Whether ITC is permissible when the payment is settled through book adjustment?

Yes, the West Bengal, AAR in the case of Paragon Polymer Products (P.) Ltd., In re [Order No. 27/WBAAR/2023-24 dated 20.12.2023] held that the claim of input tax credit by the taxpayer cannot be denied under the second proviso to sub-section (2) of section 16 of the Central Goods and Services Tax Act, 2017 when payment is settled through book adjustments because the law has not put any restriction on such adjustments. The Advance Ruling Authority of West Bengal observed that the Applicant intends to enter into agreements with different vendors to who they outsource the process of manufacturing footwear/parts of footwear. In this process, the Applicant procures raw materials and supplies to those outsourced vendors raising tax invoices. In return, vendors make outward supplies of finished goods to the Applicant for which payment is settled through book adjustment against debt created on the buy-back model. Therefore, the Applicant plays as supplier while supplying raw materials and emerges as the recipient when purchasing finished goods from those outsourced vendors. The AAR opined that the provision of Section 16(1) and (2) of the CGST Act, restricts credit of input tax to the recipient unless he pays the consideration to the supplier for inward supplies received by him along with tax payable thereon within the stipulated time limit of one hundred and eighty days from the date of issue of invoice and noted that the term ‘consideration’ has been defined in clause (31) of Section 2 of the CGST Act in an inclusive manner that extends the scope and range for mode of payment. Further, as per the said definition it is immaterial whether the payment is made by the recipient or by any other person. Further, when there is barter of goods or services, the same activity constitutes supply as well as a consideration. The AAR held that the settlement of mutual debts through book adjustment is a valid mode of payment under the CGST Act.

Author’s Comments

The Second proviso to section 16(2) of the CGST Act read with rule 37 of the CGST Rules provides a time limit of 180 days to pay the suppliers where input tax credit has been availed. Normally we have seen quite a number of cases where demand for reversal of ITC is fastened based on creditor’s balance appearing in the financial statements. The appearance of credit balance does not ipsidixitimply non-compliance with any condition to avail the ITC. No adverse inference can be drawn without showing ‘bill-wise delay’ in settlement of credits, without this, allegations are deeply rooted in guesswork, estimate and conjecture which will be incompatible with the demand under Chapter XV of the Act.

Further, there is no restriction under the law to settle payments through book adjustment and this was decided in the case of Senco Gold Ltd [02/WBAAR/2019-20 dated 08.05.2019] wherein it was held that the payment is a transfer of an asset to the payee for discharging an obligation arising out of transactions involving goods, services or other legal obligations. The most common asset class used for such payment is money, although other assets unless specifically excluded by law, may be used provided the payee accepts payment by such assets other than money as good and sufficient discharge of the obligation.