The transition from the erstwhile indirect tax regime to the Integrated Goods and Services Tax Act, 2017 (“GST”) was intended to be seamless, ensuring continuity of rights, obligations, and accrued benefits of taxpayers. The most significant amongst such accrued benefits was the unutilised balance of CENVAT credit, accumulated under the Central Excise and Service Tax laws, which represented taxes already paid to the exchequer. The legislature, cognisant of the vested nature of such credit, inserted transitional provisions allowing its migration into the GST regime as Input Tax Credit (“ITC”) under Section 140 of the CGST Act, 2017 read with Rule 117 of the CGST Rules, 2017.
However, despite the statutory intent of continuity, transitional credit has become a ground for litigation, particularly when legacy disputes under the pre-GST regime intersect with procedural requirements under GST. One such contentious issue is whether ITC, transitioned from CENVAT credit through Form TRAN-1 and reflected in the Electronic Credit Ledger (“ECL”), can be utilised to discharge the mandatory pre-deposit required for filing appeals in disputes pertaining to the erstwhile Central Excise/ Service Tax regime.
Under the pre-GST framework, Section 35F of the Central Excise Act, 1944, applicable to Service Tax matters by virtue of Section 83 of the Finance Act, 1994, mandated a fixed percentage pre-deposit of the disputed demand as a condition precedent for maintaining an appeal before the Commissioner (Appeals) or the Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”).
Crucially, neither Section 35F nor Section 83 prescribed any exclusive mode of payment for such pre-deposit. The provision merely required that the stipulated percentage of the disputed tax, interest, or penalty be deposited. In the absence of any statutory restriction, utilisation of CENVAT credit for this purpose came to be judicially and administratively recognised.
The Central Excise and Service Tax Appellate Tribunal, through Circular No. 15/CESTAT/General/2013-14 dated 28.08.2014, expressly clarified that CENVAT credit could be utilised for making pre-deposit, except in cases where the demand pertained exclusively to penalty. This clarification merely reflected the prevailing legal position that CENVAT credit, being a form of tax already paid, could be appropriated towards statutory deposits.
The Gujarat High Court affirmed the said position in Cadila Healthcare Pvt. Ltd. v. Union of India, wherein the Court held that utilisation of CENVAT credit for mandatory pre-deposit was legally permissible under the erstwhile regime. Further, even prior to the issuance of the said Circular, the Karnataka High Court in Union of India v. Vikranth Tyres Ltd., reinforced the principle that a statutory pre-deposit is not a distinct levy but a partial appropriation of the disputed demand. Thus, prior to GST, the permissibility of using CENVAT credit for pre-deposit stood firmly entrenched.
With the advent of GST on July 1, 2017, the CENVAT Credit scheme was subsumed into the ITC framework under the Central Goods and Services Tax Act, 2017 (“CGST Act”). Section 140(1) of the CGST Act read with Rule 117 of the CGST Rules, 2017, statutorily mandated the carry forward of eligible CENVAT credit lying unutilised through Form TRAN-1, as on the appointed day into the GST regime, subject to prescribed conditions.
Once transitioned, the credit ceased to be labelled as “CENVAT credit” and assumed the character of ITC under the CGST Act. Importantly, this transformation was one of form, not substance. The underlying character of the credit however, remained unchanged.
Under GST, the issue of whether ITC could be utilised for making pre-deposit under Section 107(6)(b) of the CGST Act initially witnessed divergent views. Certain authorities insisted that such deposits be made exclusively through the Electronic Cash Ledger, relying on administrative circulars and portal design.
The issue was settled by the Gujarat High Court in Yasho Industries Ltd. v. Union of India, and affirmed by the Supreme Court in Union of India v. Yasho Industries Ltd., where the Court held that, in the absence of any statutory embargo, the mandatory pre-deposit under Section 107 could be validly discharged by debiting the Electronic Credit Ledger. The insistence on cash payment was held to be without statutory backing.
The peculiar question that arises is whether ITC originating as CENVAT credit, mandatorily transitioned under Section 140 of the CGST Act can be utilised to make pre-deposit for appeals arising from disputes under the erstwhile service tax regime.
Opposition to such utilisation has primarily been founded on administrative circulars, particularly CBIC Circular No. 1070/3/2019-CX dated 24.06.2019 and Instruction vide CBIC-240137/14/2022-Service Tax Section- CBEC dated 28.10.2022., which prescribes payment of pre-deposit in legacy disputes by a ‘cash only’ mechanism through the designated portal. However, these circulars only prescribe an administrative mechanism and do not amend or override the statutory provisions.
Section 35F of the Central Excise Act, as applicable to Service Tax appeals, merely mandates a pre-deposit, it does not prescribe the mode of payment. Similarly, the CGST Act, through Section 140 and Rule 142(3) of the CGST Rules, expressly recognises utilisation of transitioned credit through debit of credit ledger for payment of amounts under law.
Further, the pre-deposit is not an independent levy but a component of the disputed demand. This principle has been expressly recognised by the Delhi High Court in Army Welfare Housing Organisation v. Union of India, wherein it was categorically held that CENVAT Credit lying under the erstwhile indirect tax regime, and duly transitioned into the Electronic Credit Ledger upon the advent of the GST regime, constitutes a legally valid and permissible source for discharging the statutory pre-deposit mandated under Section 35F of the Central Excise Act, 1944, as made applicable to service tax matters by virtue of Section 83 of the Finance Act, 1994. The Court emphasised that the availment of a portion of transitioned CENVAT credit for the purpose of pre-deposit is being permitted in the present case, where the petitioner body is a charitable, no profit, no loss organisation. A recurring theme in disputes of this nature is the reliance placed by authorities on executive circulars to restrict modes of payment. However, it is a settled principle of law that circulars cannot curtail rights conferred by statute.
The grievance of the department in not permitting the utilisation of ITC for making the pre-deposit stems from the perceived difficulty in processing a refund of such amounts in the event the assessee succeeds in the appeal. However, this concern stands conclusively addressed by the Karnataka High Court in Flipkart India Pvt. Ltd. v. Assistant Commissioner of Commercial Taxes, wherein it was held that where a taxpayer becomes entitled to refund of pre-deposit made in relation to proceedings under the Karnataka VAT Act, such refund must be granted entirely in cash, even if a portion of the pre-deposit was made by utilisation of Input Tax Credit through the Electronic Credit Ledger.
Relying on Sections 142(7)(b) and 142(8)(b) of the CGST Act, 2017, it was held that the statutory scheme does not distinguish between cash payments and ITC/ECL debits and expressly contemplates refund of all admissible amounts in cash. Having accepted the pre-deposit partly through ITC/ECL, the Department could not deny cash refund by relying on executive circulars. Further, Rule 92(1A) of the CGST Rules, 2017, provides that where a refund of tax (other than refunds relating to zero-rated supplies or deemed exports) is sanctioned under Section 54(5) of the CGST Act, 2017, the tax originally paid in cash shall be refunded in cash through Form RFD-06 after adjusting any outstanding demand, while the portion discharged through ITC shall be re-credited to the electronic credit ledger through Form GST PMT-03. However, the said provision has been held to be prospective and inapplicable to deposits made prior to 23.03.2020. Consequently, ITC utilised before that date, if found refundable, is liable to be refunded in cash along with applicable interest for the period of delay.
The object of pre-deposit provisions is merely to discourage frivolous appeals, not to penalise bona fide litigants or create artificial financial barriers. The insistence on payment in cash, notwithstanding the availability of valid credit, defeats the underlying object of the provisions and shall result in inequitable outcomes.
Hence, the utilisation of transitional ITC originating from CENVAT credit for the purpose of statutory pre-deposit in legacy disputes is consistent with the legislative intent underlying the transition to GST. The transition provisions were enacted to preserve accrued rights and ensure continuity of tax credits already earned under the erstwhile regime. Consequently, permitting the utilisation of transitioned ITC for pre-deposit not only aligns with statutory interpretation and judicial precedents but also upholds the fundamental objective of transition to GST, ensuring that taxpayers are not deprived of vested credits due to procedural limitations.
About the authors: Rishab J is an Associate Partner, Dhanyatha R is a Senior Associate and Siddhant Kishanpuria is an Associate at Shivadass & Shivadass (Law Chambers).
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