Sutherland case: Madras HC disallows cesses transition into GST

A division bench of Madras High Court on Friday disallowed transition of Education Cess (EC), Secondary and Higher Education Cess (SHE Cess) and Krishi Kalyan Cess (KKC) into GST regime through the TRAN-1 declaration.

This ruling holds significance for the GST Department as it will have implication on collection. However, some experts feel the matter will reach the Supreme Court soon.

In a matter of Sutherland Global case, the tax department appealed before the larger bench against the ruling by Single Judge’s order. The impugned order, pronounced on September 5, 2019, had allowed the company, to utilise and set off the accumulated unutilised amount of Education Cess (EC), Secondary and Higher Education Cess (SHEC) and Krishi Kalyan Cess (KKC) against the output GST tax liability.

The division bench of Justices Vineet Kothari and Krishnan Ramaswamy mentioned that the matter deals with section 140 of the GST Law which specifies some duty/taxes in the pre-GST regime as ‘Eligible Duties’ to be used for calculating tax credit to be carried forward. There are three lists which are called as Explanation 1, 2 and 3.

Explanation 1 has 7 ‘Eligible Duties’ such as Excise Duty, Additional Excise Duty, Additional Duty under Custom & Tariff Act, Additional Customs Duty on Taxable Articles and National Calamity Contingency Duty. Explanation 2 added Service Tax to the previous seven. Explanation 3 clarified that such eligible duties and taxes would exclude a Cess which has not been specified in the first two explanations.

Therefore, “only the seven specified duties as ‘Eligible Duties’ in respect of inputs held in stocks and inputs contained in semi-finished goods held in stock on the appointed date, i.e. 01.01.2017 will be eligible to be carried forward and adjusted against GST Output Tax Liability,” the bench said while adding that three cesses are not listed as ‘Eligible Duties’ which mean these cannot be included in tax credit to be carried forward. The bench did take note of the fact that though National Calamity Contingent Duty is actually a cess but since it continued beyond July 1, 2017, which is why set-off is allowed.

The bench specifically mentioned that three cesses did not operate beyond July 1, 2017. Also, the exclusion of three cesses are to carry forward and set off under Section 140 of GST law is provided explicitly under Explanation 3.

“The transition of unutilised Input Tax Credit could be allowed only in respect of taxes and duties which were subsumed in the new GST Law. Admittedly, the three types of Cess involved before use namely Education Cess, Secondary & Higher Education Cess and Krishi Kalyan Cess were not subsumed in the new GST Laws, either by the Parliament or by the States. Therefore the question of transitioning them into the GST regime and giving them credit under against output GST Liability cannot arise,” the bench said while setting aside Single Judge’s ruling.

“It is perhaps a very great victory for the department and has Pan India applicability. The revenue saved or gained by the department runs to several crores,” Aparna Nandakumar, the lawyer for the tax department said.

However, Nirmal Singh, Partner- Indirect Tax at Nangia Andersen LLP feels this judgement will have an adverse impact on taxpayers who have transitioned cess credit that such credit is allowed to be transitioned. “The matter now can be put to rest only post receipt of blessings from the Hon’ble Supreme Court,” he said.

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