No Transitional CENVAT Credit for Capital Goods in Transit under Section 140(5) CGST Act

Introduction

M/s JMD Alloys Ltd. v. Union of India is a writ petition decided by a Division Bench of the Patna High Court on January 30, 2025. The petitioner—a steel manufacturing company engaged in the production of MS‐Bars—sought to carry forward CENVAT credit of excise duty paid on capital goods that were in transit on the appointed day of GST implementation (July 1, 2017). The Central Tax authorities denied this seamless transition for goods received after June 30, 2017, and the petitioner’s appeal was dismissed. Key issues included (1) the scope of “inputs” under the CGST Act and CENVAT Credit Rules, 2017; (2) whether capital goods in transit qualify for transitional credit; and (3) the correct interpretation of Section 140(5) CGST Act, 2017.

Summary of the Judgment

The High Court dismissed the writ petition. It held that:

Under Rule 2(g) of the CENVAT Credit Rules, 2017 and Section 140(5) of the CGST Act, “inputs” do not include capital goods in transit.
Section 140(5) expressly limits transitional credit for goods received on or after the appointed day to “inputs” and “input services,” excluding capital goods.
There is legislative intent to distinguish capital goods from inputs for in‑transit transactions, and this classification is neither artificial nor discriminatory under Article 14 of the Constitution.
The petitioner’s reliance on the 2004 Rules and earlier definitions did not assist once the GST statutory framework and 2017 Rules took effect.

Analysis

Precedents Cited

The principal precedent relied upon by both parties was:

RSPL Ltd. v. Union of India (2018 (19) GSTL 430 (Guj)) – Gujarat High Court: Dismissed transitional credit claims on capital goods in transit under Section 140(5), upheld legislative classification between “inputs” and “capital goods.”

The Gujarat High Court’s reasoning was also reinforced by the Supreme Court’s refusal of SLP (Civil) No. 8350/2019, leaving RSPL Ltd. as binding persuasive authority.

Legal Reasoning

The Patna High Court’s reasoning proceeded in three stages:

Statutory Definitions: Section 2(19), (59), (62) and (63) of the CGST Act, 2017 define “capital goods,” “input,” “input tax,” and “input tax credit.” “Inputs” expressly exclude capital goods, while “capital goods” must be capitalized in the books.
Transitional Provisions (Section 140): Sub‑section (5) allows credit only for “inputs” or “input services” received on/after the appointed day but previously taxed. No parallel clause exists for capital goods in transit.
Conscious Legislative Distinction: The Court held that the legislature consciously omitted capital goods from Section 140(5). Distinguishing slower moving, high‑value capital goods from routine inputs is reasonable and not violative of Article 14.

Impact

This decision clarifies and cements the following principles:

Transitional credit for in‑transit goods under Section 140(5) of the CGST Act is strictly confined to “inputs” and “input services.”
Capital goods in transit as on July 1, 2017 cannot be claimed as transitional credit; claimants must await their receipt and subsequent input tax credit eligibility under post‑July 1 rules.
Taxpayers must carefully monitor supply timelines around the GST appointed day to plan credit utilization.

Complex Concepts Simplified

Appointed Day: GST launch date—July 1, 2017—when old excise and service tax laws gave way to the CGST/SGST regime.
CENVAT Credit: Pre‑GST mechanism allowing manufacturers/service providers to offset excise/service tax paid on inputs, input services, and capital goods against output tax liability.
Transitional Credit: A one‑time carry‑over of unavailed pre‑GST credits into the new GST credit ledger, subject to conditions in Section 140.
Inputs vs. Capital Goods: “Inputs” are goods (other than capital goods) used in business, while “capital goods” are assets capitalized in accounts (e.g., machinery).
Seamless Transfer: A policy goal to allow pre‑GST credits to be carried into GST, subject to statutory eligibility windows and definitions.

Conclusion

M/s JMD Alloys Ltd. v. Union of India reaffirms that Section 140(5) of the CGST Act, 2017 carves out a deliberate exception for capital goods in transit. By upholding the legislative classification between “inputs” and “capital goods,” the Patna High Court has provided certainty to taxpayers and revenue authorities on transitional credit claims. The judgment underscores the importance of precise statutory interpretation and the necessity of aligning supply and receipt dates with the GST appointed day to secure seamless credit.