 2004, introduced the levy of Education Cess and, vide Finance Act 2007, the levy of Secondary and Higher Education Cess. The relevant Credit Rules specifically provided that once these cesses were availed, the utilization thereof shall be restricted respectively to payment of EC or SHEC only.

Notification No.14/2015-CE exempted all goods falling within the first schedule to the Central Excise Tariff Act, from the levy of EC and SHEC. In the meanwhile, the levy of EC and SHEC on taxable services were also abolished vide Finance Act 2015, with effect from 01.06.2017.

It can be clearly seen that Cesses were discontinued even during 2015, except for a short duration after that till 2017 on services. Owing to compulsions to honour the set-off of cesses involved in certain specified transactions, it dragged on for some time between 2015 and 2017 across board namely goods and services.

Vide Finance Act 2016, Krishi Kalyan Cess (KKC) was levied on taxable services by the Central Government with effect from 01.06.2016 with the avowed object of financing and promoting initiatives, including agriculture or related activities.

Notification No. 28/2016-CE (NT)  dated 26.05.2016 enabled a provider of output services to avail CENVAT credit and utilize the same against KKC.

In the above backdrop one can take it that all Cesses got practically merged as a first step into GST. Some 19 taxes got merged eventually into GST is history.

The Sutherland 1 decision

And there was nothing that the taxpayers could do with such credit, by carrying it forward under GST, since the same was ineligible ab initio, from being utilized against payment of any taxes except against those same category of Cesses to which they belonged, was the broad understanding of Revenue.

This argument was rejected by the High Court -  TOG-912-HC-MAD-GST-2019 on the ground that any accumulated credit cannot be said to have been wiped out unless there is a specific order under which it lapses and there was no such specific order lapsing it and therefore, it survives.

Writ Appeal by the Government against Sutherland 1

The Government went in for a writ Appeal before the Divisional Bench of the Madras High Court seeking its views and as also its direction in the above matter, which has far reaching constitutional and revenue implications to the Government, at an all India level, and across the States.

It was argued against Revenue by the Respondent that there were no specific rules/orders barring it specifically and that any credit is a vested right-once so granted unto the taxpayer it can't be said to be taken away except by a Procedural rule to snap their doors shut.

Like A.A.Milne had put it in his famous work 'Winnie the Pooh', it all came from wanting to have honey that Pooh bear got stung by a bunch of bees, it all started with the Delhi HC decision in the Brand Equity case that held credit to be a vested right.

It drew support to its view from Article 300A of the Constitution by equating it to a right in a property that can't be taken away except by a rule of Law.

Hence we are back again before the Madras High court Division Bench asking if credit is indeed an absolute right vested in the taxpayer or not.

Sutherland 2 decision - TOG-736-HC-MAD-GST-2020

In answering to the question the Single Judge of the Madras HC felt it was allowable basis among other things mainly the Eicher Motor Case as per the Author.

But in the Writ Appeal before the Division Bench, the Judges felt otherwise, as if approving the old adage 'two heads are better than one', to concur with the decision in the case of Uttam Steel, Jayaram & Co and Unicorn Industries- all of the Hon'ble SC.

There are a number of cases of Transitional credit, pending in SLP before the SC though not straight on the question whether Credit is a vested right or not.

But among other challenges mounted by Revenue in the SLP against the Delhi HC decision in the case of Brand Equity, this is also one of the grounds and therefore one eagerly looks forward to at least an obiter dicta in the matter from the SC, falling in line with its earlier decisions in this regard.

The rationale behind Article 300A holding right in property as a Vested right and how it is distinguishable from Credit as a Property right

The Author continues to wonder how the idea of credit being a Vested right and that too equable to a right in property enacted vide Article 300A, under totally different circumstances of immovable property matters.

When it came to compensation for acquisition of Lands by the Government from individuals for development and nation building, payment of a farthing in place of a fortune was felt fine by the Hon'ble SC.

In the Post Independent India it was fine to hold so in keeping with the importance of economic development of a newly formed Republic.

But soon in the next 30 years India became a developing nation and the norms of compensation could not remain the same in a free enterprise and therefore the need to amend the individual rights to property had to be strengthened.

In keeping with the times and the Joneses, the economic Laws were to be modified and accordingly in the light of the economic development that the Country had already achieved, Article 300A amendment was introduced through the 44th Constitutional Amendment Act of 1978 to the effect that the right to personal property is a vested right and it can't be taken away, not any more for any whims of economic considerations except by a rule of Law.

If viewed in the above light, you would appreciate that the decision in Brand Equity case of the Delhi HC can be said to have paved way for the misunderstanding in the matter and it had of course its roots in the earlier decision of the Siddharth Enterprises v. The Nodal Officer - TOG-618-HC-GUJ-GST-2019 of the Gujarat High Court that held Article 300A states that no person shall be deprived of his property save by authority of law.

In Nelco case the Bombay HC (Appeal Number. W.P. No. 6998 of 2018 Dated 20/03/2020 - TOG-224-HC-BOM-GST-2020), has clearly said that even if input tax credit is termed as property, it can be taken away by law.

The Hon'ble Bombay HC in the Nelco case, further distinguished the Eicher Motor case, which served as a corner stone in the Southerland 1 decision of the Single Judge of the Madras HC, in Transitional matters like the present one as follows , which was cited in the Nelco case, as below;

We are not confronted with a situation of lapsing of the credit though the petitioners may equate the position before us with that of Eicher Motors (TOG-659-SC-CE-2004 refers).

We are dealing with the validity and legality of a condition, imposed in the transitional arrangement.

While moving from one legislation to another comprehensive legislation, in the latter legislation the Legislature deemed it fit and proper to continue the earlier or erstwhile arrangement by terming it as a transition or transitional one.

That continuation was with conditions and one of the conditions which is questioned here is consistent with the conditions imposed under the existing law. Such a situation was not dealt with in Eicher Motors. Thus, the decision is clearly distinguishable.

Thus, a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue, until the facility available thereto gets worked out or until those goods existed.

Thus, this is a case where the Rule, as introduced, provided for total lapsing of that credit which was lying unutilized with the manufacturer on 16/3/1995. That was held to be impermissible within the scheme of the law. We are not considering here such a situation, was the final verdict.


In sum, the Author's comments on the above titled subject are as follows;

1. Credit is a concession and granted conditionally subject to ifs and buts of compliance

2. Credit can't be claimed unconditionally as a Vested right as a straight equivalent of rights arising from immovable properties

3. Credit being treated as a Liquid Asset in accounting parlance and practice, can't be taken to mean the same as in Property Laws which have a different connotation and meaning.

4. The move of the Government to abolish Cess or subsume it or to permit it to be moved into a future general credit pool (ITC) will depend upon the Policy intent of the Government which the Courts will be too keen to take notice and formulate into its decisions.

5. Last but not the least, some genuine technical flaws/omissions and lacunae in drafting of the Rules can't be touted against the Government as a major issue for they are absolutely remediable by passing such legislations as deemed fit to push for the substantive policy of its taxation, in the final view of the Author.

[The Author is a former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer, GST and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.]