Make Inter unit bank payment to claim ITC.

Make  Inter unit bank payment to claim ITC.

Following had been ruled recently by the Tamil Nadu Authority for Advance Ruling ("AAR") for the applicant, M/s. Sanghvi Movers Limited.

The issue for consideration before AAR was to examine the admissibility of Input Tax Credit ("ITC") wherein the underlying supply was between distinct persons. Despite the fact that GST law acknowledges such supplies to be without consideration, AAR held that branch office will not be eligible for the ITC on services provided by head office as it was not paying full consideration for the services provided by the head office.  

2. Legal background

♦ Second proviso to section 16(2) of the CGST Act provides that if recipient fails to pay to the supplier the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice by the supplier, an amount equal to ITC availed by the recipient shall be added to his output tax liability along with interest.

♦ However, proviso to Rule 37(1) of the CGST Rules provides for an exception and states that value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.

Now, in the backdrop of these legal provisions, the issue before AAR was to examine the admissibility of ITC by the applicant on supplies made by its head office, which falls under the ambit of Schedule I of the Act.

3. Facts of the case

♦ Applicant's HO had entered into a formal service arrangement with its branch offices by entering into a Memorandum of Understanding ("MOU"), wherein it had agreed to provide cranes and crane components to all branch offices on hire charges.

♦ As part of the service arrangement, whenever branch offices receives a final work order from their customers for providing cranes on hire the said branch office will, in turn, raise an internal work order on applicant for providing the requested cranes on hire to them.

♦ Applicant's HO raises a monthly invoice on branch offices for the use of such cranes and the value considered for levying GST is approximately 95% of the value charged to the customer by the applicant.

♦ MOU provided that the lease/hire charges payable by branches to HO are netted off receivable and payable in books of account and is considered as deemed payment.

4. Contention of the applicant

♦ Applicant contented that as supply is between distinct persons as defined under Section  25(4) of the CGST Act and is treated as supply, the condition of 180 days is not applicable to the applicant and they are entitled to ITC on GST charged by the HO by making deemed payment by netting off receivables and payable in books of account.

5. Decision and observations

♦ AAR observed that in this case, there is a consideration to be paid by applicant to HO as per the MOU and as applicant was not paying full consideration of the transaction to HO but was netting it off against the receivables by HO from the applicant.

♦ Accordingly, the applicant will not be eligible for full ITC for inward supplies from HO as they would be required to reverse such ITC in accordance with section 16(2) of the CGST Act.

6. Issues arising from AAR's decision

♦ It can be seen that provisions under GST law do not require payment of consideration in cases where supplies are specified under Schedule I of the CGST Act. The modest reason behind the same is that these supplies are deemed to be supplies even without consideration by Schedule I and, therefore, the question of payment of consideration itself doesn't arise in such a case. Had there been a consideration involved in the transaction, it would not have even come under the ambit of Schedule I of the CGST Act.

♦ However, AAR suggested that even if supplies specified in Schedule I are monetised, they will attract reversal on account on non-payment of consideration. The dilemma here is whether taxpayers are bound to pay consideration in case where it is essentially a supply without consideration under Schedule I and monetization of consideration under agreement/MOU is only for the purpose of the payment of GST?

♦ Ideally, once it is established that an activity is a supply by virtue of Schedule I, presence of consideration thereon should not impact the position of non-requirement to reverse ITC.

7. Classic case of supply between distinct persons

It is only by way of a deeming fiction that different offices of an entity under a single PAN are considered as 'distinct persons' under GST. Such transaction cannot even qualify to be supply without resorting to Schedule I for the reason that it is a single legal person per se and there cannot be supply and consequent payment within the same person. In such a case, the question of payment of consideration cannot even arise. Therefore, in all cases pertaining to supplies between distinct persons there cannot be any requirement of reversal of ITC on account of non-payment of consideration contrary to what has been suggested by the AAR. Without prejudice to the above, netting off against receivables is considered as a valid payment and, thus, second proviso to section 16(2) will not trigger in such cases as well. The said view is supported by various judicial pronouncements. The AAR failed to take a note of the same.

Conclusion

8. AAR has laid down an incorrect interpretation of the related law. However, in presence of such AAR, it is likely that other advance authorities and department will also take a similar position in future. Though advance rulings are binding only in respect of the applicant who has sought it and has only persuasive value for others, it is imperative for taxpayers to timely restructure such transactions to ensure seamless availment of credit.