Financial credit note as a conduit to transfer input tax credit- AAR AP

Background:

• The Applicant is engaged in business of supply various electronic items. 
• The supplier has issued Tax Invoice , and charged GST on such taxable value, calculated in terms of Section 15 of CGST Act, 2017. 
• The applicant submits that, supplier paid GST and filed GSTR-3B for the relevant tax period and reported details of supplies GSTR-1. 
• Applicant has received the goods and made the payment of consideration as per tax invoice for the goods received from the supplier. 
• The applicant has received various incentives viz. Turnover Discount, Quantity Discount, Cash Discounts, Additional Scheme Discounts, 3 Months regular scheme discounts, etc.  All the above discounts are in the form of after sale discounts.
• For the above-mentioned discounts, the supplier has raised financial/ commercial credit note without GST for accounting purpose only. 
• Further, supplier does not reduce its output tax liability in respect to said Financial/commercial Credit Notes, as Section 15 doesn't permit to exclude “Post Supply Discount” from transaction value. 
• Supplier also filed affidavit stating that they don't reduce GST liability on account of financial/commercial credit note.

The applicant seeks advance ruling on the following:

1. Whether the applicant is duly eligible to take full credit of GST Charge in Tax invoice issued by supplier and GST was paid by such supplier to government even though later commercial/ financial credit note is issued for part amount of invoice.

2. Whether the applicant is required to reverse the ITC proportionately to the extent of financial/ commercial credit note issued by supplier.

APPLICANT IS NOT REQUIRED TO REVERSE THE ITC AS CREDIT IS VALID:

The prerequisites for availing credit by registered person are: Sec 16(2)

"(a) He is in possession of tax invoice or any other specified tax paying document

(b) He has received the goods or services. “Bill to ship to” scenarios also included

(c) Tax is actually paid by the supplier

(d) He has furnished the return

(e) If the inputs are received in lots, he will be eligible to avail the credit only when the last lot of the inputs is received

(f) He should pay the supplier along with the tax within 180 days from the date of issue of invoice, failing which the amount of credit availed by the recipient would be added to his output tax liability, with interest [rule 37(1) & (2) of CGST Rules, 2017]. However, once the amount is paid, the recipient will be entitled to avail the credit again. In case part payment has been made, proportionate credit would be allowed.”

Sec 15(3)-The value of the supply shall not include any discount which is given--

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after the supply has been effected, if—

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply

For the applicability of provisions of 15 (3) (b) there should be prior agreement and a link established with the relevant invoices of the discount given. No such co-relation between the credit notes issued by the supplier to the applicant is found except credit note mentioning the scheme and the goods for which the credit note is being given. In absence of such specific Information, the benefit of lessening the value of discount from the transaction value as per the provisions of 15 (3) (b) is not allowed and therefore the contention of the applicant is correct. Therefore, as being correctly done by the supplier no adjustment in price is done in respect of goods already sold as per their own undertaking nor any adjustment of GST made in the credit note. Therefore, the corresponding reduction in ITC is also not warranted as there is no corresponding reduction of outward liability at the end of the supplier. The amount received by the applicant is in the form of post supply discount by the supplier and it will not affect transaction value between the supplier and the applicant for the reasons discussed above. For the same reasons, the applicant is eligible to take full credit of GST charged in the tax. Invoice and not required to reverse the ITC to the extent of financial/commercial credit notes issued by the supplier.

However, it is pertinent to note that the financial credit note shall not be used as a conduit to transfer input tax credit fraudulently, by raising an Invoice for a higher value to transfer ITC and then reducing the transaction value though financial credit note whereas the ITC transferred Is left unaltered. In case such a misutilisation of financial credit note is noticed at any point the same shall be liable for penalties under section 132(b).

In the instant case, ruling was in favour of the applicant.

- LDR