GST Transition Trap: Company Gets Second Chance on Stranded Cenvat Credit

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Case Name

The Assistant Commissioner of GST & Central Excise, Puducherry-II Division v. M/s. Ganges International Private Limited

Case No.: W.A. No. 1648 of 2022 & CMP No. 11262 of 2022

Court Name: High Court of Judicature at Madras

Decided on: 17.08.2022

Key Takeaways

1. Cenvat Credit Entitlement Was Not Disputed: The Revenue itself admitted that the assessee was entitled to Cenvat credit — the only problem was the timing of the payment, which fell after the GST transition date of 01.07.2017.

2. Late Payment Loss of Entitlement: Just because the service tax was paid late (on 02.05.2018, after being flagged in a departmental audit), the assessee shouldn’t automatically lose their rightful credit. The court recognized this as a “peculiar circumstance.”

3. Section 142(3) of CGST Act, 2017 is the Right Provision: The court directed the authority to consider the assessee’s application specifically under section 142(3) of the CGST Act, 2017, rather than treating it purely as a cash refund claim.

4. Remand Order Modified, Not Set Aside: The Division Bench didn’t completely overturn the Single Judge’s order — it only modified it to streamline the directions, making it cleaner and more specific.

5. Opportunity of Hearing is Mandatory: The authority was directed to give the assessee a proper hearing before passing any fresh order.

Issue

The central legal question: Can a taxpayer who paid service tax after the GST transition date (i.e., after 01.07.2017) — due to a late discovery through departmental audit — claim a refund or carry forward of that Cenvat credit under the transitional provisions of the CGST Act, 2017, even though they missed the normal transitional credit window?

In simpler terms: Should the tax department be forced to reconsider a Cenvat credit/refund claim that fell through the cracks during the GST transition?

Facts

• Who is the assessee? M/s. Ganges International Private Limited, based in Puducherry, is a manufacturer of GI Tower Parts, ERW Black and GI Pipes falling under Chapter 73 of the Central Excise Tariff Act, 1985.

• What did they do? During their business, they received technical know-how / intellectual property rights from foreign persons and paid royalty to them. This happened during the period April 2016 to June 2017.

• What was their tax obligation? For these services received from abroad, they were required to pay service tax under the reverse charge mechanism. However, they did not pay this on time.

• When did they pay? A departmental audit flagged the non-payment. Following this, the assessee paid:
• Service tax: Rs. 24,20,684/-
• Interest: Rs. 3,82,139/-
• Payment date: 02.05.2018
• The GST Problem: By the time they paid, GST had already come into effect on 01.07.2017. The old Cenvat Credit Rules, 2004 had been superseded by new rules vide Notification No. 20/2017-CE(NT) dated 30.06.2017. The transitional provisions under sections 140 to 142 of the CGST Act, 2017 and Rule 117 of the CGST Rules, 2017 required a GST-TRAN 1 form to be filed within 90 days — which the assessee couldn’t do since they paid the tax only in May 2018.

• What did they do next? They filed a refund claim of Rs. 24,20,684/- before the Assistant Commissioner, relying on sections 140 and 142(9)(b) of the CGST Act, 2017.

• What happened to the refund claim? By Order-in-Original No. 67/2018 (Refunds) dated 29.08.2018, the refund was rejected. The reason given was that the claim was not relatable to section 11B of the Central Excise Act (CEA), 1994 (made applicable to service tax matters by section 83 of the Finance Act, 1994), and the assessee didn’t fall under any situation listed under section 54(8) of the CGST Act, 2017.

• Writ Petition: The assessee challenged this rejection by filing WP No. 528 of 2019 before the Madras High Court. The Single Judge, on 22.02.2022, set aside the rejection order and remanded the matter for fresh consideration, directing the authority to look at it under section 142(3) of the CGST Act, 2017.

• Writ Appeal: The Revenue (tax department) was unhappy with this and filed the present Writ Appeal No. 1648 of 2022 before the Division Bench.

Arguments

Revenue’s Arguments (Appellant / Tax Department):

1. The assessee did not pay service tax on time — they paid only in May 2018, after being caught in a departmental audit. This was their own fault.

2. Because of the late payment, the assessee could not take Cenvat credit in the ST-3 returns within the stipulated period of 15.08.2017.

3. The refund claim did not fit into any provision of section 142 of the CGST Act, 2017, so the rejection was legally correct.

4. The Single Judge should have directed the assessee to avail the alternative remedy available under the statute, rather than entertaining the writ petition.

5. The doctrine of necessity cannot be invoked just because the assessee claims they have no remedy. Tax laws must be interpreted strictly — there is no equity in fiscal matters.

Assessee’s Arguments (Respondent / M/s. Ganges International):

1. The assessee is genuinely entitled to Cenvat credit — this was not disputed even by the Revenue.

2. There is no eligible provision available under the new GST regime to allow them to claim this credit, which is precisely why the court’s intervention was needed.

3. The Single Judge rightly set aside the rejection order and directed reconsideration under section 142(3) of the CGST Act, 2017.

4. The order of remand should be upheld and there is no reason to quash it.

Key Legal Precedents & Provisions

This judgment doesn’t cite specific prior case laws by name, but it extensively references the following statutory provisions:

Section 142(3) of the CGST Act, 2017

Transitional provision dealing with claims/proceedings pending under the old regime — the key provision the court directed to be applied

Section 142(9)(b) of the CGST Act, 2017

Relied upon by the assessee in their original refund claim

Section 140(1) of the CGST Act, 2017

Transitional credit provision — the Single Judge noted that the right to apply under this section cannot be denied merely because the transitional provision came into effect

Sections 140 to 142 of the CGST Act, 2017

Overall transitional provisions for input tax credit under GST

Rule 117 of the CGST Rules, 2017

Required filing of GST-TRAN 1 within 90 days for transitional credit

Notification No. 20/2017-CE(NT) dated 30.06.2017

Superseded the Cenvat Credit Rules, 2004 with new rules

Sections 173 and 174 of the CGST Act, 2017

Repealed the Central Excise and Service Tax enactments

Section 11B of the Central Excise Act (CEA), 1994

Refund provision under old regime — Revenue argued the claim must be relatable to this

Section 83 of the Finance Act, 1994

Made section 11B of CEA applicable to service tax matters

Section 54(8) of the CGST Act, 2017

Situations under which refund is permissible — Revenue argued assessee didn’t qualify

Cenvat Credit Rules, 2004

Old rules under which the assessee was originally entitled to credit

Chapter 73 of the Central Excise Tariff Act, 1985

Classification of the assessee’s manufactured goods

Judgment

It’s a partial win for the assessee — the Revenue’s appeal was not fully allowed. The Division Bench upheld the remand but modified the Single Judge’s order slightly.

What Did the Court Decide?

The Division Bench of Justices R. Mahadevan and Mohammed Shaffiq made the following key observations and orders:

1. Admitted Facts: It was an admitted fact that the assessee was eligible to claim Cenvat credit under the erstwhile Central Excise Act prior to 30.06.2017, but was unable to claim it due to the transitional provisions coming into effect from 01.07.2017.

2. Peculiar Circumstances Recognized: The court acknowledged the “peculiar circumstances” — the assessee paid service tax late (on 02.05.2018) after being flagged in a departmental audit, and then found themselves in a legal vacuum with no clear provision to claim their rightful credit.

3. Remand Upheld: The court agreed that the rejection order needed to be reconsidered. It was not appropriate to simply dismiss the assessee’s claim when their entitlement to credit was not even disputed.

4. Modification of Single Judge’s Order: The Division Bench modified the Single Judge’s order by giving a cleaner, more specific direction — the appellant (Revenue) must:

• Consider the assessee’s application under section 142(3) of the CGST Act, 2017
• Decide it on merits
• Give the assessee a proper opportunity of hearing
• Pass orders within six weeks from receipt of the judgment

5. No Costs were awarded. The connected miscellaneous petition (CMP No. 11262 of 2022) was closed.

FAQs

Q1: Why did the assessee pay service tax so late — in May 2018?

The service tax liability under the reverse charge mechanism was not paid originally. It was only pointed out during a departmental audit, after which the assessee paid it on 02.05.2018.

Q2: Why couldn’t the assessee just claim Cenvat credit normally?

By the time they paid the service tax (May 2018), GST had already replaced the old regime (from 01.07.2017). The transitional credit window required filing GST-TRAN 1 within 90 days of GST implementation — a deadline the assessee had already missed since they hadn’t even paid the tax yet at that point.

Q3: Why did the Revenue reject the refund claim?

The Revenue said the claim didn’t fit under section 11B of the CEA, 1994 (as applicable to service tax via section 83 of the Finance Act, 1994), and the assessee didn’t qualify under any of the situations listed in section 54(8) of the CGST Act, 2017.

Q4: What is section 142(3) of the CGST Act, 2017, and why is it important here?

Section 142(3) is a transitional provision that deals with pending claims/proceedings from the old tax regime. The court felt this was the most appropriate provision under which the assessee’s application should be reconsidered, since their situation arose from the transition period.

Q5: Did the assessee get their refund of Rs. 24,20,684/-?

Not yet — at least not from this judgment. The court only directed the Revenue to reconsider the application afresh under section 142(3) of the CGST Act, 2017. The actual decision on whether to grant the refund or allow credit will be made by the Revenue authority after a fresh hearing.

Q6: What does “remand” mean in this context?

“Remand” means the court sent the matter back to the original authority (the Assistant Commissioner) to reconsider and decide again, this time following the court’s specific directions. It’s like saying, “You got it wrong — go back and look at it properly.”

Q7: What was the Revenue’s strongest argument, and why didn’t it work?

The Revenue’s strongest argument was that tax laws must be interpreted strictly and there is “no equity in fiscal matters” — so the doctrine of necessity shouldn’t be used to create a remedy where none exists in the statute. However, the court found that since the assessee’s entitlement was admitted and the peculiar circumstances were genuine, a fresh consideration under section 142(3) was warranted.

Q8: What happens if the Revenue doesn’t pass an order within six weeks?

The court directed the order to be passed within six weeks from the date of receipt of a copy of the judgment. If the Revenue fails to comply, the assessee would likely need to approach the court again for enforcement.

This appeal is filed by the appellant / Revenue, assailing the order of

the learned Judge dated 22.02.2022 passed in WP.No.528 of 2019.

2.Briefly stated facts are as follows:

2.1. The respondent / assessee is engaged in the manufacture of GI

Tower Parts, ERW Black and GI Pipes falling under Chapter 73 of the

Central Excise Tariff Act, 1985. In the course of such business, they had

received technical know-how / intellectual property right from foreign

persons and paid royalty to them during the period from April 2016 to June

2017. For the said services received by them, they were liable to pay service tax under reverse charge basis, which was not paid by them originally. After pointing out the same in the departmental audit, they had paid the service tax liability of Rs.24,20,684/- along with interest at Rs.3,82,139/- on 02.05.2018.

2.2. The appellant further stated that though the assessee is entitled

to avail cenvat credit, as per the Cenvat Credit Rules, 2004, consequent to

the introduction of GST with effect from 01.07.2017, the relevant

enactments pertaining to Central Excise and Service Tax have been repealed

vide sections 173 and 174 of the CGST Act, 2017; and the Cenvat Credit

Rules, 2004 has also been superseded by new Cenvat Credit Rules, 2017

vide Notification No.20/2017 CE NT dated 30.06.2017. However, various

transitional provisions were enacted under the CGST Act, 2017 to avail

input tax credit on transitional basis vide sections 140 to 142 of the CGST

Act, 2017 and Rule 117 of the CGST Rules, 2017. For claiming transitional

credit, a return in form GST-TRAN 1 has to be filed within a period of 90

days. The said provision was not applicable to the case of the assessee, as

they had paid the service tax for the period from April 2016 to June 2017

only on 02.05.2018 and hence, they were unable to avail credit of the

service tax already paid by them. Thus, the assessee preferred a claim before the appellant for refund of Rs.24,20,684/- in cash, relying on sections 140 and 142(9) (b) of the CGST Act, 2017.

2.3. By order-in-original No.67/2018 (Refunds) dated 29.08.2018,

the aforesaid claim of refund was rejected by the appellant on the premise

that the same is not relatable to section 11B of CEA, 1994 which made

applicable to service tax matters by virtue of section 83 of the Finance Act, 1994; and the assessee did not fall under any situation enumerated under section 54(8) of the CGST Act, 2017.

2.4. Challenging the aforesaid order passed by the appellant, the

assessee filed WP.No.528 of 2019, which was ordered by the learned Judge

on 22.02.2022, by setting aside the rejection order and remanding the matter

to the respondents for fresh consideration. Therefore, this writ appeal by the appellant / Revenue.

3.The learned standing counsel appearing for the appellant submitted

that the assessee had not paid the appropriate service tax within the

stipulated time and paid only in May 2018 after having noticed through

departmental audit, thereby lost the opportunity of taking cenvat credit of

the amount to be paid under reverse charge. Elaborating further, the learned

counsel submitted that as the payment had been made belatedly, the

assessee could not take the cenvat credit in the ST-3 returns within the

stipulated period viz., 15.08.2017 and hence, they resorted to refund of the

service tax by filing refund claim under the transitional provisions under

section 142 of the CGST Act, 2017. As the claim did not fit into any of the

provisions of section 142 of the CGST Act, 2017, the same was rejected by

the jurisdictional Assistant Commissioner. However, the learned Judge,

instead of directing the assessee to avail the alternative remedy provided in the statute, has ordered the writ petition, by remitting the matter to the respondents for fresh consideration in the light of applicability of section 142(3) of the CGST Act 2017, by the order impugned herein, which is

contrary to law and opposed to the facts and circumstances of the case. The

learned counsel also submitted that the doctrine of necessity cannot be

invoked merely because the assessee pleaded that they had no remedy, and

that, the taxing statutes are to be interpreted strictly and there is no equity in fiscal matters so as to invoke the doctrine of necessity for the purpose of providing a remedy just for asking, when the assessee has not complied with the statutory provisions. Therefore, the learned counsel sought to allow this appeal by setting aside the order of the learned judge.

4.On the other hand, the learned counsel for the respondent / assessee

submitted that taking note of the entitlement of the assessee with respect to cenvat credit and there is no eligible provision available, the learned Judge rightly set aside the order passed by the appellant rejecting the claim of the assessee, and directed the authority to reconsider the matter under section 142(3) of the Act. Thus, according to the learned counsel, there is no requirement to quash the same.

5.Heard both sides and perused the materials available on record.

6.It is an admitted fact that the assessee is eligible to claim cenvat

credit under the erstwhile Central Excise Act, prior to 30.06.2017, but they

were unable to claim, due to transitional provision has come into effect from 01.07.2017. It is also not in dispute that they had paid the service tax for the period from April 2017 to June 2017 belatedly i.e., on 02.05.2018, after pointing out the same through departmental audit. Thereafter, the assessee filed an application for refund. The appellant rejected the claim of refund made by the assessee on the premise that there is no provision in the new regime to allow such refund as input tax credit in GST/credit in Electronic cash ledger/ payment in cash. The said order was put to challenge by the assessee by filing WP.No.528 of 2019. After considering the case of the asseesee, the learned Judge was of the view that merely because the transitional provision has come into effect from 01.07.2017, the chance of making an application under section 140(1) to seek the refund or otherwise of the credit, which was subsequently accrued in the account of the assessee, cannot be denied. Observing so, the learned Judge ordered the said writ petition, by setting aside the order rejecting the claim of refund made by the assessee and remanding the matter to the appellant for fresh consideration. The operative portion of the said order is extracted below for ready reference:

“48. For all these reasons, this Court, having considered the peculiar

facts and circumstances of the case, is inclined to dispose of these writ

petitions with the following orders:

“(i) That the impugned orders in these writ petitions are liable

to be set aside, accordingly are set aside. As a sequel, the matters are

remitted back to the respondents for reconsideration. While

reconsidering the same, the authority concerned, who has to deal with

the applications of the petitioners, shall consider and dispose of these

applications under section 142(3) of the CGST Act, 2017.

(ii) While reconsidering the said applications, the claim made by

the petitioners need not be considered for the purpose of refund of the

claim made by them. However, the said claim made by the petitioners

can very well be considered for the purpose of permitting the petitioners

to carry forward the accrued credit to the electronic credit ledger of the

GST regime.

(iii) After considering the said applications, as indicated above,

the necessary order shall be passed by the respondents within a period

of six weeks from the date of receipt of a copy of this order. It is made

clear that, before passing the orders as indicated above, an opportunity

of being heard shall be given to the petitioners, so that the petitioners

can put forth their case by providing all necessary inputs to the

satisfaction of the authorities to take a decision thereon."

7.It is evident from the aforesaid order that the learned Judge,

considering the peculiar circumstances of the case, viz., the assessee is

entitled to avail cenvat credit of the service tax already paid, which fact was also admitted by the Revenue, but they were unable to claim, due to

transitional provision has come into effect from 01.07.2017, ordered the

writ petition by setting aside the rejection order of the appellant and

remanding back the matter to the appellant for fresh consideration, with

certain directions, which are aggrieved by the appellant / Revenue.

8.This court is of the view that what was impugned herein is only the

order of remand passed by the learned Judge and hence, there is no

requirement to set aside the same in entirety. However, this court is inclined to modify the order of the learned Judge to some extent. Accordingly, the same is modified by directing the appellant to consider the application of the assessee under section 142(3) of the CGST Act, 2017, based on the available materials and dispose the same, on merits and after affording an opportunity of hearing to the assessee, within a period of six weeks from the date of receipt of a copy of this judgment.

9.With the aforesaid modification, this writ appeal stands disposed of.

No costs. Consequently, connected miscellaneous petition is closed.

[R.M.D.,J.] [M.S.Q.,J.]

17.08.2022