Book Adjustments – Whether deemed as payment under GST

Authority for Advance Rulings, Kerala (‘AAR’) in the case of M/s Paragon Polymer Products Private Limited ‘the applicant’ has issued a ruling holding that Input Tax Credit (ITC) shall be admissible in the event of payment of consideration through book adjustment. Captioned ruling has been analyzed in this update.

1. FACTS OF THE CASE

• The applicant is in the business of manufacturing & trading of footwear.
• The applicant outsources some activities to outside vendors and is planning to sell few raw materials required for production to these vendors.
• Subsequently, these outside vendors would be selling the footwear/ parts of the footwear to the applicant through tax invoice.
• Due to the above, there shall be both receivable and payable in the name of outside vendor standing in the books of applicant.
• The applicant wants to settle these mutual debts through book adjustments and pay the net amount through bank transfer.

2. QUESTIONS BEFORE THE AAR

• In case of sale and buy back transactions whether the input tax credit is admissible in respect of goods purchased from outsourced vendors, when payment is settled through book adjustment against the debt created on outward supplies to these vendors?

3. CONTENTION OF THE APPLICANT

• That second proviso to Section 16(2), does not prescribe or restrict the mode in which the payment has to be made.
• That the definition of consideration under section 2(31) is very vast and covers the payments in money or otherwise and thus the settlement of account through book adjustment is also included therein.
• That West Bengal AAR has also ruled allowing the payment through book adjustment in the matter of ‘Senco Gold Limited’.

4. RELEVANT LEGAL PROVISIONS REFERRED                                                                

• Second Proviso to Section 16(2) of CGST Act, 2017
• Section 2(31) of CGST Act, 2017 defining ‘Consideration’

5. OBSERVATION AND RULING BY THE AAR

• That second proviso to Section 16(2) specifies that in case of failure of recipient to pay the consideration within 180 days from the date of issue of invoice, then the ITC claimed need to be reversed with interest.
• That definition of ‘consideration’ is inclusive and therefore if the payee owes the payer a debt, and accepts a reduction in such a debt liability as a valid form of payment, that should also be regarded as a valid ‘consideration’ for a supply.

AAR finally ruled as under on the stated questions:

• Yes, the Input Tax Credit is admissible when consideration is paid through book adjustment as detailed above, subject to the other conditions and restrictions prescribed in Section 16, 17 and 18 of the CGST Act, 2017 and the rules made there under.

6. Our comments

In the captioned ruling, the Kerala AAR has reiterated wide scope of ‘consideration’ which would include such book adjustments also which has the impact of reducing the debt of a party and thereby the condition of second proviso of Section 16(2) stand satisfied regarding payment within 180 days from the date of issue of invoice by supplier.

*****

(Author can be reached at dinesh.singhal@snr.company or cadineshsinghal@gmail.com).

DISCLAIMER: The views expressed are strictly of the author. The contents of this article are solely for informational purpose and for the reader’s personal non-commercial use. It does not constitute professional advice or recommendation. Author do not accept any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon. Further, no portion of our article should be used for any purpose(s) unless authorized in writing.