GST: Whether book adjustment is treated as payment?

Introduction

In present times, since movement of goods and services is seamless across states and across any part of India and even the world, there are huge number of transactions between associated enterprises, sister concerns, difference branches, branch and HO, etc. In these cases, there is a requirement to raise a GST invoice and hence the same is issued and the goods/services are supplied and the recipient avails the benefit of eligible ITC. However, when it comes to payment, the payment is not made because these parties are related or they are all part of the same company. Sometimes, the parties take goods/services from each other and there is no actual flow of money.

Whether the ITC would still be eligible in such cases?

The author has tried to discuss this issue in this article.

Legal Provision

Section 16 of the CGST Act provides the list of conditions for the purpose of availment of credit under GST. One such condition is provided in 2^nd proviso to Section 16(2) of the CGST Act read with Rule 37 of the CGST Rules. The proviso states that the receipt has to make the payment to the vendor within 180 days from the date of invoice to ensure that the ITC is eligible. If he fails to make payment to supplier, then the ITC availed should be reversed along with interest.

Rule 37 also provides that if the value of supply is paid to the supplier, then the taxpayer would be entitled to re-avail such reversed credit. Further, there is no time limit for the purpose of re-availment of such credit i.e., time limit as provided in Section 16(4) of the CGST Act would not apply to such re-availment.

Whether the above said provision [2^nd proviso to Section 16(2)] is applicable even if the transaction is between related parties?

The term related party is defined in explanation to Section 15 of the CGST Act. The extract is as follows:

(a) persons shall be deemed to be “related persons” if-

(i) such persons are officers or directors of one another’s businesses;

(ii) such persons are legally recognised partners in business;

(iii) such persons are employer and employee;

(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them;

(v) one of them directly or indirectly controls the other;

(vi) both of them are directly or indirectly controlled by a third person;

(vii) together they directly or indirectly control a third person; or

(viii) they are members of the same family;

(b) the term “person” also includes legal persons;

(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

When entering into transactions with related parties, GST is required to be paid even if there is no consideration agreed with the parties in terms of section 7(1)(c) of the CGST Act r/w Schedule I.

Now coming back to the query, proviso to Rule 37(1) provides that where supplies are made without consideration in terms of schedule I to the CGST Act, then the value of supply would be deemed to have been paid for the purpose of the above provision and there would not be any requirement to reverse credit under Rule 37.

What if the parties have agreed for a consideration however, the parties are related?

Where the parties have agreed for a consideration, then the transaction would not be covered under Schedule I and hence the exception as provided in proviso to Rule 37(1) would not be applicable to such a transaction. The payment has to be made to the supplier to avoid reversal under the said Rule.

What does payment mean?

Payment is not defined under GST. We refer to various dictionaries for understanding the meaning [Star Paper Mills Ltd vs C.C.Ex. (1989 (43) E.L.T. 178 (S.C.)].

The dictionary meaning is as follows:

• Cambridge dictionary: an amount of money paid
• Merriam Webster: The act of paying
• Collins Dictionary: A payment is an amount of money that is paid to someone, or the act of paying this money
• Oxford Learner’s Dictionary: the act of paying somebody/something or of being paid

From the above definitions, it could be said that payment means the act of paying money to someone. For the purpose of GST, it means the act of paying the agreed consideration to the supplier/vendor.

For the purpose of section 16 r/w Rule 37, should the payment be done only in monetary form?

The term consideration is defined under Section 2(31) of the CGST Act which includes:

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

The above definition clearly provides that the payment could be made in money or otherwise. The other ways of payment of consideration are as follows (which are part of the definition of supply):

• Bater – consideration is in the form of goods/services and not money
• Exchange – where consideration is not in money but in form of immovable property (CIT v. Motors and General Stores (P) Ltd. AIR 1968 SC 200).

In addition to the above, another way of settling books otherwise than in money is book adjustment. In simple terms, book adjustment means cross adjustment of  account payable and account receivable by a journal entry without any actual monetary settlement.

For example: ABC Ltd. is the subsidiary of XYZ Ltd. ABC Ltd. purchased goods worth Rs.50,000/- from XYZ Ltd. In FY 2023-24. ABC Ltd. Also provided services worth Rs.35,000/- in the same year. Against purchases of Rs.50000, ABC ltd. paid only Rs.15,000/- in case and the balance Rs.35,000/- was adjusted in the books against the services provided by ABC Ltd. to XYZ ltd..

In the case of CCE v. Modern Food Indus. (India) Ltd., 1988 (37) E.L.T. 294 (T), it was held that merely because no payment is made in cash or because there is book adjustment, it cannot be said that there is no sale. Book adjustment is also a form of payment.

Similarly held in the following advance rulings:

• Paragon Polymer Products (P.) Ltd., In re [Order No. 27/WBAAR/2023-24 dated December 20, 2023]: Settlement of mutual debts through book adjustment is a valid mode of payment under the CGST Act. The Recipient can pay the supplier by way of setting book debt since the provision of the CGST Act has not put any restrictions in this regard.
• Senco Gold Limited [TS(DB)-GST-AAR(WB)-2019-472]: The authority held that Input Tax credit (ITC) is rightly admissible for inward supplies from the Franchisee by way of settling off book debts since the applicant pays ‘consideration’ for inward supplies by way of book adjustment. It was held that “Unless the law specifically restricts the recipient from claiming the input tax credit when consideration is paid through book adjustment, credit of input tax cannot be denied on this ground alone”;

It is important to note that advance rulings are applicable only to the assessee who has applied for and the corresponding officer. These are not applicable and binding on other assessee’s. However, AAR’s could be used to understand the department’s view and confirm our understanding of the law and interpretation.

Also, CBEC has clarified as follows in respect of levy of service tax on transactions between associated enterprises vide Circular No. 334/1/2008-TRU dated 29.2.2008. The circular clarified that service tax is leviable on taxable services provided by the person liable to pay service tax even if the amount is not actually received, but the amount is credited or debited in the books of account of the service provider. In other words, service tax is required to be paid after receipt of payment or crediting/debiting of the amount in the books of accounts, whichever is earlier.

The above circular also indicates and treats debit/credit in books on par with payment in money. Though the circular is of service tax period, the same would have persuasive value under GST.

Further, 2^nd proviso to Section 16(2) states that the reversal of ITC would be required when there is failure to pay. There would be failure to pay only if a liability exists. However, once the payment/settlement is done by way of book adjustment, then there is no liability to pay anything and consequently, there cannot be any failure to pay. Hence, this provision would not at all apply.

Further, the intention of inserting this provision was to ensure that the taxes are paid on timely basis to the government. However, the law has been amended and new provisions have been inserted in such a manner that it ensures that the taxes are paid and returns are filed by the supplier to enable the credit to the recipient. Hence, the intention of the government is getting fulfilled without even the need of this provision.

Conclusion

Therefore, based on the above discussion, in the view of author, where payment is done through book adjustment, ITC is not required to be reversed in terms of Section 16 of the CGST Act r/w Rule 37 of the CGST Rules. Payment by way of book-adjustment should not be the only criteria for the purpose of denial of ITC. This aspect should be kept in mind during GST audits as the department may furiously create a dispute.

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I wish to thank CA Jatin Nagpal for vetting this article and providing his inputs.

In case of any clarifications/doubts, the author may be reached at [email protected].