AUGUST 12, 2019

By R Sridhar, Consulting Editor, TIOL

ITC issues- 2 decisions reflecting opposite intentions

THE tax fraternity heaved sigh of relief when the Appellate Authority for Advance Ruling 2019-TIOL-61-AAAR-GST held in favour of MRF permitting Input tax credit to be availed on Invoice settled net of post of sale discounts (PSD) given through Commercial Credit Notes. The earlier ruling of AAR had held that there was a requirement to proportionately reverse ITC to the extent of PSD.

In this context it will be useful to examine a recent decision of Sanghi Movers Limited - 2019-TIOL-247-AAR-GST wherein relying upon the same section 16 (2), credit to recipient branch of the same entity (Sanghi) has been denied to the extent of adjustments made in inter unit invoices. It is pertinent that both Rulings are contradictory and hence a balanced approach is desired from the Revenue side.

In the above issue, the Advance Ruling Authority construed that when two different registered assessees (though a part of single entity) have transactions of goods and services between them, then unless payment is made in full for the Invoices raised, credit was not available even if adjustments are made for reimbursement of expenses rendered by the Branch to the HO. The denial of the credit was made on the ground that full payment was not made as per mandate of section 16(2).

Structure of Input Tax Credit Regime in GST and erstwhile law

It is pertinent that the GST law has carefully built in entitlement and disentitlement provisions separately. The provisions though well drafted in the disentitlement section have a scope to be stretched and hence there is an attempt to refuse credit. In the two years of GST we have had more cases of credits being denied (mainly AAR Rulings) which, with utmost humility and respect, appear inconsistent with legal provisions.

In the above case, the provisions of Rule 37 have been stretched to abnormal reading and proportionate credit has been denied. In the Cenvat regime (erstwhile regime), the provisions of definition of input services contained the means, includes and excludes portion separately. However it was distressing, that there was a spate of litigation post the integration of Services with Goods in Q4 of 2004 till the date of GST.

It will be pertinent to adduce that under the erstwhile regime, issues such as activities relating to business, credit of GTA (paid on RCM basis) was so much litigated upon thereby frustrating the real intention behind credits and one fervently hopes that the same does not recur in the GST regime.

Suggestions

Bearing in mind that litigation that commence in GST, with the filing of Annual Returns in August 2019, it is fervently prayed that the GST Council address the above issue of credits in the context on inter unit goods and services of a single parent but registered in various States, through an appropriate amendment in law in GST 2.0

Favourable Clarifications

While the Trade and Industry always points out the gaps in the ITC regime from time to time in GST, appreciation of the balanced clarifications issues of ITC, issued by GOI, have not been seen in the public domain. In the recent past, the beneficial clarification, in the area of ITC credit transfer, on death of sole proprietor to the successor in business, is worthy of mention. (Clarification Circular No. 96/15/2019-GST dated 28 March 2019). The clarification settled doubts regarding credits of ITC when a proprietor dies, as there were opposing views in the fraternity that only reorganization of business was covered under 18(3). The reassurance hence is welcome and sends a strong signal of the ITC regime planned by GOI and the Council.

Issues associated with Credit Regime needing re-look in GST 2.0

At this juncture it will be equally pertinent if the Law Committee of the GST Council addresses some of the issues also on top priority in GST 2.0

- Inter-Unit transactions to be exempted from taxation,for staff services specifically in view of certain Advance Rulings;

- Methodology for Reversal of ITC in respect of Sales Returns wherein ITC has been availed by an appropriate amendment to section 17(6);

- Clarification regarding ITC relating to service bills used in course of business, in case supplies of output goods, services become taxable as explained in section 18(1) (d). This is relevant because there is unintended difference in the language of section 18(1) (d) and 18(2) of the CGST law.

The Trade and Industry pins it hope that years 2 to 5 of GST regime will pave way for greater clarity and an environment of mutual trust between assessee and the Government as regards ITC which is an important part of the regime.