Analysis of the phrase ‘In respect of’ in GST and its impact on Blocked Input Tax Credit (ITC)

INTRODUCTION

Be it any law, it’s all about the interpretation of various words and phrases which brings in divergent views by professionals. One such phrase which has been used in GST law is ‘in respect of’, the interpretation of which can change the dimensions of the views held by one.

Section 17(5) of CGST Act has always been in limelight since the inception of Goods and Services Tax Act as it caters one of the most important concern of any business, which is blocking of input tax credit. Restriction on availment of input tax credit directly affects the working capital and profitability of any entity as non availment of ITC means increase in cost of purchases/expenses. In this article, we will touch upon two such entries of section 17(5) which are to be analyzed keeping in mind the use of phrase “in respect of” and consequently we will come to a conclusion, if we can save our money through ITC in certain circumstances. The relevant extract of section 17(5) are as follows:

LEGAL PROVISIONS

17(5)- Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver)

(ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa):

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples

ANALYSIS

On reading section 17(5) (h), Prima facie, it appears that Input Tax Credit, in respect of any goods which later on gets destroyed or stolen or lost, is required to be reversed. As far as ITC is taken on goods intended to be traded as such, this interpretation holds valid but a different view of ITC reversal arises where the raw material is processed and converted into finished goods. Whether finished goods destroyed or written off, is liable for ITC reversal as ITC was taken on raw material and not on the finished goods destroyed.

Similarly, plain reading of section 17(5) (ab) gives a view that ITC is not available in respect of motor vehicle for transportation of persons having an approved seating capacity of less than 13 persons. Question that arises out of this extract is that whether ITC will be available on other goods or services or both, which are related to motor vehicle.

The answer to both the questions above lies in the interpretation of the phrase “in respect of” which has been stated in section 17(5). In general, ‘in respect of’ means ‘as regards’ or ‘with reference to’ which gives a little wider meaning to the phrase and it can be treated as something which is ‘related to’ or ‘in relation to’ also.

This issue has been taken up by The Supreme Court, in the case of M/s Swastik Tobacco Factoryvs State of Madras,wherein the company used to purchase raw tobacco on paying excise duty and after processing it, sell it as chewing tobacco. The company contended that excise duty paid on raw tobacco must be deducted to arrive at the net turnover under the prescribed rule. It was contended on behalf of the appellant that the raw tobacco was converted by a manufacturing process into chewing tobacco, which is a different commodity and therefore, as excise duty was paid only in respect of raw tobacco and not chewing tobacco, excise duty is not required to be deducted from the turnover.The relevant extracts of the said provision are as follows

“Rule 5. (1) The tax or taxes under section 3 or 5 or 5A or the notification or notifications under section 6(1) shall be levied on the net turnover of the dealer.

In determining the net turnover the amounts specified in the following clauses shall, subject to the condition specified therein, be deducted from the gross turnover of a dealer:

(i) the excise duty, if any, paid by the dealer to the Central Government in respect of the goods sold by him;… “

On perusal of the above rule, The Supreme Court was of the view that Indian tax laws use the expression “in respect of” as synonymous with the expression “on”. The reference of article 288 of the Constitution of India, section 3 of the Indian Income-tax Act, 1922, sections 3(2) and 3(5), second proviso, of the Madras General Sales Tax Act, 1939; section 3(1A) of the Central Excises and Salt Act, 1944; and section 9 of the Kerala Sales Tax Act was given by The Supreme Court in this regard.  It was held that the expression “in respect of the goods” means only”on the goods”.

ITC REVERSAL IN CASE OF GOODS LOST/STOLEN/DESTROYED

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples

Going through the analysis above, it can be construed that the phrase “in respect of” is to be seen as “on” and accordingly it can be elucidated that if ITC is availed on raw material which is further lost or destroyed at finished goods stage, there should be no denial of ITC on raw material purchased, as the same material has not been destroyed. The situation becomes different when ITC is availed on traded items as the traded goods are purchased and sold as it is and thus reversal is required. Similarly, if any raw material is destroyed then ITC is very much required to be reversed. The above situations can be summarized as follows:

Particulars Goods Destroyed Reversal Required
ITC taken on Raw Material Raw Material Yes
ITC taken on FG (Trading) Traded goods Yes
ITC taken on Raw Material Finished Goods (manufactured from RM) No

One can also argue that with the goods being destroyed or lost, the raw material portion of goods also gets destroyed or lost and thus the reversal is very much required in this case. ITC taken on raw material is attributable to the finished goods destroyed or lost or expired which was manufactured by processing the raw material.

This argument was also presented before court in the same case and The Supreme Court was of the view that“Even if the word “attributable” is substituted for the words “in respect of”, the result will not be different, for the duty paid shall be attributable to the goods. If it was paid on the raw material it can be attributable only to the raw material and not to the goods”.

While the interpretation of provisions gives the above view, an alternate view has been taken up by the department on the other hand. CBIC has issued Circular No. 72/46/2018-GST, in order to clarify the treatment of ITC in case of expired goods. Extracts of the circular are as follows

“where the time expired goods, which have been returned by the retailer/wholesaler, are destroyed by the manufacturer, he/she is required to reverse the ITC attributable to the manufacture of such goods, in terms of the provisions of clause (h) of subsection (5) of section 17 of the CGST Act.”

It has put up a question mark as to what actually is the intention of law makers in this regard. Since the circulars are always binding on the revenue only,assesseecan opt not to follow the circular and considering the materiality of the transaction, if the amount involved is high, one can always take the aggressive view that ITC is not required to be reversed.

ITC AVAILABLE IN RESPECT OF MOTOR VEHICLE

(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver)

(ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa)

As the phrase “in respect of” is to be seen as “On”, the question of ITC on goods or services related to motor vehicles arises. It is coherent that if we buy motor vehicle for transportation of persons having seating capacity of less than 13 persons, ITC is not available to the buyer. In our view, before the amendment in section 17(5), the input tax credit on repairs of motor vehicle could have been claimed based on the interpretation given in the swastik tobacco case as mentioned above. ITC was not available on motor vehicle only and ITC could be availed on repairs and maintenance and other services related to vehicle used for the transportation of persons. Now, when section 17(5) has been amended to give effect to the non-availability of ITC on service of general insurance, repairs, etc., this availability of credit is blocked. Had this amendment was not there, one could understand the importance of the phrase “in respect of” in this particular condition, which this article is emphasizing on.

It is also interesting to see here that Section 17(5)(ab) uses the word ‘services’ only and not ‘goods’. Therefore, only services part on motor vehicle has been blocked and not the goods which are used for the repairs of vehicle.

Hence, one can take the credit of goods used in the servicing of the motor vehicle or goods used in the repairs of the motor vehicle as the blocking provisions is on motor vehicle and the services portion on motor vehicle.

A circular also helps in order to avail such input tax credit wherein it has been mentioned that supply of goods and services on repairs or servicing of motor vehicle is to be treated as separate supplies.This circular was actually issued by the department to protect the revenue of the department. Generally, the spare parts used at the time of servicing of motor vehicle comes under the umbrella of 28% tax while the service portion comes under 18%. Being a composite supply, the whole transaction is to be charged at 18% and thus department was losing revenue in such type of transactions. In order to protect the revenue, department came up with the circular no.  47/21/2018-GST dated 8thJune 2018, the relevant extracts of the same are stated below:

2. How is servicing of cars involving both supply of goods (spare parts) and services (labour), where the value of goods and services are shown separately, to be treated under GST? 2.1 The taxability of supply would have to be determined on a case to case basis looking at the facts and circumstances of each case.
2.2 Where a supply involves supply of both goods and services and the value of such goods and services supplied are shown separately, the goods and services would be liable to tax at the rates as applicable to such goods and services separately.

The goods and services portions are required to be shown separately and applicable rates are to be charged on such goods or services. This transaction loses the element of composite supply and can be treated as separate supplies.

Although, above mentioned circular is against the fundamental concept of composite supply and the legality of the same is questionable, one can take the shelter of the above and claim the ITC on goods part from the invoice of repairs.

One argument which comes out this analysis is that if any spare part of motor vehicle is changed, it becomes part of motor vehicle only and consequently as per section 17(5)(a) ITC ‘on’ motor vehicle is blocked. This view seems to be reasonable if the part changed is capitalized in the books. Since, changing spare parts comes under repairs which is generally charged to profit and loss account, it would be a little unreasonable to hold the view that spare part changed is to be included as part of motor vehicle.

CONCLUSION

In light of the above discussion, it can be observed that interpretation of phrase “in respect of” changes the meaning which is usually derived out of a plain reading of the provisions. Although, rules and regulations are subject to the judicial interpretations which can be different on case to case basis, we have taken the principles out of a landmark judgment and analyzed it in relation to the provisions of the present GST regime.

Author Bio

Qualification: CMA
Company: M.M & ASSOCIATES
Location: New Delhi, New Delhi, IN
Member Since: 05 Apr 2019 | Total Posts: 3
Mr. Mahesh Giri is a Fellow Member of the Institute of Cost Accountants of India. He is member of the GST cell of the Institute of Cost Accountants of India Northern Region. View Full Profile

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One Comment

  1. camk90 says:

    Very Interesting perspective on 17(5) of CGST Act.

    I would like to add (in continuity of your argument) that availment and utilisation of ITC is a constitutional right to property as per Article 300A of the constitution. This right can only be taken away by operation of law. When we say Operation of law it only means acts and notifications.It does not mean circulars (Article 13 of constitution). Hence if the law/section 17(5) states “in respect of” (read as on) goods destroyed and SC has ruled it does not include raw material then the by combined logic this argument should hold true. The circular is not an operational of law and cannot take away the constitutional right to property.

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