GST update on whether ITC pertaining to debit notes can be denied on the basis of linkage to original invoice.

GST regime which was introduced with aim to provide seamless credit to the purchaser. But with passage of time the same seems to be going away from taxpayer. With the frequent changes in provisions regarding claiming of credit and introductions of Rule 36(4), Rule 86(b) etc. it has become a mammoth task to claim the rightful eligible ITC. Recently the ruling by Gujarat AAR also aims at further blockage of credit by disallowing credit on certain debit notes issued for earlier years.
Gujarat AAR in the matter of M/S I-Tech Plast India Pvt. Ltd. [Advance Ruling No. GUJ/GAAR/R/10/2021 decided on January 20, 2021] held the applicant cannot claim Input Tax Credit in relation to CGST and SGST separately in debit notes issued by the supplier in current financial year i.e. 2020-21, towards the transactions for the period 2018-19.
Assessee was engaged in manufacturing and supply of toys made of plastic and/or rubber or both wherein on realization that certain output supply was billed less than the actual for which it wishes to issue debit note for the same with GST effect. The transactions pertain to 2018-19. Assessee contended that Recently GSTN has enabled the facility to delink reporting of debit note or credit note corresponding with their original invoice. Earlier, to report debit or credit note in GSTR 1/ GSTR 6, tax payers had to link each to their corresponding Invoice. Therefore, the provision of section 16(4) cannot be invoked.
AAR believed that requirement in case of debit note is that the serial number and date of the corresponding tax invoice is to be provided in the debit note. Therefore, the very purpose of making the aforementioned entry in the debit note is to enable the recipient of the supply to correlate the said debit note with the original invoice issued by the supplier and to take credit of the same in his input tax credit account. Thus from a combined reading of the definition of ‘debit note’, sub-section (3) of Section 34 of the CGST Act, 2017 and the particulars to be provided in a debit note issued under GST, it is amply clear that the debit note is not an independent document or an invoice in itself and is connected to an invoice as it is issued in pursuance to change in value of an invoice. It, therefore, follows that the financial year to which a debit note pertains, is invariably the financial year in which the original invoice (related to the said debit note) was issued. Thus, the credit on debit note persuading to 2018-19 cannot be claimed in 2020-21.
Section 34(3) which provides that where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient one or more debit notes for supplies made in a financial year containing the prescribed particulars. Other than this act does not specifically speaks about debit notes regarding time limit.
Further analyzingSec. 16 (4) which provides A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or ~~invoice relating to such~~ debit note pertains or furnishing of the relevant annual return, whichever is earlier.
The phrase "invoice relating to such" in the above provision was omitted vide Section 120 of the Finance Act, 2020 and this omission has taken effect from 01.01.2021 vide Notification 92/2020-Central Tax Dt. 22.12.2020.
Also, after amendment where the de-linkage was done it is pertinent that the time limit under section 16(4) in case of debit note also applies from the date of debit note. For example, if the discrepancy has come to notice after September 2019 and debit note is issued in October 2019 whose original invoice was of March 2019, then the said limit under section 16(4) applies from date of debit note. And new limit will fall till September 2020.
The above interpretation will be benefit at large for the assessee and his will very much also encourage the genuine taxpayer and also ensure the primary intention of government authority to provide seamless ITC. But AAR ruling has given a different interpretation. AAR is going against the plain and simple language. So, the legal battle will go on this issue. To avoid the same, Government should come forward with the clarification on this issue. This will save time and money of both department as well as of taxpayers.

This is solely for educational purpose.

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GST update on whether ITC pertaining to debit notes can be denied on the basis of linkage to original invoice.

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