Compensation whether 'furtherence of business' for input tax credit

[Rakesh Chitkara]

FACTS :A developer pays compensation to its customers to compensate for delay and default in handing over of the possession of property within the stipulated time.Compensation will be formula based (more like an interest) calculated based on amounts paid and period of delay.

QUERY ::Whether GST will be applicable on this compensation.

Whether such tax will be paid under RCM because the customer is an unregistered person ?

If yes, then whether developer can get the ITC of the same ?

First Opinion

1. This is an expense item.
2. Self – Invoice would be raised bearing unique serial number,
3. RCM will apply as the buyer is an unregistered person,
4. Rate would be 18%,

5. ITC shall be available as it is in the course of furtherance of business.

Second Contra Opinion
First four points are same except 5^th.

5. ITC can not be taken because –
ITC is available in terms of the enabling provision which states that services which are used or intended to be used for the purpose of furtherance of business or commerce is available as credit. In case of delayed payment of compensation, it may be a bit difficult to establish the such delay is for the furtherance of business or commerce carried on by company. In such a case, availing credit of the same may be prone to dispute.

Crux : Whether compensation for default can be treated as an activity “used or intended to be used for the purpose of furtherance of business or commerce” for ITC purposes ? Is it expansive and enlarges the scope or is it an expression of restricting the scope ?

Also relevant case laws please.

AI Summary

Developer Compensates for Delays; GST Applicability Debated Under RCM with ITC Considerations in Question A developer compensates customers for delays in property possession, raising questions about the applicability of GST on such compensation. The debate centers on whether GST should be paid under the reverse charge mechanism (RCM) since customers are unregistered. Opinions differ on whether input tax credit (ITC) is applicable, with one view supporting ITC as the compensation is in furtherance of business, while another argues it's disputable. The consensus is that GST applies as the compensation is a service, and RCM is applicable, allowing the developer to claim ITC as the service is business-related.