West Bengal Authority for Advance Ruling (AAR) recently deliberated on the admissibility of Input Tax Credit (ITC) when payment is settled through book adjustments, specifically in the case of Paragon Polymer Products (P.) Ltd., In re [Order No. 27/WBAAR/2023-24 dated December 20, 2023]. The West Bengal, AAR in this case held that claiming credit of input tax by the assessee cannot be denied under the second proviso to sub-section (2) of section 16 of the Central Goods and Services Tax Act, 2017 (CGST Act) when payment is settled through book adjustments because the law has not put any restriction on such adjustments. Understanding this ruling sheds light on the nuances of GST regulations concerning payment modalities and their implications for businesses.
Facts:
M/s Paragon Polymer Products (P.) Ltd. (“the Applicant”) was engaged in the business of trading footwear in the state of West Bengal under the brand name ‘Paragon’. The Applicant intended to manufacture the footwear through independent outsource units under the sale and buyback model where the raw materials for production were to be sold by the Applicant to the outsourced vendors and the Applicant was to buy back the manufactured goods from the said vendors. The Applicant expressed the willingness to settle these mutual debts through book adjustments and the net dues through bank transfer.
Hence, the Applicant has made an application under sub-section (1) of Section 97 of the CGST Act raising the question in the application in FORM GST ARA-01 to understand whether the input tax credit (“ITC”) 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 in case of buy-back model.
Issue:
Whether the ITC is admissible when payment is settled through book adjustment?
Held:
The Advance Ruling Authority of West Bengal in Order No. 27/WBAAR/2023-24 held as under:
- Observed that, the Applicant intends to enter into agreements with different vendors to whom they outsource the process of manufacturing footwear/parts of footwear. In this process, the Applicant procures raw materials and supplies to those outsourced vendors raising tax invoices. In return, vendors make outward supplies of finished goods to the Applicant for which payment is settled through book adjustment against debt created on the buy-back model. Therefore, the Applicant plays as supplier while supplying raw materials and emerges as the recipient when purchasing finished goods from those outsourced vendors.
- Opined that, the provision of Section 16(1) and (2) of the CGST Act, restricts credit of input tax to the recipient unless he pays the consideration to the supplier for inward supplies received by him along with tax payable thereon within the stipulated time of one hundred and eighty days from the date of issue of invoice.
- Relied on, In Senco Gold Ltd, [2019] 105 taxmann.com 143 (AAR-WEST BENGAL), the West Bengal Authority for Advance Ruling wherein it was held that the payment is a transfer of an asset to the payee for discharging an obligation arising out of transactions involving goods, services or other legal obligations. The most common asset class used for such payment is money, although other assets unless specifically excluded by law, may be used provided the payee accepts payment by such assets other than money as good and sufficient discharge of the obligation. Of course, in the payer’s books of account, such a transfer will be reported as a reduction in the book value of the asset being transferred.
- Noted that, the term ‘consideration’ has been defined in clause (31) of Section 2 of the CGST Act in an inclusive manner that extends the scope and range for mode of payment. Further, as per the said definition, it is immaterial whether the payment is made by the recipient or by any other person. Further, when there is barter of goods or services, the same activity constitutes supply as well as a consideration. For example, when a barber cuts hair in exchange for a painting, hair cut is a supply of services by the barber. It is a consideration for the painting received. Similarly, supply of painting is supply by the painter and the painting is the consideration for hair cut.
- Held that, 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. Therefore, claiming credit of input tax cannot be denied on the sole ground that consideration is paid through book adjustment.
Conclusion: The West Bengal AAR’s ruling in the Paragon Polymer case clarifies that businesses can avail Input Tax Credit even when payment is settled through book adjustments. By affirming the validity of non-monetary settlements, the ruling aligns with the pragmatic interpretation of GST laws, promoting efficiency and flexibility in commercial transactions. Understanding such interpretations is pivotal for businesses to navigate GST compliance effectively and optimize their tax positions.
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Useful write-up. The key practical point that often trips up audits is the documentation side, even when the legal position is clear.
When consideration is settled via book adjustment, keep three documents in a single file:
– The original tax invoice with GST charged
– The ledger or journal entry showing the adjustment (debit creditor, credit debtor or intercompany account)
– Any agreement or email confirming the book adjustment was mutually agreed
Assessment officers challenge ITC on book adjustments by citing Section 16(2)(b) – payment not made. The counterargument: settlement via book adjustment is a recognised mode of payment under commercial law, and does not require actual cash outflow. The Supreme Court has interpreted payment to include novation and set-off in analogous contexts.
One more point worth noting: ensure the adjustment is reflected identically in both parties books. Asymmetric accounting (one party records it differently from the other) is what actually draws scrutiny and is hard to explain in a reply. Symmetric entries plus the three documents above make the ITC position defensible at the first assessment stage without requiring HC intervention.