1. Introduction

The makers of the GST Law always intended it be a simpler tax regime, but they couldn’t ascertain as to when it started turning complex. The very object of ensuring ease of doing business has been diluted by the highly complex, inconsistent and illegitimate provisions of the law. Certain provisions are drafted in such a manner that they are self-contradictory and do not stand the test of legality. However, there is a great saying that every dark cloud has a silver lining and likewise GST has turned out to be an evolving law, brining better versions of itself and refining and ironing out the self-contradictions within itself. The GST Council has also been sporting enough to bring amendments wherever felt necessary. However, there are still many areas where the Council must decide immediately to ensure the desired object of ease of business.

Input Tax Credit (ITC) is the base of GST Law and its success or failure depends entirely on the manner ITC provisions are implemented in letter and spirit. Section 16 of the CGST Act, 2017 gives detailed conditions regarding entitlement of ITC and one shall have to religiously comply with them to become eligible to entitle the same. It is worth mentioning that there are many apparent ambiguities in such conditions and each & every condition u/s 16 has become a subject matter of debate. There are serious arguments for and against such conditions. One such condition requires entitlement of ITC by a registered person only if he has received the goods or services or both. Now, the question arises as to what will be construed as ‘received’? Whether only physical delivery of such goods is required or even symbolic or constructive delivery shall suffice. By way of this article, the author has attempted to give a point of view to this issue and how can the provisions be harmoniously interpreted in a manner so as to arrive at the correct and desired interpretation of the law.

Input tax credit

2. Legal Provision

Let us now try to understand the legal provision around which the debate revolves. Section 16(2)(b) and the First Proviso to Section 16(2) reads as follows:

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,-

“(a)………

(b) he has received the goods or services or both

Explanation—For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services-

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person

(c)…………

(d)…………

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

A plain reading of the above provisions gives us the following understanding:

i) ITC can be availed by a registered person only if he has received the goods or services or both. [Section 16(2)(b)]

ii) In case of supply of goods, it shall be deemed that the registered person has received the goods if,

a) Goods are delivered by the supplier to a recipient.

b) Goods are delivered by the supplier to any other person on the direction of the registered person whether acting as an agent or

c) The delivery may occur either before or during movement of goods.

d) The delivery may occur either by way of transfer of documents of title to goods or

[First Explanation to Section 16(2)(b)]

iii) In case of supply of services, it shall be deemed that the registered person has received the service if, the services are provided by the supplier to any person on the direction of and on account of such registered person. [Second Explanation to Section 16(2)(b)]

iv) Where goods against an invoice are received in lots, the registered person shall be entitled to take credit upon receipt of the last lot. [First Proviso to Section 16(2)]

v) Where goods against an invoice are received in instalment, the registered person shall be entitled to take credit upon receipt of the instalment. [First Proviso to Section 16(2)]

3. Issues arising out of the above provisions

The above provision seems to be very simple and clear at the first instance. However, there are certain larger issues which need to be addressed to avoid future litigations and undue harassment to the honest taxpayers. In the following part, we shall discuss the legal issues created by the above provisions and the possible interpretation of the same at length:

i) Interpretation of the term ‘received

Literal meaning of the word ‘Receive’:

To get or accept something that is sent or given to you.

(Source: https://www.oxfordlearnersdictionaries.com/definition/american_english)

From the above, we observe that the word ‘received’ nowhere implies presence of physical connection. It is much broad in nature and may include actual as well as constructive delivery of goods.

Thus, in the context of GST Law, we may conclude that the use of word ‘received’ in Section 16(2)(b) is for transfer of title in goods and not physical possession of goods. Further, the word ‘received’ has also been used along with the word ‘services’. It is well understood that service does not have any physical existence and hence using the word received with the word service clearly reflects the intent of the legislature to mean transfer of ownership and not transfer of possession.

Explanation to section 16(2)(b) states that goods shall be deemed to be received even if they are delivered by the supplier of goods to any other person on the direction of the registered person whether acting as an agent or otherwise. Further, it neither require physical movement of goods nor does it require transfer of documents of title to goods or otherwise. Thus, the legislative intent behind drafting the section seems to be very clear to the effect that it does not require any physical possession to be handed over to the buyer.

Further, the word “otherwise” used twice in this legal sentence open the scope of broad sense of intent of the law maker. The makers of law did not intend to restrict the entitlement of credit in any way on account of physical receiving of goods or services, that’s why the provision was kept open ended by using the word “otherwise”. If we further analyse the sentence “before or during movement of goods”, it gives us a clear indication of the legislative intent that the goods can be received by the buyer even without movement of goods.

Provisions of Sale of Goods Act, 1930

In this connection, it becomes imperative to analyse the provisions of the Sale of Goods Act, 1930 which are stated as under:

Section 20 states that the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed.

Section 26 states that when the property in goods is transferred to the buyer, the goods are at the buyer’s risk whether delivery has been made or not.

Section 35 states that unless there is any express contract to the contrary, the seller of goods is not bound to deliver them until the buyer applies for delivery.

A critical analysis of the above provisions leads us to the following broad conclusions:

a) Ownership in goods passes when contract is executed. In the present context, execution of contract shall be acceptance of purchase order and consequent generation of invoice. Thus, if invoice is generated and accepted by the buyer, we may assume that ownership has passed to the buyer, unless anything to the contrary exists in the contract executed between the parties.

b) With ownership, risk on the goods also passes to the buyer of goods irrespective of the location where it is stored. Thus, even if the goods are located in the premises of the seller after the ownership passes and there is loss of goods which is not due to the fault of the seller, the loss has to be borne by the buyer.

c) The seller is not bound to deliver the goods unless there is any contract imposing condition on the seller to deliver the same.

Thus, from the above analysis, a question arises if someone can bear loss of something which he has not even received? Let us try to understand the same by analysing the accounting treatment of such transactions.

Accounting Treatment

In a situation where goods are purchased by the buyer on the last day of the month, invoice is generated by the seller and even payment is made to the seller immediately on that day. However, the buyer instructs the seller not to release the goods for physical delivery for some days due to certain reasons. Now a question arises, can the buyer avail ITC on such purchase in the same month or when he physically receives the goods?

Now, when the buyer makes the purchase on the last date of the month, the accounting entry is made as under on the date of purchase:

Stock in Transit A/c…….Dr.
Input IGST A/c      …….Dr.
To Creditor A/c………Cr.

Creditor A/c  ……..Dr.
To Bank A/c  ………Cr.

The stock in transit need to be separately disclosed under each class of inventory in the financial statements.

The stock in transit which is reflected on the assets side of the balance sheet of the buyer cannot be recorded without having actually received the same. It is only because goods have been received by the buyer (constructively), that the same has been recorded in books and is considered as an asset.

Sale by Transfer of Delivery Order

In case of auction of mineral items such as coal, let us assume that sale of certain quantity of coal is made, say 500 MT at a certain price. Delivery order is issued to the buyer, who in turn makes complete payment to the auctioneer and the sale transaction is complete at this point of time. This delivery can be taken within a specified period of time at the instance of the buyer. The buyer, instead of taking physical delivery of the coal, sells the coal and transfers the delivery order to a trader after keeping a margin of profit and the goods remain at the possession of the coal company (Seller). The trader after keeping a margin for himself, sells it further to a manufacturer who will use it in his production process. This entire process may take more than a month or even in some cases, where there are many intermediaries, many months. Now a question arises as to since none of the intermediaries have taken physical delivery of the goods, are they allowed to avail ITC till physical delivery of goods is taken by the ultimate manufacturer? Will all the intermediaries have to pay output tax on their sales, but will not be able to claim ITC on their coal purchase?

In the views of the author, this can never be the intention of the legislature and thus each intermediary shall be allowed ITC as and when the invoice is generated and delivery order is transferred in his name i.e. with transfer of ownership.

Place of Dispatch in E-Way Bill

In case of movement of goods, place of dispatch is required to be entered in the e-way bill. Let us understand the same with the help of an example:

Suppose Mr. A (Guwahati) sold 10 MT steel to Mr. B (Kolkata). The goods are lying at the godown of Mr. A (Guwahati) and Mr. B (Kolkata) has not taken physical delivery of goods. Mr. B (Kolkata) further sold 10 MT steel to Mr. C (Shillong) who again does not take physical delivery. Mr. C (Shillong) sells 10 MT steel to Mr. D (Aizwal) who in turn takes the final physical delivery of goods.

In this case, when the e-way bill will be generated, the supplier will be Mr. C (Shillong) and buyer (recipient) will be Mr. D (Aizwal) and as per Section 10(1)(c) of the IGST Act, 2017 in case the supply does not involve movement of goods, whether by the supplier or the recipient, the place of supply shall be the location of such goods at the time of the delivery to the recipient. Thus, place of supply as per the last transaction shall be Aizwal. However, since the goods are still physically located at Guwahati, the place of dispatch to be filled in e-way bill shall be entered as Guwahati.

Thus, it seems apparent that the Act nowhere requires physical delivery of goods since if this was the intention, the concept of Place of Dispatch would not have been introduced. Further, if physical delivery would have been the requirement, in the above transaction, Mr. B & Mr. C will not be able to take ITC of the tax paid by them, but will be liable to pay GST on outward suppliers to Mr. C & Mr. D respectively. Thus, the Government receives triple tax from the sale of same goods until the delivery is received by Mr. D which is not justified. Thus, it seems very clear that physical delivery of goods is not the requirement for availing ITC, but ownership of goods.

Test for Interpretation

From the above analysis, we may conclude that the word ‘received’ is not meant to imply actual delivery of goods, but ownership of goods. Thus, the test for determining whether the buyer has ‘received’ the goods or not is the passing of ownership and not physical delivery of goods. By accepting the invoice generated by the seller, the buyer is receiving ownership on goods which is the actual legislative intent behind the provision.

iii) Availment in case of purchase of Goods in Lots or Instalments

First Proviso to Section 16(2) states that in case goods are received in lots or instalments, ITC can be availed only upon receipt of the last lot or instalment. Let us first understand the concept of lot and instalment separately:

Sale in Lots

The concept of Sale in Lots is more prominently used in case of sales on the basis of “as on where basis” or scrap sale where goods are identified at the time of offer for sale. Further, only an approximate amount of material is available for sale i.e. the quantity is not always fixed or certain and hence it is not certain whether the seller will be able to supply the exact quantity or not because seller himself unable to exact quantity of goods. Hence, availment of ITC should happen only when the last lot is received by the buyer.

Sale in Instalments

In case of instalment sale, the quantity to be supplied is available with the supplier and the contract of sale is complete. The delivery, however, happens on the instructions of the buyer. Thus, since the sale contract is complete, the ownership on goods passes to the buyer at the time of generation of invoice and hence, ITC can be availed at the time of receiving the every instalment itself having multiple invoices for each instalment.

It is worth mentioning that the Proviso also has deliberately pointed towards this issue by allowing ITC availment in case of lots at the time of receiving of last lot and in case of instalment sale, it may be claimed even at the time of receiving instalment.

iii) Delivery delayed due to National Lockdown:

Due to the unprecedented situation arising out of the Novel Corona Virus Pandemic, the Hon’ble Prime Minister of India imposed National Lockdown w.e.f. 25-03-2020. Accordingly, all non-essential supplies were stopped and movement of vehicle were halted altogether. In this situation, there are many sale contracts which are lying in the godowns of the seller even though the invoice has been generated, ownership has been passed to the buyer and in some cases full payment has been made. If a conservative interpretation of the Section is taken to understand that ITC can be availed only on actual receipt, will it not be an injustice with the buyers who have committed no mistake. Further, if this would have been the intention of the legislature, the Hon’ble Finance Minister would have definitely relieved the buyers by allowing availment of such ITC after the announcement of National Lockdown.

4. Position under the earlier laws:

Rule 4(1) of the CENVAT Credit Rules, 2002 allowed availment of input “immediately on receipt of the inputs in the factory of the manufacturer”. Thus, in case of the Central Excise Act, 1944, receipt of goods in the factory premises was necessary. However, the Excise Law and the GST Law are entirely different in its nature. Under the Excise Laws, the point of levy of excise duty was manufacture of goods and ITC can be availed only on inputs. Thus, goods have to physically reach the factory to enable manufacture of goods and subsequent levy of duty. However, no such similar condition was there under the State VAT Laws.

Under the GST Law, tax is levied on supply of goods and that can occur even if the goods are not available physically with the supplier. Levy in case of GST is not on manufacture, but on supply.

5. Revenue Neutral Situation:

Further, if the buyer avails ITC at the time of passing of ownership, the revenue does not lose anything since as per Section 16(2)(c) of the Act, since a buyer becomes entitled to ITC only if tax has been actually paid by the seller. Thus, the revenue is not at a loss if ITC is claimed even if the same is not physically received by the buyer.

6. Conclusion:

From the above analysis, we may conclude that transfer of ownership in goods is the essence behind a sale transaction. Transfer of physical delivery may not be required in certain trade situations. Further, allowing ITC without physical delivery does not put the Revenue at any prejudicial position and it is a revenue neutral situation for them. Thus, there seems to be no intent of the legislature behind the allowing of ITC only on physical delivery of goods. However, it is upon the conscience of the Hon’ble courts who shall have to put the position of law in proper perspective.

CA (Dr.) Ayush Saraf & CA Vikash Kumar Banka

CA (Dr.) Ayush Saraf, Guwahati, B.Com. (Hons.), FCA, CS, LL.B. , Ph.D. DISA (ICAI)

CA Vikash Kumar Banka, Kolkata, B. Com. (Hons.), FCA

Disclaimer: The above expressed views are purely the personal views of the authors. The possibility of other views on the subject matter cannot be ruled out. So the readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The authors are not responsible in anyway.

Author Bio

More Under Goods and Services Tax

9 Comments

  1. Shaashwath says:

    With regard to ITC on service, spread across financial years, a case where an assessee has purchased a Adobe software license valid for 1 year, need to know the treatment as per GST Act. The license is valid from 1-12-2019 and valid till 30-11-2020. Now few questions that needs to be addressed:
    1. Can the assessee claim 100% of the ITC while filing returns for the month of December 2019? If yes, please quote relevant section and rule.
    2. If the answer is no to the 1st point, should the assesee split the ITC across 12 months and claim it on month-on-month basis?
    3. If the answer is yes to 2nd point, last date for availing ITC for any FY is the date of filing return for September month of succeeding FY, so as per law it cannot be claimed till November 2020. So should the entire balance be claimed in September months return?

    Please let me know.

  2. Subodh P Barnwal says:

    What happens when there is Transit Shortage – both within industry tolerance OR in excess. Can the recipient claim ITC for the full Qty as per Tax Invoice in both the cases. Appreciate clarity !

  3. Samidurai says:

    DISCUSSION ON SECTION 16(2)(b) OF THE CGST ACT
    1. In the article, the authors had raised a question as to what will be construed as “received ”as contemplated under 16(2)(b) of the CGST Act 2017 with reference to the explanation and also to the first proviso given there under. They came to the conclusion on interpretation with the aid of certain provisions of the Sale of Goods Act 1930 that there seems to be no intent of the legislature behind allowing of ITC only on physical delivery of goods.
    2.While appreciating their efforts made for a deep analysis of the issue,to the extend what I know would like to bring the following few points for further discussion on the issue dealt with in the Article cited above.
    2.1Under the system of claim exemption on the point of second sale as experienced in the past regime of single point taxation system and also claim of input tax credit under the multi point taxation under the VAT period during which the revenue had occasion to fight against large scale of evasion in the guise of exemption on second sales/claim of input tax by producing fake invoices without any actual purchase/ movement /actual payment of tax to the exchequer by many of the tax evaders . In order to curb and check such fraudulent nature of evasion and to remove the loop holes either by following the evasive or tax planning method and also in order to overcome the litigations met in the previous regime, it has since been tried now by making strict and stringent provisions under the present GST regime by the law makers . One of such attempt is the method of drafting the provision relating to the claim of input tax credit as envisaged under section 16(2)(b) of the CGST Act read with rule 36 there under. The eligibility of input tax credit as envisaged under section 16(2)(b) of the Act read with the above rule ,among other procedures laid down, is subject to the cumulative satisfaction of both possession of Tax invoice prescribed under section 31 of the Act and also the possession of the goods.
    2.2 The analytical portion of the explanation given to section 16(2)(b) runs as follows:
    For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise
    2.3 The said Article, revolved round the words and phrases “received the goods”, “delivered” available in the above explanation given to section 16(2)(b) of the Act and it was interpreted by the authors that the words “received goods” could not be interpreted as the physical delivery of goods since it was not the intent of the legislatures in framing the statute. In support of their view, they had taken aid of section 20,,26 and 35 of the Sale of Goods Act 1930 solely depending upon the concept of the transfer of ownership of the goods to the buyer.
    2.4 with regard to the rule of interpretation for this purpose, I would like to refer the case of Grid Corporation of Orissa Limited and others Vs. Eastern Metals and Ferro Alloys and others (2011) 11 SCC 334, the law in this regard has been summarized by the Supreme Court in the following terms :
    The golden rule of interpretation is that the words of a statute have to be read and understood in their natural, ordinary and popular sense. Where however the words used are capable of bearing two or more constructions, it is necessary to adopt purposive construction, to identify the construction to be preferred, by posing the following questions: (i) What is the purpose for which the provision is made? (ii) What was the position before making the provision? (iii) Whether any of the constructions proposed would lead to an absurd result or would render any part of the provision redundant? (iv) Which of the interpretations will advance the object of the provision? Such an exercise involving ascertainment of the object of the provision and choosing the interpretation that will advance the object of the provision can be undertaken, only where the language of the provision is capable of more than one construction.
    2.5 By applying the above rulings, I already discussed point no(i) and (ii) above as per the findings given in para no.2.1 above. The discussion on the later and remaining exercise involved in no.(iii) and (iv) above made me to deviate from the view of the authors for which I prepared to go to certain other provisions of the Sale of Goods Act 1930 and also certain internal aids from the CGST Act which were not looked in to by the authors . Here in below is my view.
    2.6 As defined under section (2) of the Sale of Goods Act 1930 “delivery” means voluntary transfer of possession from one person to another According to section 33 of the Sale of Goods Act 1930, delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorised to hold them on his behalf.
    2.7 So also, according to section 36 of the Sale of Goods Act 1930 the . Rules as to delivery has been prescribed as the one (1) Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the contract, express or implied, between the parties. Apart from any such contract, goods sold are to be delivered at the place at which they are at the time of the sale, and goods agreed to be sold are to be delivered at the place at which they are at the time of the agreement to sell, or, if not then in existence, at the place at which they are manufactured or produced. (2) Where under the contract of sale the seller is bound to send the goods to the buyer, but no time
    2.8 The words receipt of goods as envisaged in the explanation given to section 16(2)(b) of the CGST Act 2017 with reference to the provisions of the Sale of Goods as given above, would indicate only the voluntary transfer of possession from one person to another and nothing beyond that, both in the case of direct delivery and in the case of Bill to ship transaction consequent to the transfer of documents of title to the goods In both cases, it would mean the possession acquired in the event of physical delivery of the goods in respect of the direct delivery and in the case of bill to ship transaction ,the possession acquired in the event of transfer of title to the goods. The possession so explained above is nothing but the receipt of goods as contemplated under section 16(2)(b) of the CGST Act 2017
    2.9 More over, the eligibility of input tax credit as envisaged under section 16(2)(b) of the Act is subject to the cumulative satisfaction of both possession of Tax invoice prescribed under section 31 of the Act and also the possession of the goods as explained above.
    2.10 As per section 31 of the CGST Act, 2017 an invoice for supply of goods needs to be issued before or at the time of removal of goods for supply to the recipient where the supply involves movement of goods. However, in other cases, invoice needs to be issued before or at the time of delivery of goods or making available goods to the recipient. Similarly, an invoice for supply of services needs to be issued before or after the provision of service but not later than thirty days from the date of provision of service
    conclusion
    3. Fair reading of the above in a holistic view, would say that the eligibility to claim input tax credit is subject to the possession of tax invoice and also the possession of goods which is created by the action of physical delivery of the goods in the case of direct delivery and by way of transfer of title to goods in the case of Bill to ship transactions . As such there is no ambiguity or lacuna in drafting section 16(2)(b) of the CGST Act 2017 as viewed in the Article.

    G.Samidurai
    VAT/GST Practitioner &
    Retd., Dy, Commissioner of Comml. Taxes
    (Tamilnadu)(Mobile 9442122187)

    1. K.Rajendra says:

      Sir,
      I request you to kindly clarify, in the example mentioned by the authors, whether ITC claim of Mr. B (Kolkata) is allowable or not, as he has neither taken direct delivery nor made Bill to ship transaction. He is only in possession of tax invoice issued by Mr. A (Guwahati).
      But Mr. A (Guwahati) and Mr.B (Kolkata) entered a contract that Mr.B (Kolkata) shall lift the goods from go down of Mr. A (Guwahati) within a specified period. Mr.B (Kolkata) in turn sold the goods Mr. C (Shillong) and issued a delivery order. Then Mr. C (Shillong) took delivery of goods from the go down of Mr. A (Guwahati) and generated e-way bill with place of dispatch Guwahathi.
      Please clarify whether ITC claim of Mr. B (Kolkata) is allowable or not
      K.Rajendra, ACTO, Hyderabad, T.S.

  4. Sanjiv says:

    What about import of goods where duty has been paid but lying in ICD. Here it should be considered as received and input should be availed on filing of bill of entry itself ??

  5. Vijay says:

    What about input credit on services like Annual maintenance contract, Invoice raised in advance and delivery of service is yet to be provided

    1. avm rao says:

      As per 16(2), ITC can be availed after receipt of last lot or installment. In respect of AMC, services are received in installments. Hence, ITC can be availed after receipt of last lot/ installment of service

      1. Mahesh Giri says:

        In AMC contracts you buy the right/assurance of maintenance by paying a certain amount in the beginning only. service of buying the right gets completed in the beginning only. Hence, ITC would be available.

  6. ASWINI Kumar Sahu says:

    Very well and thoroughly explained.
    It will definitely help us to explain it to statutory authority in case of any problems without taking help of our tax consultants

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

October 2020
M T W T F S S
 1234
567891011
12131415161718
19202122232425
262728293031