Recovery of Cylinder Cost

[Kaustubh Karandikar]

XYZ selling Gas in cylinders. The cylinders are on returnable basis and once it gets emptied, the customer returns it back. If the customer is not returning the cylinders back, XYZ is recovering the cylinder cost from the customer. XYZ need to issue a debit note on the customer for cylinder cost or raise a service invoice for penalty for not returning the cylinders?

[Amit Agrawal]

Answer to the query raised depends upon terms & conditions agreed between parties.

If recovery of charges (against cylinders not returned) are penal in nature (i.e. to ensure that cylinders are returned back by the recipient of gas & not kept by the recipient), then, GST is not payable there-against.

If terms & conditions agreed between parties shows that 'cylinders not returned back' is treated as 'sale' between parties, then, "tax-invoice charging applicable GST against 'goods' (i.e. cylinders) sold" needs to be raised by XYZ.

I am not sure that I have understood any factual situation where debit-note needs to be raised u/s 34 against 'gas' originally supplied towards 'cylinders not returned back'. This is because of my understanding that original intention between parties was only supply of 'gas' where recipient was supposed to return 'emptied cylinders' back to the supplier.

These are ex facie views of mine, the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

In order to avoid any tax-disputes at end of XYZ (specially when it is not at a fault though the recipient is at fault), as a practical measure, it is better that "tax-invoice charging applicable GST against 'goods' (i.e. cylinders) sold" is raised by XYZ where terms & conditions agreed between parties are demonstrating that 'cylinders not returned back' is treated as 'sale of cylinders' between parties.

These are ex facie views of mine, the same should not be construed as professional advice / suggestion.

[Kaustubh Karandikar]

Thanks Amit ji for your valuable guidance as you are doing always. In my view and as endorsed by you, let the supplier issue a Debit Note towards recovery of cost of cylinders by charging GST.

[Amit Agrawal]

You are welcome, Shri Kaustubh Ji!

Kindly note that in my post/s above, in specified scenario, I have suggested 'tax-invoice' charging applicable GST being altogether new supply of "cylinders" and NOT a debit-note u/s 34 against old / original supply of gas.

I feel that debit-note can NOT be raised u/s 34 against 'gas' originally supplied on account of the fact that 'cylinders not returned back'. This is because as the original contract - between parties - was only supply of 'gas' where recipient was supposed to return 'emptied cylinders' back to the supplier.

Supply of ''cylinders' - in specified scenario - is new supply of goods (i.e. cylinders) and same has nothing to do with original supply of 'gas' in my view.

These are ex facie views of mine, the same should not be construed as professional advice / suggestion.

[Kaustubh Karandikar]

Yes Amiy ji i fully agree with your advice and i also thought of the same but then if tax invoice for goods is issued, the issue of e - way bill arises and since there is no movement of goods, e - way bill cannot be issued and in that case there will be a difference in the value of GSTR - 1 and value as appearing on e - way bill portal which again might be objected by GST authorities which needs to be explained to them. Therefore, i thought of this remedy.

[Amit Agrawal]

Sir,

Raising debit-note (against non-returning of cylinders) can lead to Dept's raising valuation-issues (i.e. charge of under-valuation) for 'gas' supplied originally (i.e. even when empty cylinder were subsequently returned back to the supplier). You will be find many case-laws under Excise Regime when Dept. tried the same (though unsuccessfully).

Furthermore, what happens if there are different tax-rates for supply of 'gas' and 'çylinder'?

What if Dept. again demand taxes against 'çylinder' sold, alleging that additional taxes paid against debit-note was for 'gas' supplied and not against 'çylinder' sold?

And so on ....

Hence, in my view, it s better to stick with interpretation as per law in any situation. W.r.t. query of difference/s (between e-way bill and sale-invoice etc.) if raised by Dept., same can be & will need to be explained.

These are ex facie views of mine, the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

*Please read in above post for relevant line as follows: Hence, in my view, it s better to stick with consistentinterpretation as per law in any situation. ............

These are ex facie views of mine, the same should not be construed as professional advice / suggestion. & I respect contrary views.

[Kaustubh Karandikar]

yes sir, i appeciate your views. But as per the terms of the contract, the price charged agains the original supply was for gas and cylinders were to be returned back. Since the same are not returned back, cost of cylinder is recovered through debit note. will it have any issues?

[Amit Agrawal]

Recovery (against cylinders not returned) is not additional consideration OR even a consideration for 'gas' supplied. Hence, debit-note u/s 34 cannot be raised.

Debit-note u/s 34 (3) can be raised only where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to be less than the taxable value or tax payable in respect of such supply.

Recovery (against cylinders not returned) - in given scenario - can NOT lead to charge that the taxable value or tax charged in that tax invoice (i.e. original invoice) is less than the taxable value or tax payable in respect of such supply of original supply i.e. "GAS".

Hence, debit-note u/s 34 cannot be raised, in my view, against recovery for cylinders not returned in given scenario.

W.r.t. issues that may arise in raising debit-notes u/s 34, I have already explained them in my earlier post.

These are ex facie views of mine, the same should not be construed as professional advice / suggestion. & I respect contrary views.

[Padmanathan KV]

To support the views of Amit Ji from contract Act/ Sale of goods Act POV, the original contract is only for sale of gases alone and the title in cylinder does not originally pass to the recipient. Therefore, there is no initial supply of cylinder. It is only a new supply (as and when cylinder is not returned and the title passes to customer).

[Kaustubh Karandikar]

Thanks amit ji and padmanathan ji for your valued advice.

AI Summary

GST treatment of cylinder recovery: treat as new supply and issue tax invoice if title transfers; penal charges may be non taxable.
Recovery for non returned cylinders is not a debit note under section 34 because it does not correct the taxable value of the original gas supply. If contract terms treat non return as a transfer of title, the recovery constitutes a new supply of goods (cylinders) and a tax invoice charging applicable GST should be issued. If the charge is penal in nature to ensure return, it may be non taxable. Treating the recovery as a sale raises e way bill, reporting and valuation risks which must be managed with consistent documentation.