JOB WORK CAPITAL GOODS TO RETURN IN 3 YEARS

[VIPUL JHAVERI]

Dear Experts

For our pharmaceutical client, wherein equipments were send to job worker / Loan Licence sites it has been advised to get such equipments back max in 3 years else revese ITC availed quoting sections 143 & 16

According to Section 143 of the CGST Act, capital goods sent to a job worker must be returned to the principal within three years from the date of being sent out. If not returned within this period, it is deemed as a supply from the principal to the job worker, and GST is applicable.

As per Section 16 of the CGST Act, you can claim ITC on capital goods sent to job workers, provided they are returned within the stipulated period. If the capital goods are not returned within three years, the ITC claimed may need to be reversed.

while business manufacturing and job work agreement are continuing and can be supported with job-work in and job work outward challans, still institing on physical movements is somewhat hard to belive

Please suggest way out if any or physical take back and re-send is the only option

[YAGAY andSUN]

The situation you’ve described involves the return of capital goods sent to job workers or loan license sites under the provisions of the CGST Act, specifically Sections 143 and 16, with implications for ITC (Input Tax Credit).

Clarification of the Sections:

• Section 143 of the CGST Act mandates that capital goods sent to a job worker or a loan licensee must be returned to the principal within three years from the date of being sent out. If not returned within this period, it is treated as a deemed supply, and GST will be applicable.
• Section 16 deals with the claim of ITC on capital goods. It allows the principal to claim ITC when capital goods are sent to the job worker, provided that they are returned within three years. If the goods are not returned within the stipulated time frame, the ITC claimed will need to be reversed.

Physical Movement and Documentation:

You are correct that while the job work agreement and job work challans may substantiate the business activity, ensuring compliance with the physical return of goods within the specified period is crucial for maintaining the validity of the ITC claimed. However, the challenge of physically taking back and re-sending the capital goods could be cumbersome.

Potential Solutions or Alternatives:

1. Extend Job Worker Agreements and Documentation:
   • If it is not feasible to physically take back the capital goods, one alternative is to ensure that ongoing job work agreements or job work documentation (such as challans) explicitly mention that the goods are still being actively used by the job worker within the permitted time frame.
   • You could also issue a letter of intent or agreement extension, clearly documenting that the goods are still in the process of being utilized for manufacturing under the terms of the job work agreement.
2. Job Worker Holding the Goods Beyond 3 Years:
   • If the capital goods cannot be physically returned, you might need to engage the job worker in an arrangement where the goods are considered transferred back to your factory or establishment in a paper sense (i.e., documented transfer), such as a "reversal of loan" agreement.
   • In this case, it could be treated as a fresh supply of capital goods (back to the principal), ensuring that the GST implications are adhered to.
3. Issue Credit Notes or Adjustments:
   • If the goods cannot be returned within three years and the ITC needs to be reversed, you can issue credit notes to adjust the claim or initiate the reversal of ITC.
   • This process will ensure you comply with the GST provisions even if physical return is not possible. You can take this as an opportunity to rectify the ITC records and prevent any potential tax-related disputes in the future.
4. Possibility of Goods as Part of Business Restructuring:
   • If the goods cannot be physically returned, you may need to consider restructuring the agreement with the job worker so that they are no longer considered "loaned" goods, potentially involving a transfer of ownership.
   • In this scenario, the transaction would be treated as a sale and GST would be applicable on the transfer of ownership.
5. GST Advance Ruling:
   • If the above options still seem complex or unclear, you may consider seeking an Advance Ruling from the GST Authorities. This can help clarify the situation based on the specific facts of your case and allow you to receive an official interpretation on how to handle ITC reversal or physical return issues.

Conclusion:

While physical return seems like the most straightforward option, the complexity of the situation could mean that alternative approaches, such as revisiting the job work agreements or issuing credit notes, could provide a workaround. It would be best to also consult with a tax professional or GST consultant to ensure compliance with the latest regulatory guidelines while optimizing your processes.

[VIPUL JHAVERI]

Brilliant

Thanks a Lot Expert @ Y&S, for your very precise guidance and overcoming phyiscal movemnents with multiple possible options, i am sure very soon some practicle felxibility also will emerge within legal boundries as well

[Shilpi Jain]

Have a look at the below proviso in section 143 of the CGST Act which allows a 2 years time extension in case of capital goods by the Commissioner.

Provided further that the period of one year and three years may, on sufficient cause being shown, be extended by the Commissioner for a further period not exceeding one year and two years respectively.

[YAGAY andSUN]

What strategy should be adopted by a Manufacturer if the capital goods are being transferred permanently to the Jobworker/Supporting Manufacturer/Third Party Manufacturing etc. {e.g. particularly in terms of EPCG Scheme where EOP is Six (6) years}? Whether obtaining extension permission is feasible in such matters or not?  In the erstwhile Excise Laws there were such provisions into existence to provide deemed permissions in such scenarios?

[Shilpi Jain]

Extension is one way. Another way could be to treat it as a supply from the very first day for the purposes of GST alone since you know that it will not return within 6 years. This will enable to avoid interest and provide credit to job worker timely.

AI Summary

Pharma Firm Faces GST Challenge: Return Capital Goods in 3 Years Under CGST Act or Reverse ITC (Sections 143, 16) A pharmaceutical company is concerned about the return of capital goods sent to job workers under the CGST Act. According to Sections 143 and 16, these goods must be returned within three years; otherwise, GST applies, and Input Tax Credit (ITC) must be reversed. While physical return is ideal, alternatives include extending agreements, issuing credit notes, or restructuring ownership. A two-year extension by the Commissioner is possible. Seeking an Advance Ruling may provide clarity. Experts suggest considering these options to comply with GST regulations while minimizing logistical challenges.