2023 (6) TMI 1051 - AAR - GST

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 ... Input tax credit - Transaction value - Post-supply discount - Section 15(3)(b) - discounts given after supply and conditions for exclusion from transaction value - Section 16(2) proviso - reversal of ITC where recipient fails to pay value of supply within 180 days - Misuse of financial/ commercial credit notes and penalty under section 132(b)Input tax credit - Transaction value - Post-supply discount - Section 15(3)(b) - discounts given after supply and conditions for exclusion from transaction value - Applicant entitled to take full credit of GST charged in supplier's tax invoice notwithstanding subsequent issuance of commercial/financial credit notes by the supplier. - HELD THAT: - The Authority examined the language of Section 15(3)(b) and found that discounts given after supply are excluded from the transaction value only where (i) the discount is established by an agreement entered into at or before the time of supply and is specifically linked to the relevant invoices, and (ii) the input tax credit attributable to the discount has been reversed by the recipient. On the facts, the supplier issued post supply financial/ commercial credit notes without GST for accounting purposes and there was no prior agreement or invoice specific linkage satisfying Section 15(3)(b). The supplier also did not reduce its outward tax liability. In the absence of the statutory conditions for excluding the discount from transaction value, the GST charged in the invoice stood and the recipient was correctly entitled to take full ITC. The Authority cautioned that financial credit notes must not be used to transfer ITC fraudulently, which would attract penalty under section 132(b). [Paras 7]Affirmative - the applicant is entitled to take full credit of GST charged in the supplier's tax invoice.Input tax credit - Section 16(2) proviso - reversal of ITC where recipient fails to pay value of supply within 180 days - Post-supply discount - Applicant is not required to reverse ITC proportionately on account of financial/ commercial credit notes issued by the supplier, subject to payment adjustments. - HELD THAT: - The Authority applied the proviso to Section 16(2) which mandates reversal of ITC only where the recipient fails to pay the amount towards the value of supply along with tax within the prescribed period. Here, the post supply discounts were not reflected as reductions in the supplier's outward liability and there was no failure by the recipient to pay the value of supply as reduced. Consequently, there was no statutory basis to require proportionate reversal of ITC. The Authority further relied on clarifications (as reflected in Circular No. 92/11/2019 GST and prior circulars) that secondary/post supply discounts which are not known at the time of supply do not satisfy Section 15(3)(b) and do not affect ITC availability unless the statutory conditions are met. The ruling qualified that if the recipient pays the reduced value (after adjusting the post sale discount) plus the original tax charged by the supplier, no reversal is required. [Paras 7]Negative - the applicant is not required to reverse ITC proportionately to the extent of financial/ commercial credit notes, provided the reduced value is paid as adjusted and the supplier's tax treatment remains unchanged.Final Conclusion: The Authority ruled that the applicant may retain full input tax credit taken on supplier invoices despite subsequent post supply financial/ commercial credit notes, and need not reverse ITC proportionately so long as the statutory conditions for exclusion under Section 15(3)(b) are not satisfied and the reduced value is appropriately paid; misuse of credit through artificial invoicing and credit notes would attract penalties. 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 InvoiceThe 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 ProportionatelyThe 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.