RETROSPECTIVE TAXATION – THE INDIAN EXPERIENCE

8.2 Taxation Law

Submitted by

Brijbhan Singh

UID NO. SM0116014

4th Year, 8th Semester

Submitted to

Dr. Daisy Changmai

(Guest Faculty of Law)

National Law University & Judicial Academy, Assam

 Abstract

The past few years have witnessed numerous retrospectively applicable amendments to tax
law. And though their terms make them unequivocally enforceable, their validity remains
enshrouded in ambiguity. The validity of such amendments is an issue of serious import and
this paper is an attempt to grapple with the same. Article 245(1) of the Constitution gives
power to the Parliament to enact laws for the whole or any part of the territory of India, and
the Legislature of a State to make laws for the whole or any part of the State. The power so
broadly postulated enables the legislative to enact both prospective as well as retrospective
law. Though taxing statutes are no exception to this rule, the presumption, in the absence of
a contrary intention, is always one of “prospectivity.” Amendments, however, when they are
of an explanatory, declaratory, curative or clarificatory nature, whether or not expressly
retrospective, are to be judicially construed as retrospective. The rationale of non-
retrospectivity, it is submitted, is in its opposition to arbitrary infliction of taxes. Tax statutes
are generally predicated on the principle, 'Nova constitutio futuris forman imponere debet
non praeteritis' – every new enactment should affect the future and not the past.

Keywords: Retrospective, amendment, tax, law

 INTRODUCTION

The art of taxation consists of so plucking the goose as to obtain the largest amount of
feathers with the smallest amount of hissing . [Jean Baptiste Colbert]

The levy and collection of tax has historically been one of the most controversial
exercises. Its critics have considered it nothing less than theft sanctioned by law. Its
protagonists elevate it to the platform of a great instrument to finance State welfare and
achieve the elusive dream of egalitarianism. Like all such controversies, the truth may
lie somewhere in between especially when tax is imposed retrospectively.

Taxation has left its indelible mark on most societies. Even the architecture of
civilizations has not been spared from the effects of taxation. Taxes on windows in the

17th Century impacted the architecture in England, Wales and Scotland and the tax
based on frontages led to the defining feature of the architecture of buildings in
Netherlands1.

The evolution of democracies with elected governments and bills of rights gradually
changed the perception of taxes as the price for civilization. Chief Justice Marshalls’
seductive cliché that the power to tax involves the power to destroy2 was seemingly
taken seriously by the Governments, until it was tempered by later judges and put to rest
by the redoubtable Holmes with the trenchant observation that the power to tax is not
the power to destroy while this Court sits3.

1
Andrew E. Glantz, A Tax on Light and Air: Impact of the Window Duty on Tax Administration and
Architecture, 1696-185, 15 PHR. 18, 29 (2008).
2
Mcculoch v. Maryland, 17 US 316 (1819).
3
Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U.S. 218, 223 (1928).
 HISTORY OF TAXATION IN INDIA

Taxation in India also has a history similar to other taxes imposed in other colonies by
foreign rulers. The first major tax to be imposed by the British was a tax on income. It
was unsurprisingly resented because it was imposed to make India pay for the whole of
the extra regiment sent to India, and also to recover retrospectively the costs of the
regiment for the past six months4.
The tax was withdrawn for a while, but then it was imposed afresh in 1922 by enacting
the Indian Income Tax Act 19225. This law continued in force, with amendments made
from time to time although it suffered endless amendments which left it "shapeless and
order less"6. Realising the need for a fresh code, the government established a Direct
Taxes Administration Enquiry Committee in 1959, and based on its recommendations,
as well as those of the Law Commission, a new act was put in place which came into
force in 1961. In less than three decades of its existence this law suffered more than 66
amendments.
Apart from the Income Tax Act, the three significant tax legislation in the field of
indirect tax India were the Central Excise and Salt act which was imposed in 1944, the
Customs Act which was first imposed in 1868 and sales tax laws which operated at the
provincial and then the State level of government.

The principal commodity taxes in the late 19th century were taxes imposed under the
British tax collection system upon salt and alcohol for portable consumption.
Commodities were added over a period of time, although a quantum change was made
in 1942 when Excise duty was imposed on tobacco to raise finances for the war effort.
The tax on manufacture of goods continues under the 1944 Act as the principles of
taxation in relation to indirect tax are – or at least were - fairly simple, and the procedure
for levy and collection was exhaustively dealt with in the rules framed from time to
time.
Similarly, the principles underlying the imposition of customs duty on imports and
exports were fairly simple. The Sea Customs Act of 1878 was replaced in 1962 by the
Customs Act which continues to be in force.
4
Ira Klein, Utilitarianism and Agrarian Progress in Western India, 18 Econ. Hist. Rev. 576, 583 (1965).
5
The Indian Income Tax Act, 1922, No. XI, Acts of British Parliament, 1922 (India).
6
Jamshedji Behramji Kanga, Nani Ardeshir Palkhivala, and Dinesh Vyas, The Law and Practice of Income Tax,
8 th Edition (LexisNexis 1990).
It is only in the mid-80s that the principles for valuation of goods became complex after
India amended its laws to bring them in line with international principles of valuation
and classification.

That apart, the growth in the economy as well as of economic activity generally and the
proliferation of industry in India increased the impact of taxation and therefore disputes
became more frequent and more complex even under the indirect tax laws.
Prior to this the two principal legislations that gave rise to disputes, which then led to
Court decisions and which in turn prompted the occasional retrospective amendment,
were the income tax law and the sales tax law, and the problems relating to retrospective
taxation therefore centred around these legislation.

RETROSPECTIVE LAWS AND LEGISLATIVE COMPETENCE

The Constitution of India imposes two limitations on the legislative power of Parliament
or the State legislatures. The first is by way of legislative competence – in that the
subjects of legislation are divided into three lists, with Parliament having the exclusive
power to legislate on List I and the States having the exclusive power to legislate with
respect to List II, and the two having concurrent power in relation to List III.
The second limitation is by way of Part III of the Constitution – the equivalent of a bill
of rights. Tax laws are amenable to a challenge on the ground that they are
discriminatory [violative of equality before the law] or that they are unduly burdensome
and harsh and thus an unreasonable restriction on the right to carry on business.
The first important challenge to retrospective changes being made was a by way of
challenge to amendment in 1951 imposing a duty on an manufactured tobacco which
was brought into force retrospectively i.e. from the date of the introduction of the Bill
and not from the date in which the law came into force.

This legislation was challenged in Court on two bases. The first was that the State
legislature lacked the legislative competence to enact a sales tax law with retrospective
effect. The argument was that sales tax was primarily an indirect tax, the essential
feature of which was that its’ burden could be passed on to the consumer. Where it was
imposed retrospectively, the burden of the past could not be so passed on to the
consumer and therefore it ceased to be an indirect tax and for that reason was
unconstitutional. This argument was tersely dispatched, following decisions of the Privy
Council holding that the method of collecting the tax was an accident of its
administration, and the fact that it could not be passed on did not affect its essential
characteristic. The Court also followed and cited with approval the decision of the privy
Council in Colonial's sugar refining Co Ltd versus Irving7 which had stated the
proposition with clarity-if there was a power to impose taxation conferred by a
constitution, the legislature could equally make the law retroactive and impose the

duties from a date earlier than that from which it was imposed8.
The Supreme Court accepted that tax laws were subject to the discipline of Part III of
the Constitution. However the Indian Supreme Court chose to follow the American
decisions that had rejected the suggestion that mere retrospectivity would render a tax
laws arbitrary and capricious.
These principles laid down in 1962 were followed consistently in a host of cases. The
defining feature of these cases was that the amendments which are made retrospectively
related invariably to either correcting some drafting flaw which clearly defeated
legislative intent, or correcting some feature on account of which the Court found the
law unconstitutional. As the Court explained in 1963, while they could not be any
dispute that the legislature in India had the power to make retrospective legislation, it
would be open to a party affected by such laws to contend that the retrospective
operation creates a situation which could be described as an unreasonable restriction
which violates the right to carry on business or the right to hold and dispose property.

While in theory the Court did subject tax laws to the fundamental rights to carry on
business, and the right to hold and dispose of property, in practice the only few
occasions on which the Court did strike down laws were situations where the tax was
brazenly discriminatory. There is no reported decision in which on account of the
retrospectivity itself the Court found the law imposing a tax retrospectively falling foul
of constitutional limitations.
The bar was set rather high- the reasonableness of each retroactive tax depends on the
circumstances in which it comes to be made, and the test of the length of time covered
by the retrospective operation could not by itself be a decisive test. For e.g. where a

7
Colonial Sugar Refining Co Ltd v Irving, [1903] St R Qd 261.
8
Chhotabhai Jethabhai Patel And Co vs The Union of India, 1962 AIR 1006.
statute may have continued to be in operation for years and was then found to be
constitutionally flawed on account of a feature which was amenable to correction by an
amendment, , if after the final judicial verdict the law was amended and brought into
place retrospectively, the length of time would be irrelevant.
In a later case decided in 1969 9the Supreme Court cited article that had appeared in the
Harvard Law Review which suggested that "it is necessary that the legislature should
be able to cure inadvertent defects in statutes oh their administration by making what
has been aptly called small repairs".

Clearly what the Court had in mind were cases where on account of bad drafting or
introducing some feature in the tax law which made it unconstitutional, the State stood to
suffer loss of revenue and there was a corresponding windfall upon a taxpayer. In such a
situation the legislature could legitimately make a retrospective amendment and also
introduce a validating clause.

RETROSPECTIVE AMENDMENTS TO THE INCOME TAX ACT

In the Finance Act (2012), the Government of India introduced over a dozen retrospective
amendments to the Income Tax Act (1961), casting a shadow on the government’s intent and
leading to apprehensions about the certainty, predictability and stability of tax laws in India.
Ostensibly, these amendments were made to clarify and restate the legislative intent of the
source rule of taxation for non-residents in India. In particular, they addressed the situation of
transfer of assets in India exclusively between non-residents. It was strongly felt that
amendments to certain sections (especially Section 9 on indirect transfer of assets situated in
India) of the Act were made to overrule the Supreme Court’s judgement on Vodafone. While
such ‘clarificatory’ amendments have been issued in the past, it was the sheer numbers
carried out through the Finance Act 2012 that was alarming. Although such amendments are
intended to clarify existing law, they effectively end up changing the law in favour of ITD.
During the authors’ consultation meetings, two areas where retrospective amendments were
made through the Finance Act 2012 were unanimously pointed out – royalty on services and
capital gains on indirect transfer of shares. The amendments to Section 9(1)(vi) Explanation 4

9
Assistant Commissioner of Urban Land Tax and Others vs Buckingham and Carnatic Company Limited, 1970
AIR 1969.
to 6 through the Finance Act 2012 retrospectively from 1976 identified payment toward
shrink-wrapped software, connectivity charges, transponder hire charges and so on as
‘royalty’. This implied that the transfer of all or any right to use computer software, including
licensing, would be treated as royalty, irrespective of the transfer medium. Another
amendment was made to the definition of ‘royalty’ to include any consideration with respect
to right/property/information irrespective of whether the recipient controls or uses it, or
whether it is located in India or outside. Moreover, the definition of the term ‘process’ was
also broadened to include transmission by satellite, cable, optic fibre and so on. In the case of
computer software, a person using the right to replicate off-the-shelf software or shrink-
wrapped software for replication makes a royalty payment and deducts tax at source. The
issue arises as the amendment subjects to tax the payment by the distributor to the replicator
for shrink-wrapped software. This is against the underlying concept of royalty. Here, the
distributor is not exploiting copyright but is only distributing the product and earning a
business income. This has largely affected both American companies such as Microsoft and
Motorola, and non-American companies such as Samsung and Nokia.

The Shome committee, in its report, stated that the “Taxation of indirect transfer as
introduced by the Finance Act, 2012, are not clarificatory in nature”. It recommended that
retrospective amendments to tax law should occur in exceptional or in the rarest of rare cases
and with particular objectives. It stated that in case the retrospective nature of the
amendments is proceeded with, no burden should be fixed on the payer for not withholding
taxes since the same would result in ‘impossibility of performance’. In any case, if the
amendments were to be introduced, the committee was of the view that capital gains should
be made taxable on account of retrospective amendments but no penalty and interest should
be levied in respect of the income brought to tax on the application of retrospective
amendments. One important suggestion of the expert committee was that the phrase “directly
or indirectly” be clarified to represent a “look through” approach. By implication, this meant
that to determine the value of a share of a foreign company, all intermediaries between the
foreign company and assets in India may be ignored. Finally, the expert committee was of the
view that, as a matter of policy, the government should best avoid introducing fundamental
changes in tax provisions without consultation with, and hence not anticipated by, the
taxpayer. Retrospective amendments are not uncommon. In countries that follow the
Westminster system of government (such as UK, India, Canada, etc.) ex-post facto law is
technically possible through the power vested in Parliament by the doctrine of parliamentary
supremacy. In UK, the government introduced the Finance Act 2008 through which it
retrospectively changed the law to target tax avoidance schemes. This was done to find a
solution to the impasse where a UK court of appeal had in 1989 upheld the decision of a
lower court to quash the decision of the UK tax department to tax a UK resident's earnings
through an offshore partnership based in Jersey. The amendment specifically targeted tax
avoidance schemes that made use of offshore trusts and double taxation treaties to reduce the
tax paid by the scheme's users. Similarly, in India, the legislature does have the power to
legislate civil law amendments with retrospective effect. However, against the backdrop of
the increasing frequency and number of retrospective amendments carried out in the recent
past, it needs to be questioned whether this power can be exercised if the sole motive is to
merely overturn the verdicts of courts. While it holds true that the power to retrospectively
make amendments is essential in contemporary tax regimes, the manner, method and
frequency of these amendments in India is nevertheless disturbing. It is essential to bear in
mind that no agency and authority should 37 be allowed to try to achieve indirectly
something that is otherwise directly forbidden. This is primarily so because in a democratic
setup as in India, such retrospective amendments tend to disturb the balance of power.
USIBC has urged the India government to ensure that any changes to India’s tax law should
not be retrospective. The government should also provide a clarification that recent changes
to the law will be legally binding and not subject to arbitrary application. While assurances
have been given on the retroactivity of certain provisions affecting indirect share transfers
and software royalties, US companies require predictability and remain concerned about how
such assurances will translate into law.

VALIDATING CLAUSES-THEIR VALIDITY

One of the interesting issues which has recurred in Indian jurisprudence is the challenge
to validating clauses that seek to override judicial verdicts.
The Indian Constitution recognizes separation of powers. In the early 60s, the Supreme
Court of India dealt with challenges to the constitutional validity of statutes brought into
force with retrospective effect in a manner so as to nullify the effect of a decision of the
Court. The Court recognised that as a facet of the power to make laws with retrospective
effect, it was open to the legislature to correct the defect and change the basis on which
the decision of the Court had been rendered, and having done so it was open to
legislatively declare that notwithstanding anything contained in any judgment or decree
of a Court, the imposition or tax for the past also would be valid. The key feature of
such legislation had to be correction or change of the very basis on which the decision
had been given. As the Court explained "a Court's decision must always bind unless the
conditions on which it is based are so fundamentally altered that the decision could not
have been given in the altered circumstances"10.

There were some cases in which an amendment failed to ‘cure the defect’ - in those
cases the Court held that the law seeking to validate past collections would constitute a
usurpation of judicial power and would therefore be unconstitutional. However if the
amendment carefully altered the basis of the judgment which had declared a demand or
a recovery of tax illegal [irrespective of whether it was merely a matter of interpretation
or on account of some feature of the law the Court had found the statute to be
unconstitutional] then the legislature could not only legislate retrospectively but could
also validate past collections or past demands.

CLARIFICATORY OR RETROSPECTIVE – WHO DECIDES

A number of retrospective amendments of recent times have been passed off as

"clarificatory" or declaratory".

Where the amendment is not made expressly retrospective, but is statutorily described as
being a clarification (i.e. by use of words such as “for the removal of doubts it is
clarified”) the Supreme Court has held that the mere legislative assertion that an
amendment is a clarification is not conclusive, and whether a change is clarificatory or
whether it is a substantive change (and therefore not retrospective) as it is a matter of
statutory interpretation and therefore for the Courts to adjudicate.
Where a law is challenged as being unconstitutional, the legislative assertion that the
law is clarificatory would be of no avail.

10
S.S. Bola & Ors v. B.D. Sardana & Ors, 1997 (8) scc 522.
 CURRENT TRENDS

Retrospective legislation did occur from time to time but for the most it was designed to
deal with some Court verdict which upset the existing law or upset the existing
understanding of the law.
The first controversial retrospective amendment was in 1983. The Income tax Act
conferred a tax exemption upon new industrial undertakings as percentage of Capital
employed in such undertakings. Since the inception of the exemption, a Rule that had
been in place for computation of the capital employed . This Rule was struck down by
various High Courts as being inconsistent with the parent Act insofar as it provided for
excluding long-term liabilities from the computation of Capital Employed. Parliament
retrospectively amended the parent statute itself and engrafted the Rule in the parent
statute. This retrospective amendment was challenged on the ground that business
undertakings had altered their position acting on the face and belief that the parent law
would prevail and that the Rules that were plainly inconsistent would be ignored, and
therefore if the law was now retrospectively altered to ratify as it were rules that were
illegal, it would seriously upset settled affairs and thus be harsh and burdensome. The
majority judgment held the rules were valid even as they were framed, and therefore the
retrospective amendment was really clarificatory in nature. The issue of such a challenge
to retrospectivity was not decided by the majority.

The dissenting judgement which accepted the proposition that the original rules were
ultra-vires, struck down the retrospective amendment to the statute is being an
unreasonable restriction on of the right to carry on business.
Recent years have seen a spate of retrospective changes made to direct tax laws and also
to indirect tax laws. One common feature of most of these changes in the decades of
1980s and the early 1990s was that they either cured some defect or made some change
which could not, in all fairness, be condemned as a change of law as such – it was more
a case of parliamentary intent missing fire. The trend has distinctly changed in recent
times.
The trend has clearly changed since 2000. Moreover this is clearly discernible in the
realm of direct tax law-possibly on account of the fact that in current times, after the
rationalisation of indirect taxes (partly on account of WTO commitments) direct taxes
particularly corporate tax have become the largest source of revenue.

These changes have not merely been procedural –but to substantive laws as well. For eg.
in 2001, retrospective changes were made with effect from 1961 to disallow a claim of
expenses, [which would otherwise constitute a legitimate business expense] where the
income in relation to which such expenses had been incurred is exempt from tax. There
was no language in the law to suggest any such disallowance – just the assertion of the
tax office, and that too in recent times. The assertion of the tax office was, by
retrospective amendment, made the law in force. Over the years, such changes have
become a steady stream as it were. The one area of greater concern is the retrospective
amendments dealing with incomes of non-resident assesses.
In 1976, a series of changes were made in the scope of total income deemed to accrue
arise in India to non-resident assessees. This provision was frequently amended as more
and more categories of incomes of non-residents were brought to tax in India . The most
prolific amendments were to the definition of royalty earned by a foreign enterprises in
an endeavour to tax incomes in which the only connection with India was that the
service received from the non- resident was used by a resident assessee in India. It was
no different from taxing Ede and Ravenscrofts for the profits they earn on sale of collars
and bands to Indian counsel.

Although the Indian Constitution provides that a law does not become unconstitutional
solely on account of the fact that it has extraterritorial operation, the question whether
Parliament could make a law that directly seeks to tax income that has no territorial
nexus with India, is a vexed issue which has not been resolved.
In a decision given in 2007 the Supreme Court accepted the proposition that the
provisions of a statute have to be construed in harmony with the principle that income
which has no territorial nexus with India would not fall within the mischief of the fiction
of "income deemed to accrue arise in India".

This decision has been sought to be retrospectively modified by a number of

amendments made to provisions where this principle of presumption against
extraterritoriality would apply. The validity of some of these provisions has been put in
issue but the matter has not yet been decided by the Indian Courts.
India has witnessed in recent times and exponential growth in foreign direct investment.
Prior to the breakup of the USSR Indian had very close economic relations with the
USSR including by way of rupee-ruble trade and was able to finance a significant
portion of its major imports such as oil and arms through this special relationship. The
breakdown of the USSR also saw the lowest point of the Indian economy-Indian foreign
exchange had reached a point where in order to prevent defaulting on foreign loans
repayment schedules, India had to pledge planeloads of its gold reserves to raise more
loans. The wave of economic reform which put India on the path of becoming a market
economy can therefore be traced to 1991. With this change came the need for foreign
investment.
During this period not just India but a large number of developing economies saw
quantum growth in foreign direct investment-by mid- 1990s the FDI flows became
greater than the flows of official development assistance.
With increasing FDI came the presence of MNCs. By 2005 almost 36% of FDI flows
were rooted to the developing countries. India has had its fair share of foreign
investment. On account of this the Indian service industry has grown exponentially, and
a large part of the growth is attributable to the advent of foreign investment and the
presence of MNCs in India.

Indian tax law has undergone significant changes to deal with the economic change in
which a significant portion of tax revenues now flows from either multinational
corporations carrying on business in India, or from transactions that are transnational
with one of the parties receiving income being a non-resident.
Even the size of businesses in India has grown. In the 1980’s, a tax dispute involving
Rs.10 million [GBP 100,000] was considered a huge dispute – now it would considered
insufficient to justify the fee of an eminent silk ! Assessments of income measured in
terms “ billion dollars” are now reasonably common.

The two areas that have seen significant changes are the provisions for taxing in India
offshore income of non-residents [on the basis of some connection with India] and
enacting provisions for transfer pricing determination so that in transactions between
associated enterprises operating within India and outside India, the fair amount of
income attributable to in India can be brought to tax under Indian tax law. All such laws
are relatively new to Indian jurisprudence, and drafting them is a daunting task for
Indian draftsmen. Fiscal legislation is experimental and more so in new areas which are
evolving to keep pace with the changing dynamic of global business.

However the interest of certainty and stability, and the need to inculcate public faith in
the dispute resolution process, demand that laws are not frequently changed. Every time
the income tax Department misreads the law, it is not necessary to change the law to
accord to the intent of the assessing officers. There is no harm in accepting that the
Courts are better judges of Parliamentary intention and if they find that the assessing
officer has misread the law, unless the situation is such as to clearly warrant
Parliamentary intervention, certainty and stability would demand that the law be not
changed for the asking.

Recognising the need for certainty, the income tax law has been amended to provide for
machinery whereby non-resident assessees can obtain then advance rulings in respect of
potential transactions. The raison d’être of such a mechanism is to impart certainty
before or transactions entered into. If interpretations of law by advance ruling authorities
are frequently tinkered with, it erodes public confidence in the procedure prescribed and
defeats the fundamental purpose underlying their creation.

RETROSPECTIVE INDIAN TAXATION LAWS FROM THE VANTAGE

POINT OF SUPREME COURT

One of the most controversial legal issues in India has been with respect to the power with
the Government to make retrospective amendments in taxing statutes. This trend of
retrospectivity in statutes was first stirred in the case of Chhotabhai v Union 11, wherein
through a retrospective amendment duty was sought to be imposed on manufactured tobacco
from the date of the introduction of the Bill and not from the date in which the law came into
force. The Supreme Court validated the act on the principle that retrospective amendments
11
Supra note 8.
are brought into effect to correct earlier flaws which defeated the purpose of the legislation in
the first place. Among the various cases leading to retrospective amendments, a landmark
judgement which shook the industry was of Vodafone International Holdings BV vs. Union
of India & Anr12. ('Vodafone Case'). The Hon'ble Supreme Court held the case in favour of
Vodafone holding that the transaction in question could not be taxed under the Income Tax
Act, 1961 (the 'IT Act'). Consequent to the judgement, the provisions of IT Act were
amended retrospectively, such that the transaction under question could be subjected to tax
within India. Such a retrospective amendment resulted in a negative impact on the foreign
investment in India and the government was faced with major backlash.

Pursuant to the Vodafone case, there were immense controversies on fairness of imposing tax
implications with retrospective effect. It is an undisputed fact that business decisions are
arranged upon the tax law prevalent at the time of taking decision and it is impractical to
organize or plan for present activities basis a future law that may arise. The tensions with
respect to retrospective amendments were narrowed down to a few basic principles by the
Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Vatika Township 13.
In the said case, the Court laid down general principles concerning retrospectivity of
legislations. By doing so, it provided a much needed blanket test for scrutinizing validity of
legislations brought into effect retrospectively.

Retrospective amendments tend to modify vested rights or impose obligations which cause
unnecessary financial burden. Of late, one of the pressing issue under the Goods and Services
Tax ('GST') has been of transitional credit. In terms of Section 140 of the Central Goods and
Services Tax Act, 2017 (the 'CGST Act'), a registered person is allowed to carry forward
eligible duties from the erstwhile regime to the GST regime "in such manner as
prescribed". The manner to avail transitional credit was provided in Rule 117 of the Central
Goods and Services Tax Rules, 2017 (the 'CGST Rules'), which also sought to impose a
time limit to carry forward the transitional credit.

Various writs were filed before High Courts challenging this aspect of time limit restricting
carry forward of transitional credit on the basis that the act did not empower the rules to
provide for any time limit. Most Courts provided relief whereby, the department was directed
to provide opportunity to all registered taxpayers to file requisite form for carry forward of

12
Vodafone International Holdings BV vs. Union of India & Anr, (2012) 6 SCC 613.
13
Commissioner of Income Tax (Central) v. Vatika Township (P) Ltd., 2014-TIOL-78-SC-IT-CB
duties from the erstwhile regime. One such favourable judgement arising of High Court of
Punjab & Haryana14 was further challenged before the Hon'ble Supreme Court however, the
Court refused to divulge into the matter and dismissed the case15.

In the meanwhile, Section 140 of the CGST Act was amended vide Finance Act, 2020
whereby, the CGST Act was amended to allow rules to 'prescribe a time limit' in addition to
the manner for the transition of eligible duties. The amendment was to be made applicable
retrospectively from 01.07.2017 however; the amendment was not immediately notified.
During the same time, various cases were pending before different High Courts on the issue
of transitional credit. One such case was that of Brand Equity Treaties & Ors. vs. Union of
India16 ('Brand Equity'). The Delhi High Court in this case categorically held that
transitional credit is an accrued and vested property of the Assessee which could not be taken
away. Additionally, the Court came on very strong and held that Rule 117 of the CGST Act is
to be read down as being directory in nature, insofar as it prescribes the time-limit for
transitioning of credit. Immediately after the judgement rendered by the Delhi High Court,
the government on 18.05.2020 vide Notification No. 43/2020 – Central Tax dt. 16.05.2020 7,
notified the retrospective amendment in Section 140 of the CGST Act. Consequently, the
department filed a petition before the Hon'ble Supreme Court of India against the Delhi High
Court judgement.

Since then, speculations have been rife on whether the amendment would apply to
judgements rendered in favour of registered taxpayers prior to the amendment being notified
and also as to whether the Courts would use their power of judicial review to invalidate such
a draconian retrospective amendment on the basis of unreasonableness. The question of
applicability of the retrospective amendments on prior judgements was answered by the Delhi
High Court in the case of SKH sheet metals components vs. Union of India and ors., wherein
the Court held that the decision in Brand Equity did not entirely rest on the fact that the
CGST Act did not prescribe for any time limit for availing the transition of the input tax
credit. There were several other grounds and reasons enumerated and discussed in the
decision, that continue to apply with full rigour even today, regardless of amendment to
Section 140 of the CGST Act. Furthermore, the Hon'ble Supreme Court vide judgement dt.
03.06.2020 in the case of Union of India & Ors. vs. Chogori India Retail Ltd., did not

14
Adfert Technologies Pvt Ltd Vs UoI, 2019-TIOL-2519-HC-P&H-GST.
15
2020-TIOL-64-SC-GST.
16
Brand Equity Treaties Ltd v. UOI, 2020-TIOL-900-HC-DEL-GST
interfere with the judgement of the Delhi High Court 10 whereby the Court had directed the
department to reopen the portal or allow manual filing of form TRAN-1. Furthermore, it is a
well settled legal position that a Court's decision must always bind unless the conditions on
which it is based are so fundamentally altered that the decision could not have been given in
the altered circumstances. Thereby, it can be inferred that the retrospective amendments tend
to not apply on judgements rendered prior to date on which the amendment is notified.

As for the latter question i.e. the validity of the retrospective amendment, it is trite to note
that a legislative amendment can be held to be valid only in cases where the intent is to cure
inadvertent defects. Time and again the courts have held that the legislature must recognize
the concept of separation of powers and not encroach upon power vested with the judiciary in
so much as it aims to bring into effect legislative amendments with retrospective effect in a
manner so as to nullify the effect of a decision of the Court. Likewise, Courts have
consistently held that retrospective amendment maybe treated as 'unreasonable' when it tries
to take away accrued rights and/or is against Article 14 of the Indian Constitution, whereby it
tends to create disparity among registered taxpayers.
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