Explanation 3 of S.140 CGST Act Not Sufficient to Deny Transitional Credit Refund to Tata Sons: CESTAT [Read Order]

The Mumbai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that Explanation 3 to Section 140 of the CGST Act, though inserted retrospectively, cannot by itself be used to deny refund of transitional credit unless the related provisions it refers to are also notified and in force.

Tata Sons Pvt. Ltd., the appellant, is a registered taxpayer that was availing CENVAT credit on cesses such as Education Cess, Secondary and Higher Education Cess, and Krishi Kalyan Cess under the earlier regime.

As of 30 June 2017, the company had an unutilized credit balance of Rs. 46,44,542, which it transitioned into the GST regime through Form TRAN-1 under Section 140(1) of the CGST Act, 2017.

Following the enactment of the CGST (Amendment) Act, 2018, the government inserted Explanation 3 into Section 140 with retrospective effect from 1 July 2017. This explanation excluded certain cesses from the definition of "eligible duties and taxes."

Based on this, the department compelled the appellant to reverse the credit and later rejected their refund claim for the same amount. The Commissioner (Appeals) upheld the rejection. Aggrieved by the decision, the appellant filed an appeal before the Tribunal.

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The appellant’s counsel argued that the refund could not be denied merely by relying on Explanation 3, as the amendments to Explanations 1 and 2 on which Explanation 3 is dependent had never been notified. They submitted that Explanation 3 alone has no legal effect unless the provisions it links to are brought into force through proper notification.

The department’s counsel argued that Explanation 3 clearly excludes cesses from transitional credit and that the refund was rightly rejected in line with the retrospective amendment. The department also pointed to CBIC circulars supporting their stance.

The single-member bench of Ajay Sharma (Judicial Member) observed that Explanation 3 relies on amended Explanations 1 and 2 to define the term “eligible duties and taxes,” and those amendments were never notified, so they have no legal effect. The tribunal explained that an amendment, even if passed, cannot be enforced unless it is officially notified. The rejection of the refund based solely on Explanation 3 was not sustainable.

The tribunal set aside the Commissioner’s order and remanded the matter to the adjudicating authority for fresh consideration of the refund claim after verifying documents and providing the appellant an opportunity to be heard.

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