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Full ITC on goods and services not available if consideration is netted off against receivables

Blog: NASSCOM Official Blog

Under the GST law, different units of the same entity functioning in different States are treated as ‘distinct persons,’ and as per Schedule I of the CGST Act, the supply of goods or services or both between such distinct persons, even if made without consideration are treated as supply. This deeming fiction was created so that the Input Tax Credit (ITC) chain is maintained intact. The recipient is required to make payment to the supplier within 180 days to claim ITC.

Recently, the Appellate AAR, in the case of Sanghvi Movers Ltd.i (‘the taxpayer’), has held that full ITC is eligible to the taxpayer. However, the consideration is netted off in the books of accounts.

In the instant case, the taxpayer is engaged in the business of providing cranes on lease/hire to its clients. The Head Office (‘HO’) of the taxpayer is located at Pune, Maharashtra, and has branch offices across India. The ownership of the cranes is with the HO.

The Tamil Nadu Branch Office (‘BO’) placed an internal work order with its HO for the supply of cranes on hire charges upon receiving work orders from its customers. The HO then transports the crane to the BO or the customer’s location. The BO raises the invoice on the customers, and the HO raises the invoice on the BO for the supply of the crane, which is approx. 95% of the value charged to the customers. The customers can make the payment either directly into the bank account of HO or issue a cheque in favor of the taxpayer.

The HO discharges IGST on the value charged to the BO, and the BO, in-turn, avails the ITC of the taxes paid by the HO. The taxpayer has made book adjustments by netting off the amount payable/receivable between the HO and BO.

Based on the above facts, the BO had applied to the AAR (Tamil Nadu) to obtain a ruling on whether it is eligible to claim the ITC of the IGST payable on the supplies made by the HO for the further supply on lease/hire to customer. The AAR rejected the ITC claimed by the BO as per Section 16(2) of the CGST Act since the BO did not make the payment to the HO. Also, the exemption available in Rule 37 of the CGST Rules would not be possible since consideration is specified in the invoice raised by the HO.

The BO aggrieved by order of the AAR filed an appeal before the Appellate AAR and argued that they are eligible for full ITC basis the following:

After considering the various provisions/rule of GST law, the Appellate AAR observed as under:

Based on the above, the Appellate AAR held that BO is entitled to avail full ITC of IGST paid by the HO. To avoid any litigation, the CBIC should issue necessary clarification in respect of netting off – as an accepted mode of payment for transactions between distinct persons.

To understand how Avalara can help you with GST compliance, visit www.avalara.com

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