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

  • Mar 19, 2020 | Viren Shah

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:

  • The consideration agreed between HO and BO is merely for compliance with the valuation provisions of the GST law, and it does not have any commercial substance;
  • Inter-branch transactions are never to be considered as revenue-generating transactions;
  • As per the accounting principle (IndAS 32), the receivable and payable have to be considered at the entity level and not at the GST registration level;
  • The term ‘otherwise’ used in the definition of consideration under Section 2(31) of the CGST Act is very wide and would include all modes of payment including barter, exchange, netting off, etc.; and
  • The proviso to Section 16(2) r.w. the proviso to Rule 37 applies only if there is a failure to make payment of invoice value and tax and not where the amount payable to the supplier is reduced as a result of the mutual settlement between them. Thus, the proviso cannot be invoked;

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

  • The transaction is between distinct persons and is covered under Schedule I of the CGST Act;
  • The customer is making the payment either in the bank account of HO or in the name of the BO, and the receipts are accounted for at an entity level. Rule 37 provides for deemed payment of value in such transactions; and
  • Assuming that the proviso to Rule 37 does not apply, the ITC cannot be restricted since the consideration is paid to the HO by the customer of the BO or by setting off against the payable of the BO to the HO which is per the accounting principles.

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.

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[i] 113 taxmann.com 24 (AAAR - Tamil Nadu)


Avalara helps businesses of all sizes get GST return filing, e-way bill generation and e-invoicing right with cloud-based GST compliance solutions in India. Goods and Services Tax (GST) rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Viren Shah
Avalara Author Viren Shah
Viren Shah, a member of the Institute of Chartered Accountants of India and a Bachelor of Commerce from Mumbai University, has experience of more than a decade in Corporate and International Taxation. He specializes in Domestic and International Taxation, with specific emphasis on cross border transactions and exchange control laws with respect to inbound and outbound investments. He has vast experience in advising companies across various industries.