Payment through adjustment of the books of accounts is a prevalent commercial practice which also finds support in Ind AS 32 which establishes the principles for offsetting financial assets and financial liabilities.
1.1 Para 42 of Ind AS 32 provides that a financial asset and a financial liability shall be offset and the net amount presented in the balance sheet when, and only when, an entity:
(a) currently has a legally enforceable right to set-off the recognized amounts; and
(b) intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously
1.2 One of the pre-requisites for availing input tax credit under the GST law is to pay the supplier the value of the goods or services along with the tax within 180 days from the date of issue of invoice. Failing to do so results in reversal of such credit availed &addition to the recipient’s output tax liability along with interest as per second proviso to Section 16(2) of the CGST Act, 2017 read with Rule 37(1) & (2) of CGST Rules, 2017. However, once the amount is paid, the recipient becomes entitled to avail the credit again.
1.3 But what if the parties settle the consideration by way of book adjustments instead of bank/cash transactions, can it be contented by the Revenue authorities that payment has not been made within 180 days & ITC needs to be reversed? Let us analyze:
2.0 Relevant Provision
Section 2(31) of the CGST Act, 2017:
”consideration” in relation to the supply of goods or services or both 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:
2nd Proviso to Section 16(2) of the CGST Act, 2017 states:
“Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.”
3.0 Whether ITC needs to be reversed where payment of consideration to the supplier has been settled by way of book adjustment?
3.1 The definition of consideration under Section 2(31) of CGST Act, provides the scope and ambit for modes of payment. It includes “any payment made or to be made, whether in money or otherwise”. The term “otherwise” is very wide, and it would include all modes of payment including netting off of receivable and payable in books of account, barter, exchange, etc.
3.2 In the ruling pronounced by the West Bengal Authority for Advance Ruling in the case of M/s. Senco Gold Limited [2019 (24) G.S.T.L. 688 (A.A.R. – GST], it has been clarified:
“The Applicant can pay the consideration for inward supplies by way of setting off book debt. The GST Act and rules made thereunder does not restrict the recipient from claiming the input tax credit when consideration is paid through book adjustment, subject to the conditions and restrictions as may be prescribed and, in the manner, specified in Sections 16 and 49 of the GST Act”
3.3 In the above ruling, the transaction was between the Applicant and its customers who are neither related persons nor distinct persons, and payment between them was being settled through book adjustment. This ruling has established that the recipient can pay the supplier consideration by way of setting off book debt.
3.4 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.This view is also in agreement with Board Circular No. 122/3/2010- ST dated 30/04/2010 issued in the context of reversal under CENVAT Credit Rule, 2004 in pre-GST regime. Hence, the proviso to Section 16(2) of the CGST Act would be satisfied in case of settlements done by way of book adjustments.
4.0 Book adjustments between HO & Branch Offices
4.1 The relationship between branch office and corporate office is that of ‘distinct persons’ for the purpose of GST. Under the GST regulations, the branches of a company in different States/UTs are separate taxable entities and therefore, any goods/services received by one branch from another shall be considered as “supply” even if without consideration as per Schedule I under the CGST Act. Generally, Input Tax Credit can be claimed by any branch office on its input invoices. However, exempted supplies made by a branch office can result in restrictions on Input Tax Credit claim.
4.2 It is an industry practice where several transactions between HO & branches are settled by way of book adjustments. Even if both the parties are distinct persons under GST, ITC cannot be denied u/s 16(2) solely on the ground that payment was settled through book adjustment.
4.3 The Appellate Advance Ruling in the case of M/s. MRF Limited [2019 (27) G.S.T.L. 578 (App. A.A.R. – GST)] observed that the second proviso to Section 16(2) of the CGST Act is merely an anti-evasion measure introduced in the law and the legislative intention behind introducing the same, is to ensure that suppliers especially from MSME sector are paid promptly. It is not the intention of the legislator to apply this proviso to transactions between inter-offices as distinct persons. Therefore, transactions between inter-offices as distinct persons cannot be subjected to this proviso. In case of transactions between inter-offices as distinct persons, there is no revenue loss to the Government as long as the necessary compliances as per Section 16(2) of CGST Act are made.Therefore, it would be incorrect to deny the admissibility of ITC case when all necessary conditions of Section 16(2) of CGST Act have been satisfied.
4.4 The Appellate Authority for Advance Ruling, Tamil Nadu in the case of Sanghvi Movers Limited [2020 (32) G.S.T.L. 586 (App. A.A.R. – GST – T.N.)]where a transaction between a branch office & HO was settled by way of book adjustment, held that:
“….we find no reason to restrict the Input Tax Credit of the tax paid by the SML HO, in the hands of the appellant as it has been substantially brought out that the ‘consideration’ stands paid to the SML HO either by the customer of the Appellant or by setting off against the payables of the appellant to SML HO, in respect of lease/hire of Cranes, etc. which is as per the established Accounting Principles. Therefore, we do not find any reason to restrict the eligibility of ITC credit under Section 16(2) of the Act, in the case at hand.”
4.5 Further, para 45 of Ind AS 32 states that ‘A right of set-off is a debtor’s legal right, by contract or otherwise, to settle or otherwise eliminate all or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor.’ Therefore, the netting off of receivable and payable between the debtor and the creditor would be permissible under Ind AS 32 since it grants a legally enforceable right to set-off and clearly indicates both the parties’ intention to settle the asset and liability on a net basis. Accordingly, the recipient should be eligible for full ITC provided all the conditions of Section 16(2) of the CGST Act are satisfied.
5.0 Concluding Remarks
Payment for the purpose of second proviso to section 16(2) can be made by way of book adjustments and law nowhere restricts the payment to be made by cheque or cash mode for the requirement of this proviso.
Further, Proviso to Sec 16(2) does not specify that entire value of supply has to be paid. The words ‘amount towards the value of supply’, implies only the amount as agreed between the supplier and the recipient which need not be the entire value of supply. As per the mutual agreement, if such value of supply is reduced, even such reduced payment fulfils the requirement, ‘amount towards the value of supply’.
In view of the above discussion, it should be within the accepted bounds of lawto construe that no ITC reversal is required solely on the ground that invoices are settled by way of book adjustment.
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Disclaimer: Views and Opinions expressed in the article are my personal and do not construe any suggestion or a professional or legal advice.