Regarding ITC on Sales Return of Goods of which Buyer has not taken ITC due to restriction u/s 17(5)

[Shyam Agarwal]

Sir, Mr.A is a Cement dealer. He sold 5000 bags of Cements to Mr.B,Cloth Merchant for Office construction. Mr.B has not taken the ITC of Cement bags due to restriction u/s 17(5). Now, out of 5000 bags, Mr.B has returned 1000 bags to Mr.A and issued Debit Note without charging GST separately but GST component clubbed in the cost of 1000 Bags. On asking to him, Mr.B said that as he has not taken the ITC hence he has not charged in Debit Note. Can Mr.A can take ITC back on these 1000 bags? Is there need to take any precautions in this kind of transactions?

[KASTURI SETHI]

Actually credit note was to be issued by the supplier of goods in terms of Section 34(1) of CGST Act, 2017 whereas the buyer has issued a debit note. It is a procedural lapse. No doubt, debit note is one the prescribed documents under Rule 36 of CGST Rules, 2017. However, it can be covered under Section 34(4) of CGST Act, 2017.

In my view, ITC can be availed on this debit note provided that your books of account or agreement (if any) must prove that price of returned goods were inclusive of GST.

AI Summary

Input tax credit on sales returns permitted when accounting records show the returned goods' price was GST inclusive. Supplier entitlement to input tax credit on goods returned by a buyer who did not claim ITC depends on corrective documentation and accounting evidence: although a credit note should be issued by the supplier and a buyer-issued debit note is a procedural lapse, the supplier may avail ITC if its books of account or an agreement prove the returned goods' price was GST-inclusive and the GST component was embedded in the consideration.