Recipient not required to reverse ITC on supplier's post-sale credit notes for discounts under Section 15(3)(b)

The AAR, Andhra Pradesh ruled that a recipient is not required to reverse ITC when a supplier issues post-sale commercial/financial credit notes without GST for discounts like turnover or quantity discounts. The authority found that Section 15(3)(b) provisions requiring ITC reversal for discounts do not apply as there was no prior agreement or specific correlation between credit notes and original invoices. However, the ruling cautioned that financial credit notes should not be used fraudulently to transfer ITC, warning of penalties under Section 132(b) for such misuse.

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Issues Involved:
1. Eligibility to take full credit of GST charged in the tax invoice issued by the supplier.
2. Requirement to reverse the ITC proportionately to the extent of financial/commercial credit notes issued by the supplier.

Summary:

Issue 1: Eligibility to Take Full Credit of GST Charged in Tax Invoice
The applicant, M/s Vedmutha Electricals India Private Limited, sought an advance ruling on whether they are eligible to take full credit of GST charged in the tax invoice issued by their supplier, even if the supplier issues a commercial/financial credit note later. The Authority examined Section 15(3) of the CGST Act, 2017, which states that the value of the supply shall not include any discount given after the supply if it is established in terms of an agreement entered into at or before the time of supply and specifically linked to relevant invoices, and if the input tax credit attributable to the discount is reversed by the recipient. The Authority found that the supplier issued commercial credit notes without GST for accounting purposes and did not reduce the output tax liability. As there was no specific information linking the credit notes to relevant invoices, the benefit of reducing the value of the discount from the transaction value was not allowed. Consequently, the applicant is eligible to take full credit of GST charged in the tax invoice.

Issue 2: Requirement to Reverse ITC Proportionately
The applicant also sought clarity on whether they are required to reverse the ITC proportionately to the extent of financial/commercial credit notes issued by the supplier. The Authority noted that the credit notes were issued without adjusting the GST, and the supplier did not reduce the outward tax liability. Therefore, the applicant is not required to reverse the ITC proportionately as there was no corresponding reduction in the supplier's outward liability. The Authority emphasized that financial credit notes should not be used to transfer ITC fraudulently, and any misuse would attract penalties under Section 132(b). The Authority also referred to Circular No. 92/11/2019-GST, clarifying that secondary discounts should not be excluded while determining the value of supply unless the conditions in Section 15(3)(b) are satisfied.

Ruling:
1. The applicant is eligible to take full credit of GST charged in the tax invoice issued by the supplier.
2. The applicant is not required to reverse the ITC proportionately to the extent of financial/commercial credit notes issued by the supplier, provided the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount plus the original tax charged by the supplier.

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