ITC allowed on goods from outsourced vendors when payment settled through book adjustment against mutual debts under Sections 16(2)

AAR Kerala held that ITC is admissible on goods purchased from outsourced vendors when payment is settled through book adjustment against debt from outward supplies to the same vendors. The authority determined that book adjustment entries constitute valid payment mode under GST law, referencing Sections 12 and 13 provisions. Settlement of mutual debts through book adjustment satisfies consideration payment requirements under Section 16(2) second proviso of CGST Act 2017, making ITC available subject to other prescribed conditions and restrictions under Sections 16, 17, and 18.

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Issues Involved:
1. Admissibility of Input Tax Credit (ITC) in sale and buy-back transactions when payment is settled through book adjustment.

Issue-wise Detailed Analysis:

1. Admissibility of Input Tax Credit in Sale and Buy-Back Transactions:

The applicant, involved in the manufacturing and trading of footwear, sought an advance ruling on whether ITC is admissible for goods purchased from outsourced vendors when payment is settled through book adjustment against the debt created on outward supplies to these vendors.

Applicant's Contentions:
- The applicant outsources certain manufacturing activities and plans to sell raw materials to these vendors, who will return the finished products. The mutual debts will be settled through book adjustments, with net dues settled via bank transfer.
- The applicant referenced the second proviso to Section 16(2) of the GST Act, which stipulates that if a recipient fails to pay the supplier within 180 days from the invoice date, the ITC availed must be added to the recipient's output tax liability. However, the Act does not specify the mode of payment.
- The definition of 'consideration' under Section 2(31) is broad, encompassing any form of payment, including book adjustments. The applicant cited Indian Accounting Standards 32 and a similar ruling by the West Bengal Authority for Advance Ruling in the case of Senco Gold Ltd.

Jurisdictional Officer's Comments:
- The jurisdictional officer did not offer any comments, implying no specific objections or pending proceedings against the applicant on this issue.

Personal Hearing:
- The applicant's representative reiterated their contentions during the personal hearing.

Discussion and Findings:
- The authority examined the issue in detail and found the application admissible under Section 97(2).
- Section 16 of the CGST Act outlines the conditions for ITC eligibility. Specifically, the second proviso to Section 16(2) requires the recipient to pay the supplier for the supply received to be entitled to ITC. Failure to pay within 180 days necessitates adding the ITC availed to the recipient's output tax liability.
- The definition of 'consideration' under Section 2(31) includes any payment, whether in money or otherwise, and the monetary value of any act or forbearance. This broad definition implies that reducing a debt liability through book adjustments is a valid form of 'consideration'.
- Sections 12 and 13 of the CGST Act, governing the time of supply of goods and services, recognize entries in the books of accounts as a mode of payment.
- A combined reading of these provisions and the definition of 'consideration' indicates that settling mutual debts through book adjustments is a valid mode of payment, satisfying the requirements of the second proviso to Section 16(2).

Ruling:
- The authority ruled that ITC is admissible when consideration is paid through book adjustment, subject to the conditions and restrictions prescribed in Sections 16, 17, and 18 of the CGST Act, 2017, and the rules made thereunder.

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