REVERSAL OF ITC UNDER SEC-16(2)-SECOND PROVISO VS. CIRCULAR-92/2019

[Pramod Panda]

The recipient based on the Discounts/Financial Credit Notes received as at 31.03.2018 in respect of supply received for the Financial years 2017-18 reversed the ITC and paid output tax accordingly in accordance with Second Proviso to Section-16(2). In respect of some invoices for 2017-18, though the 180 days period is not over, but based on self-repudiation of liability by the Supplier by issue of the Post-Supply Credit Notes, the recipient in accordance with Second Proviso to Sec-16(2) reversed the ITC while finalising accounts for 2017-18. The reversal of ITC is correct as per the law. This view of the recipient finds support in the case of 2019 (3) TMI 928 - AUTHORITY FOR ADVANCE RULING, TAMILNADU IN RE: M/S. MRF LIMITED Order No. 5/AAR/2019 Dated: - 22 January 2019.

Subsequently, CBIC issued a clarificatory circular bearing No-92/2019, Dt:07th. March,2019 clarifying that the Secondary Discounts/Post-Supply Discounts which are not in accordance with Sec-15(3)/Financial Credit Notes will not reduce the ITC availability with the recipient and Output Liability of the Supplier, since such discounts are not in compliance with Sec-34 read with Sec-15. The clarificatory Circulars are always issued by CBIC based on representations received from stakeholders. The CBIC while issuing the aforesaid Circular has not discussed or referred to the provision contained in the Second Proviso to Sec-16(2) which is binding on recipients. Can a Clarificatory Circular issued by CBIC will override the provision of law as contained in Sec-16(2) ?

In the instant case of the recipient, the reversal of ITC is in accordance with the provision of law.

Kindly provide your EXPERT views.

[YAGAY andSUN]

The Law is simple on Credit Notes. If it is commercial credit note, then, no need to reverse the ITC, and if it is GST Credit Note, then, ITC is required to be reversed, however reversal of ITC is revenue neutral exercise.

AI Summary

Reversal of Input Tax Credit: recipient reversal upon supplier post supply credit notes may remain required despite administrative circular. Reversal of input tax credit under the second proviso permits recipients to reverse ITC when suppliers issue post supply credit notes or repudiate liability; recipients in the case reversed ITC on receipt of discounts/financial credit notes and treated the reversals as output tax, a position supported by an advance ruling. A later CBIC circular states secondary post supply discounts not meeting statutory credit note requirements do not reduce recipient ITC, creating a potential conflict between the administrative clarification and the recipient centred statutory proviso, while practical guidance distinguishes commercial credit notes from GST credit notes for reversal purposes.