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.

[Mehak Malhotra]

Dear Rakesh Chitkara,

1) Whether GST will be applicable on this compensation ?

GST will be applicble on this compensation.

Reason :

a) This is not a supply of goods.

b) It will get covered under definition of service. To qualify this definition, there have to be 2 important things. First, there has to be an ACTIVITY and second there should be a CONSIDERATION for that activity. In our case, activity is that the customer is waiting and giving an extension for completion in exchange of the consideration which will be calculated as per the formula decided. Hence, GST would be levied as this is a supply of service.

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

Yes, as per Sec 9(4), if the supply of taxable goods or services or both by a supplier(in our case customer), who is not registered, to a registered person (developer), shall be paid by such person (developer) on reverse charge basis as recipient.

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

Now since, GST is paid in form of RCM then credit will be allowed to the developer.

Reasons :

Example : When an individual who buys a car for personal use and after a year sells it to a car dealer, the transaction will not be supply, because supply is not made by the individual in the course or furtherance of business. Further, no input tax credit was admissible on such car at the time of its acquisition as it was meant for non-business use.

Since, this service was taken by the developer not for the personal purpose but for the business, its input tax credit would be definitely allowed. If the developer has not taken the extension, he could not have completed the construction and could not have served the customer. So, in order to complete the transaction he took the service and paid compensation. Therefore, this is very well qualify the phrase “used or intended to be used for the purpose of furtherance of business or commerce".

Thank you. I hope the above text will be of some use to you.

AI Summary

Reverse charge on compensation for delay: tax applies as a service and credit is claimable if used for furtherance of business. Compensation for delay in possession is a taxable service rather than goods, and when paid by an unregistered customer the developer must pay GST under the reverse charge mechanism. Tax paid under reverse charge is claimable as input tax credit where the service is used or intended to be used for furtherance of business; in the developer's circumstances the compensation facilitates project completion and thus ordinarily satisfies the business-purpose requirement for credit.