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.
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,-
(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
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.
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.
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.
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, 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.