1. Circular No. 72/46/2018-GST dated 26.10.2018 has been issued clarifying the procedure in respect of return of time expired drugs or medicines. Said circular clarifies that the time expired drugs or medicines can be returned either by issuance of credit note or by treating the said goods return as fresh supply and hence on an invoice. Said circular also clarifies the input tax credit (ITC) implications under both the options. Let us explore whether the said clarification is in line with the legal provisions.
2. Referred circular at paragraph 3(A) provides for an option to treat the return of time expired drugs or medicines as “fresh supply”. In other words a person can return the said goods by treating it is as a fresh supply and thereby issue an invoice for the same as under:
i. If the registered person returning the goods is under composition: Such person shall prepare a bill of supply and pay tax at the rate applicable to a composition taxpayer. The registered recipient (wholesaler or manufacturer) shall not be entitled to ITC in respect of the composition tax paid.
ii. If the registered person returning the goods is not under composition: Such person shall prepare a tax invoice and pay the tax on the value of supply declared on such tax invoice. The recipient shall be eligible to avail ITC of the tax levied on such invoice subject to the fulfilment of the conditions specified in Section 16 of the CGST Act.
iii. If an unregistered person is returning the goods: Such person may return the said goods by issuing any commercial document without charging any tax on the same.
3. Said circular also provides that if the returned goods are destroyed by the recipient, then in accordance with the provisions of Sec. 17(5)(h) of the CGST Act, 2017 ITC on the said goods is required to be reversed. Following illustration has been provided in the referred circular:
“Illustration: Supposedly, manufacturer has availed ITC of Rs. 10/- at the time of manufacture of medicines valued at Rs. 100/-. At the time of return of such medicine on the account of expiry, the ITC available to the manufacturer on the basis of fresh invoice issued by wholesaler is Rs. 15/-. So, when the time expired goods are destroyed by the manufacturer he would be required to reverse ITC of Rs. 15/- and not of Rs. 10/-.”
4. Referred circular also provides that such time expired goods can be returned by issuing a credit note by the supplier who had originally supplied the goods. Circular further provides that an adjustment of the tax shown on such credit note can be claimed only if such credit note is issued within the time limit specified in sub-section (2) of section 34 of the CGST Act. If a credit note is issued beyond the stated time limit, the supplier issuing the credit note will not be able to claim adjustment of the tax. Consequently there is no requirement to declare such credit note on the common portal by the supplier (i.e. by the person who has issued the credit note) as tax liability cannot be adjusted in this case. Hence in such scenario from the circular it appears that even ITC is not required to be reduced by the registered recipient, if such recipient has claimed the ITC. An illustration as under has been provided in the referred circular:
|Date of Supply of goods from manufacturer/ wholesaler to wholesaler/ retailer||Date of return of time expired goods from retailer / wholesaler to wholesaler / manufacturer||Treatment in terms of tax liability & credit note|
|Case 1||1st July, 2017||20th September, 2018||Credit note will be issued by the supplier (manufacturer/wholesaler) and the same to be uploaded by him on the common portal. Subsequently, tax liability can be adjusted by such supplier provided the recipient (wholesaler / retailer) has either not availed the ITC or if availed has reversed the ITC.|
|Case 2||1st July, 2017||20th October, 2018||Credit note will be issued by the supplier (manufacturer / wholesaler) but there is no requirement to upload the same on the common portal. Subsequently tax liability cannot be adjusted by such supplier.|
5. Circular further provides that if the goods which are returned on the strength of a credit note (within the time limits or beyond) are destroyed, then the concerned supplier 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.
6. The contents of the circular stated above contains many gaps when one considers the same in light of the legal provisions. Let us understand the said gaps:
7. The circular through the illustration states that the time limit for issuing the credit notes in respect of invoices issued from July 2017 – March 2018 is the end of the month of September, 2018. Hence in case-2 above, it provides that tax in respect of the credit note issued on 20thOctober, 2018 cannot be adjusted. Sec. 34(2) of the CGST, 2017 which stipulates such time limit is relevant and hence reproduced below:
“Sec. 34(2) Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than September following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:
Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.”
8. Close perusal of the above provision will entail that the registered person who issues the credit note shall declare “the details of such credit note in the return” for the month during which such credit note has been issued but not later than September following the end of the financial year in which such supply was made or the date of furnishing of the relevant annual return, whichever is earlier. Hence the cut-off date shall be determined with reference to the “return for the month of September” wherein “details of credit note” are required to be declared or the actual date of filing of the annual return, whichever is earlier. Hence the crucial question to answer is that what is the “return” wherein the “details of such credit note” are to be declared ?
9. 37(1) of the CGST Act, 2017 read with Rule 59(2) of the CGST Rules, 2017 clearly provides that the details of the credit note are to be declared in the “details of outward supplies” which are to be furnished in FORM GSTR-1. Rule 61(2) further provides that PART A of the “return” in FORM GSTR-3 shall be electronically generated on the basis of information furnished through FORM GSTR-1, FORM GSTR-2 and based on other liabilities of preceding tax periods. Hence the “return” referred under Sec. 34(2) is the return in “FORM GSTR-3” wherein details of the credit note are required to be furnished. Return furnished in “FORM GSTR-3B” under Rule 61(5) is not the return wherein such “details of credit note” are to be declared. Hence in absence of FORM-3, the due date for issuance of such credit note shall be the date of furnishing of the relevant annual return.
10. Above conclusion emerges due to the fact that the law (which is designed on the GSTR 1, 2 & 3 system) is made to be applied where such system has been suspended and has been replaced with GSTR-3B. Hence unless law is amended to make it in line with the reality of GSTR-3B, such issues will remain open.
11. The referred circular very conveniently says that in cases where credit note is issued and returned goods are destroyed, ITC “attributable to the manufacture of such goods” needs to be reversed as per provisions of Sec. 17(5)(h) of the CGST Act, 2017. Circular however does not address the issue with respect to the determination of such “attributable” ITC (which will include capital goods as well as input services), if such reversal is called for. Let us see the legal provisions. Sec. 17(5)(h) is reproduced below for ready reference:
“Sec. 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:—
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;”
12. Close reading of the above provision shall entail that the ITC shall not be available “in respect of goods” destroyed. Now, whether the said provision can cover inputs, input services as well as capital goods which might have been used in/for the manufacture of goods which have been destroyed ?
13. The interpretation of the term “in respect of” fell on the apex court in the case of State of Madras vs M/s. Swastik Tobacco Factory 1966 AIR 1000 (SC). Hon. Supreme Court held that the Indian tax laws have used the expression “in respect of” as synonymous with the expression “on”. Reference was made to Art. 288 of the Constitution of India; s. 3 of the Indian Income-tax Act, 1922; ss. 3(2) and 3(5), Second Proviso, of the Madras General Sales Tax Act, 1939; s. 3(1A) of the Central Excise and Salt Act, 1944; and ss. 9 of the Kerala Sales Tax Act. It was also held 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 finished goods.
14. Reference is also invited to Rule 42 & 43 of the CGST Rules, 2017 which provides for the determination of the ITC “attributable” to non-business use or exempted supplies as per the provisions of Sec. 17(1) & (2) of the CGST Act, 2017. A bare reading of said Rules will lead to an inescapable conclusion that the same applies to only cases covered u/s 17(1) & 17(2). It does not apply to cases covered u/s 17(5) including clause (h) referred above. In absence of any mechanism to determine such “attributable” ITC, the said reversal is not tenable (see Commissioner of Income Tax vs. B.C. Srinivasa Setty ((1981) 128 ITR 294 (SC)).
15. It is hence suggested to the Government to kindly clarify on the gaps identified above. Leaving it for the Courts will do no good to anyone.