Book adjustments between company GSTINs satisfy Section 16(4) consideration requirements for ITC eligibility

Kerala AAR ruled that book adjustments between different GSTINs of the same company for settling mutual debts constitute valid consideration payment, satisfying Section 16(4) CGST Act requirements for ITC eligibility. Such adjustments do not create supply between GSTINs under Section 7. However, in franchisee arrangements where old gold is supplied to applicant and distinct person supplies new gold ornaments to franchisee on applicant's behalf, two separate taxable supplies arise attracting GST liability under CGST and IGST Acts.

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Issues Involved:
1. Whether net-off of receivables of one GSTIN by another GSTIN of the same company, or net-off of receivables with payables of supplier of goods/service would amount to payment to the vendor meeting the compliance requirements of Section 16(4) of CGST Act, 2017.
2. Whether such adjustments would trigger any nature of supply between the two GSTINs.

Summary:

Issue 1: Compliance with Section 16(4) of CGST Act, 2017
The applicant, engaged in retail and wholesale of jewellery, sought an advance ruling to determine if the net-off of receivables of one GSTIN by another GSTIN of the same company, or net-off of receivables with payables of suppliers, would meet the compliance requirements of Section 16(4) of the CGST Act, 2017. The applicant argued that such adjustments are common business practices and should be considered valid payments under GST law. They cited various provisions of the CGST Act, including Section 2(31) defining 'consideration' and Section 16(2) regarding the conditions for availing Input Tax Credit (ITC). The applicant also referenced previous rulings, such as those in M/s. Seneo Gold Limited and M/s. MRF Ltd., which supported the validity of book adjustments as a mode of payment.

The Authority for Advance Ruling (AAR) examined the relevant provisions and concluded that the settlement of mutual debts through book adjustment is a valid mode of payment. It satisfies the requirement of the second proviso to sub-section (2) of Section 16 of the CGST Act, 2017. Therefore, the net-off of receivables of one GSTIN by another GSTIN of the same company, or net-off of receivables with payables of suppliers, would amount to payment to the vendor and meet the compliance requirements of Section 16(4) of the CGST Act, 2017.

Issue 2: Nature of Supply Between Two GSTINs
The applicant also sought clarity on whether such book adjustments would trigger any nature of supply between the two GSTINs. The AAR analyzed various scenarios presented by the applicant, including the purchase of goods and services by different GSTINs within the same company, and the settlement of dues by the Head Office.

The AAR ruled that in most cases, such as the settlement of dues/payment of consideration for goods and/or services received by one GSTIN by another GSTIN, the transactions involved are mere transactions in money and do not constitute a supply of goods or services under Section 7 of the CGST Act, 2017. Therefore, no GST liability arises from such transactions.

However, in scenarios where the franchisee supplies old gold to the applicant, and a distinct person supplies new gold ornaments of equal value as consideration to the franchisee on behalf of the applicant, there are two supplies involved. The first supply is the old gold by the franchisee to the applicant, and the second supply is the new gold ornaments by the distinct person to the franchisee. These transactions are considered separate supplies under Section 7 of the CGST Act, 2017, and are liable to GST.

Ruling:
1. The Applicant can pay the consideration for inward supplies by way of net-off of receivables of one GSTIN by another GSTIN of the same company, or net-off of receivables with payables of suppliers. The input tax credit 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.
2. The arrangement of settlement of dues/payment of consideration for goods and/or services received by one GSTIN by another GSTIN or payment of consideration by the Head Office does not constitute a supply under Section 7 of the CGST Act, 2017. However, transactions involving the supply of old gold by the franchisee and new gold ornaments by a distinct person constitute separate supplies and are liable to GST.

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