Whether the ITC is admissible when the transaction is settled through book adjustment the debt created on inward supplies?

PJ/Case Law/2018-2019/3535

Name-M/S Senco Gold Ltd (GST AAR West Bangal)
Citation- Order No. 02/WBAAR/2019-20 dated 08.05.2019
Issue- Whether the ITC is admissible when the transaction is settled through book adjustment the debt created on inward supplies?
Brief Facts- The Applicant is engaged in the manufacturing and retailing of jewellery and articles made of gold, silver, platinum, diamonds and other precious stones under the brand name “Senco Gold & Diamonds”. Apart from his own retail stores, the Applicant also maintains a network of franchisee-operated stores. He grants such a franchisee the right and license to operate a showroom and to use, in connection therewith, certain Proprietary Marks and System in accordance with a Franchise Agreement. The Applicant raises tax invoices on the Franchisee for the supply of jewellery and other articles and also for Franchise Support Services in terms of the Agreement periodically. On its part, the Franchisee also raises tax invoices on the Applicant for the supply of old gold, silver etc., received from the customers. The Applicant intends to settle the mutual debts through book adjustments.
Submissions by Applicant-The Applicant draws attention to the second proviso to section 16(2) of the GST Act. It provides: ” 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.”
The Applicant argues that apart from the above proviso, the GST Act nowhere makes availing of input tax credit dependent upon the payment to be made for the inward supply. The captioned proviso also does not prescribe or restrict the mode in which the payment has to be made. The Applicant submits that payment through adjustment of the books of accounts is a prevalent commercial practice.
In this connection the Applicant refers to rule 19(8) of the West Bengal Value Added Tax Rules, 2005, that restricted claim of input tax credit to transactions where the payment had been made by account payee cheque or account payee draft or through electronic banking clearance when such payment exceeded rupees twenty thousand in a day. No such restriction is apparently provided under the GST Act.
Contentions by Department-In the present context, 'consideration', as defined under section 2(31), provides the scope and ambit for modes of payment. It includes, in relation to the supply of goods or services, any payment, made or to be made, whether in money or otherwise, and also the monetary value of any act or forbearance. This definition of 'consideration' cast the net so wide that almost no form of payment is excluded. For example, a mix of money and monetary value of the goods offered together with it is a valid 'consideration'. Similarly, if the payee owes the payer a debt, and accepts a reduction in such a debt liability as a valid form of payment, that should also be regarded as a valid 'consideration' for a supply. In other words, reduction in book debt (an asset in the payer's books of accounts) is a valid 'consideration'.
The above discussion establishes that the recipient can pay the supplier consideration by way of setting off book debt. 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.
Decision- In favor of assessee
AAR ruled that The Applicant can pay the consideration for inward supplies by way of setting off book debt. The GST Act and rules made there under 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.

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PJ/Case Law/2018-2019/3535

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