Background

Once a booming industry, the current phase through which the real estate industry is passing through can be at least said be a slow-down phase if not exactly recession phase.

The lack of clarity in the tax treatment of various transactions also add to the distress of the industry going through a slow-down phase. One of such transaction is reversal of service tax credit of unsold inventory on receipt of completion certificate by a developer. The department has been sending Notices to reverse the Cenvat Credit pertaining to unsold units at the time of receipt of completion certificate which was availed in the pre-GST regime.

The controversy arises in the backdrop of intention of Government to not allow any tax credit in respect of unsold units on which no tax is payable and the way in which the law has been drafted.

Provision related to reversal of credit in GST and pre-GST regimes

The provisions under the CGST Act, 2017 and the CGST Rules, 2017 have made it abundantly clear that the credit which pertain to non-taxable supplies has to be reversed. Rule 42 and 43 of the CGST Rules, 2017 as amended contain specific provisions regarding the reversal of credit pertaining to unsold inventory.

The specific rules under the GST regime has not left much scope of any arguments regarding non-reversal of credit pertaining to unsold inventory.

Unlike the specific provisions related to real estate under rule 42 and 43 of the CGST Rules, 2017, the erstwhile Cenvat Credit Rules, 2004 had not any specific provision requiring reversal of credit which pertains to unsold inventories. Further, until 13.04.2016[1], the definition of exempted services did not covered the activities which did not qualified as service. Thus, until 13.04.2016, there was no specific requirement to reverse the credit which pertained to activities which did not qualified as services.

Whether Cenvat credit lawfully availed in pre-GST regime is a vested right

It has been held in a plethora of judgments that credit once lawfully availed becomes an indefeasible right in the hand of the assesse. The later development in law cannot be a ground to deny the credit rightly availed in the absence of a specific provision which authorizes such an action.

In Authors view, the entitlement to Cenvat credit is determined at the time of receipt of service and not on the basis of what transpires subsequently. The developer was lawfully entitled to take the credit at the time the same was availed. The immediate consequence of such lawful availment of credit is that the same becomes an indefeasible right at the hands of the developer. Hence, the same cannot be denied later on the ground of subsequent developments (albeit with retrospective effect) in the absence of a specific provision which authorizes such an action. In support of the above proposition that Cenvat credit rightly availed is an indefeasible right in the hands of the assessee, reliance can be placed on the following case laws:

1. CCE, Pune v. Dai-Ichi Karkaria Ltd. 1999 (112) E.L.T. 353(S.C.)
2. H.M.T. V. CCE, Panchkula 2008 (232) ELT 217 (Tri-LB) affirmed by the P&H HC in CCE, Panchkula v. HMT Ltd 2010 TIOL 316 HC P&H.
3. Hindustan Zinc Ltd. V. UOI 2008 (223) ELT 149 (Raj)
4. CCE & Cus, Cochini v. Premier Tyres Ltd 2008 (223) ELT 149 (Raj)

Support can also be drawn from the recent judgments wherein the decision has been pronounced in favour of the assesees.

In M/s Alembic Ltd 2018-VIL-708-CESTATAT-AHM-ST and M/s Shreno Limited Vs C.C.E & ST, the issue involved was whether the appellant was required to reverse proportionate credit out of the valid input service credits availed by them during the period till obtaining completion certificate, i.e. availing during the time when whole of output service of construction of residential complex was taxable. The Hon’ble tribunal held that the appellant were not required to reverse the proportionate credit for the past period when at the time of availment of such credit, output services of the developer were taxable. Relevant extract of the judgment is as under:

“13. We agree with such plea raised by the Appellant. While the law does not intend to allow any undue benefit to a service provider in terms of Cenvat Credit of Service Tax paid on input services used in providing non-taxable output activity, however, as held by the Hon'ble Apex Court in the case of Dai IchiKarkaria 1999(112) ELT 516(SC) - 1999-VIL-02-SC-CE, Modvat / Cenvat Credit is a vested right. Once it is legally and validly availed, the same cannot be denied and/or recovered unless specific provisions exist for the same. The Appellants have also correctly relied upon the decisions / judgments in the case of HMT Ltd., TAFE, Ashok Iron & Steel Fabricators (supra) wherein an identical situation qua "inputs" used in production of dutiable finished goods was involved, where on a particular date, the said Finished goods became exempt and the issue involved was as regards credits availed at a time when such Finished goods was otherwise dutiable.

14. It has been a consistent judicial view, including that of the Hon'ble Apex Court in such cases, that credit entitlement is on the date of receipt of inputs when the output activity was wholly dutiable. Merely because the finished goods eventually became exempt later on, the credit availed on inputs which were contained in semi-finished / finished goods state was held as not deniable. The present case is squarely covered vide such ratio laid down by higher courts.

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16. This being the case, a harmonious reading of Rule 3 of the CCR, 04 read with Rule 6 and Rule 11 of the said Rules will suggest that eligibility / entitlement to credit has to be examined only at the time of receipt of input service and once it is found to be availed at a time when output service is wholly taxable, and the said credit is availed legitimately, the same cannot be denied and/or recovered unless specific machinery provisions are made in this regard. As per above TRU clarification dt.28.2.07, even if one assumed sale of immovable property after Completion Certificate to be "exempt service" even going by the findings in the impugned order, even then there is no legal requirement to reverse any credit availed on "input services" in the past (prior to obtaining Completion Certificate) at all.”

On appeal by the department, the Hon’ble Gujarat High Court upheld the decision of the tribunal in Principal Commissioner Vs. M/s Alembic Ltd 2019-TIOL-1495-Ahm-ST.

In Prajapati Developers vs CCT 2019-TIOL-806-CESTAT-Hyd, the assesse was issued SCN for reversal of Cenvat credit under rule 6 holding that the input services were used both for provision of taxable services and also for activities which do not amount to service under sec 65B(44) of the Finance Act, 1994. It was held that since there was no provision during the relevant period for reversal of credit where common inputs or input services were used for provision of taxable services and also activities which do not amount to services at all, the assesse is entitled to credit of service tax paid or duty paid in view of rule 2(l) and rule 3 of the Cenvat Credit Rules, 2004. Accordingly, as during the relevant period rule 6(1) did not provided for reversal of Cenvat credit in respect of input services used both in provision of taxable services and for activities which do not amount to service, the judgment was pronounced in favour of the assesse. The relevant part of the judgment is extracted as under:

“8. I have considered the arguments on both sides and perused the records. The show cause notice was issued seeking reversal of CENVAT credit under Rule 6 holding that the input services were used both for provision of taxable services and also for activities which do not amount to service under Sec. 65B(44) of the Finance Act, 1994. Rule 6 required reversal of proportionate amount of CENVAT credit wherever the input services or inputs were used both for provision of taxable as well as exempted services. There was no provision during the relevant period for reversal of credit where common inputs or input services were used for provision of taxable services and also activities which do not amount to services at all. It is nobody’s case that the appellant has availed credit on the inputs and input services used exclusively in activities which do not amount to service. If that be so, they would not have been entitled to the credit of service tax paid or duty paid in view of Rule 2(l) and Rule 3 of CENVAT Credit Rules, 2004. There was a gap in the law during the relevant period inasmuch as one could have availed complete credit of the common inputs and input services which are used in providing taxable services and not activities which do not amount to service at all and the assessee could have used only a small fraction of common inputs/ input services in providing taxable services and rest in activities which do not amount to service at all and still would have been entitled to full credit of the tax paid. This was rectified by insertion of explanation (3) to Rule 6(1) with effect from 01.4.2016 vide notification 13/2016-CE (NT) dated 01.3.2016. This explanation however was not given retrospective application in the notification. I am unable to agree with the learned departmental representative that since this explanation is keeping in line with the spirit of the entire scheme of CENVAT Credit Rules, 2004 that credit is available only when tax is paid, it should be treated as having retrospective application. It is a well settled legal position that taxing statutes should be read as such without any intendment in it regardless of the consequences”

The Hon’ble Gujrat High Court in the Principal Commissioner Vs M/s Shreno Ltd 2019-TIOL-1546-HC-Ahm-ST relying on its earlier decision in Alembic (supra) held that the question of law as proposed by revenue i.e. reversal of Cenvat credit availed on account of unsold units in view of provision of rule 6 of the Credit Rules is no more res-integra. It was held that in view of the ratio of M/s Alembic the assesse is not required to reverse any credit availed on valid input services availed during 2010 till obtaining of completion certificate. The appeal of the revenue was accordingly dismissed.

In authors view, the above presents very good grounds to argue that once credit was lawfully availed it becomes a vested right and cannot be made to reverse on account of a subsequent development.

It would also be worthwhile to note here that the specific provisions under GST Law provides for reversal of ITC and not of Cenvat credit which has been carried forwarded. These provisions would also be of no help to the department to contend that the assesse is required to make reversals in terms of provisions of GST Law.

The above developments and the absence of any specific provisions treating activities not amounting to services as exempted services for the purpose of reversals till 13.04.2016, developers have a good case to argue where disputes regarding reversal of credits are raised by the department

Conclusion

In the light of the specific provisions related to reversals of unsold inventory, ITC availed in the GST regime which pertain to unsold inventory has to be compulsorily reversed. However, in the absence of specific provisions in respect of Cenvat credit availed in the pre-GST regime and supporting judgments in favour of the assessee, the developer have a very good case to defend where the department seek to enforce them to make reversals.