No credit of Krishi Kalyan Cess allowed under GST: AAAR

In re Kansai Nerolac Paints Limited (GST AAAR Maharashtra)

The Appellate Authority held that the accumulated credit by way of Krishi Kalyan Cess (KKC) as appeared in the Service tax return of Input Service Distributor (ISD) on June 30, 2017 which is carried forward in the electronic credit ledger maintained by the Appellant under CGST Act 2017, shall not be allowed to be taken as admissible input tax credit. Accordingly the order of AAR stands confirmed in terms of the above order.

My commentary on the ruling would help to those taxable persons who have carried KKC balance to the GST regime as ITC credit, before it becomes too late for a likely dispute.

Issue in brief

M/s Kansai Nerolac Paints Limited (KNPL) are engaged in business of manufacture of paints and in provision of works contract service.

ARA, Maharashtra ruled that their balance of KKC as on 30^th June 2018 is not eligible for ITC credit under GST. Aggrieved by the ruling, an appeal was filed by KNPL with the Appellate Advance ruling authority on the ground

• entry 92C of union list I, empowers to levy service tax, was deleted when GST was introduced and hence KKC is sub subsumed in GST and is an admissible credit.
• The ARA was relying on the Delhi High court order ruling on the dispute of cross utilization of EC and she chess which is completely different from the subject issue.
• ARA also relies on FAQ of CBEC which has no legal binding.

After due process of law, the appellate advance ruling authority observed, KKC was accumulated due to the restriction of utilization of KKC credit only to KKC liability under earlier law. It has upheld the ruling of AAR

• based on CGST act which has not defined CENVAT credit and the explanation provided at the end of transitional provision does not also come to rescue of the appellant as the list of duties and cesses which are admissible to the like appellants defined under Rule 3 of Cenvat credit Rules,2004 which do not include KKC.
• Subsequent amendment provides for KKC credit only to output service providers and its restrictions on it’s utilistion
• The cesses cannot be treated as excise duty and service tax as the objective of the levy is for specific purpose.
• The CBEC FAQ clarification is based on the above facts and can be relied upon.

 BRIEF FACTS OF THE CASE

1. M/s Kansai Nerolac Paints Limited are engaged in business of manufacture of paints and engaged in provision of works contract service as well. The works contract services are carried out from the company’s Head Office.
2. The appellant filed an application for advance ruling u/s 98 of the CGST Ac2017 and the MGST Act 2017 raising the question as to whether the accumulated credit by way of Krishi Kalyan Cess ( KKC) as appeared in the service tax return of Input Service Distributor (ISD) on June 30, 2017 which is carried forward in the electronic credit ledger maintained by the company under CGST Act , 2017 will be considered as admissible input tax credit.
3. It was decided by the ARA through order ( No GST-ARA-18/2017-18/B-25 dt 5.4.2018) that KKC as appeared in the service tax return of Input Service Distributor (ISD) on June 30, 2017 which is carried forward in the electronic ledger maintained by the Appellant under CGST Act, 2017, will not be considered as admissible input tax credit.
4. The appellant has therefore filed an appeal against the said order under section 100 of the CGST Act 2017/MGST Act 2017.

GROUNDS OF APPEAL

1. The impugned Ruling is patently against law, unjust, erroneous and passed with complete non application of mind. The same merits to be quashed on this ground alone.
2. KKC is levied as per section 161 of the Finance Act, 2016. Section 161(5) of the Finance Act specified that for levy and collection of KKC, Chapter V of Finance Act, 1994 (Service Tax) will be applicable. Entry 92C of Union List I of Indian Constitution empowers legislature to levy service tax, as provided under Chapter V of Finance Act, 1994. 101Stamendment of constitution deletes Entry 92C of union List 1, in view of implementation of Goods and Service Tax. It implies like service tax KKC is also subsumed in Goods and Service Tax. In other words CGST liability as accrued under CGST Act, 2017 contains liability on account of KKC as well. CENVAT Credit Rules 2004 (CCR) provides KKC liability could be set off with KKC credit only. CGST liability subsumed KKC liability in view of 101st amendment of constitution. Therefore migrated KKC credit will be admissible to set off with CGST liability. Advance Ruling authority has denied aforesaid submission of the
3. Section 140(1) of CGST Act, 2017 (Act) allows a registered person to carry forward the CENVAT credit as captured in return for the period ended June 30, 2017 to electronic credit ledger provided the said credit is admissible under the Act. CCR has recognized KKC as CENVAT credit and Section 16 and Section 17 of the Act, which determines admissibility of input tax credit have put no restriction in admission of KKC as CENVAT credit under the aforesaid provision of the Act. Therefore KKC credit will also be considered as admissible CENVAT credit as per proviso (1) to section 140(1) read with section 16 and section 17 of the Act. Advance Ruling authority has denied aforesaid submission of the appellant without stating any reason for the same.
4. Advance Ruling Authority relies on the decision of Hon. Delhi High Court in case of Cellular Operators Association of India to negate the claim of the appellant without understanding the facts and the legal background of both the cases which completely different.

 Delhi High Court denied cross utilization of unutilized EC and SHE ( being withdrawn) against excise duty and service tax liability as because these cesses have not been subsumed and there was no provision in the law to cross utilized the unutilized EC and SHE cess with excise duty and service tax. In the case of appellant, Section 161(5) of the Finance Act, 2016 brought KKC under Chapter V of Finance Act, 1994 and 101stamendment of constitution subsumed Chapter V of Finance Act, 1994 on introduction of Goods and Service Tax.

Moreover section 140(10 of CGST Act,2017 allows unutilized CENVAT credit (KKC qualified as CENVAT credit in view of Rule 3(a) of CCR) to carry forward to electronic ledger without questioning the allow ability of the same under the earlier tax regime. The only condition is that the same should be admissible under the new tax regime. Therefore, the decision of Delhi High Court on which Advance Ruling Authority has relied upon is not applicable in the case of appellant.

Kansai Nerolac Paints Ltd filed an application for Advance Ruling regarding admissibility of Krishi Kalyan Cess (KKC) as input tax credit under the GST Act.

The Authority for Advance Ruling held that the taxable person is allowed to carry forward the credit to the extent admissible as Input Tax Credit Under GST as per Transitional Provision. But, the definition of ITC under GST does not include any cess.

Further, KKC credit could be utilized against KKC liability but there was no levy of KKC under GST. Hence, KKC could not be carried forward under GST.