Automobile Dealers Association Moves Supreme Court Over Compensation Cess Lapse After GST 2.0 Reforms, Claims Loss Of Rs.2500 Cr

The Federation of Automobile Dealers Association has moved the Supreme Court seeking relief related to compensation cess input tax credit worth Rs.2500 crores, which stands locked in dealers ledgers as a consequence of recent revision in the Goods and Services Tax (GST) framework.

Briefly put, a notification issued on September 17 scrapped the compensation cess on motor vehicles. This was done, as per the FADA, "without providing any transitional or refund mechanism". Therefore, dealers' accumulated compensation cess lapsed on September 22 and may not be carried forward.

Without contesting the policy reform per se, FADA says that the cess-lapsing risks hurting MSME auto dealers who operate on thin margins and have been rendered incapable of recovering the cess paid by them, leading to blocked unusable credits.

The specific reliefs sought are as follows:

- Declaration that Notification No. 9/2025 - Compensation Cess (Rate) dated 17.09.2025 is arbitrary, unconstitutional and ultra vires to the extent it fails to provide for utilization or refund of accumulated Compensation Cess credit;

- Read down/quash the notification to the extent it results in extinguishment of accumulated Compensation Cess credit without transitional mechanism; and

- Direction to the respondents to provide a mechanism for: (1) Transfer of accumulated Compensation Cess credit to CGST/IGST ledger; or (2) Refund of such credit under Section 54 of the CGST Act or any other suitable provision.

The petitioner claims that by rendering the Compensation Cess credit unusable, the respondents have unilaterally extinguished a vested right, without any legislative basis or procedural due process. "This amounts to a deprivation of property without authority of law and violates settled principles of fiscal certainty and predictability", it says.

The petitioner relies on Eicher Motors Ltd. v. Union of India and Dai Ichi Karkaria Ltd v. Union of India to contend that once credit is validly earned, it cannot be taken away by executive action.

They contended that the impugned notification creates an arbitrary and irrational classification between similarly placed dealers based on the quantum of pre-cess inventory they hold as on 21.09.2025. That is, "dealers who had lower stock on the cut-off date face no loss, whereas dealers with larger stock face a substantial financial burden because their accumulated Cess credit is stranded".

Alleging a violation of right guaranteed under Article 19(1)(g), the petitioner claims that the stranded compensation cess credit constitutes a "real economic cost" for automobile dealers who heavily rely on working capital.

"By extinguishing accumulated credit, the Respondents have effectively increased the cost of doing business, imposed without legislative sanction. This economic impairment constitutes a restriction on the freedom to carry on trade and business under Article 19(1)(g)."

The petition also asserts that the impugned action violates Article 265. "The Compensation Cess paid on inward supplies has already been collected by the Government. By denying the utilisation or refund of the corresponding credit, the State is effectively retaining tax collections without legal authority."

Further, it is claimed that there is violation of the doctrine of legitimate expectation. "Automobile dealers had a legitimate expectation, both legally and economically, that credit validly availed against inward Compensation Cess would be available for set-off against outward liability or refunded if the levy was withdrawn...Abrupt withdrawal of the levy without enabling mechanism frustrates this legitimate expectation and amounts to a breach of fiscal fairness."

Case Title: FEDERATION OF AUTOMOBILE DEALERS ASSOCIATION v. UNION OF INDIA, Diary No. 60671/2025