Skip to content

Amount held as Retention Money by the recipient-Reversal of Input Tax Credit for non-payment of consideration within 180 days from the date of Invoice

Analysis of Reversal of Input Tax Credit on retention money withheld against the Invoice in GST

The article throws light on the applicability of provisions of reversal of Input Tax Credit on account of non-payment of consideration to the supplier within 180 days of raising of the invoice in case of retention of money by the Recipient.

Second proviso to Section 16(2) of CGST Act, 2017 is being reproduced hereinbelow-

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

Supposedly, a supplier has raised invoice of Rs 1 Lakh and the recipient while making the payment has withheld Rs 5000 on account of retention money to be paid after one year of completion of the contract. That the contention of the revenue in such cases is always that since the amount has been unpaid, therefore reversal of Input Tax Credit is required.

That it would be worthwhile to highlight that normally in such cases, there is an agreement between the supplier and the recipient regarding withholding the amount and to be paid later on.

Once the condition regarding the payment of the invoice has been waived by the supplier and has been agreed by him that he will receive the same subject to conditions of the contract, such waiver shall be deemed to be performance of the condition regarding payment of the due amount for the purpose of Second Proviso to Section 16(2) of the CGST Act, 2017

The Contract Act, has been enacted for defining the essential ingredients required to solidify private rights and obligations between the parties. Be that as it may, a right which has been conferred on an individual, either by legislation or contractual provisions, such a right can be waived off by the individual which might result in complete abandonment of legal privilege cast by such legal or contractual provision. According to the Black’s Law Dictionary, the term “Waiver” has been defined as the voluntary relinquishment or abandonment of a legal right or advantage. It is an act of surrender of benefit or privilege.

The Doctrine of Waiver finds its place under Section 63 of the Contract Act which provides for relinquishment of rights between the parties. Rights that may be relinquished include obligations as well as claims that had been earlier consented to be performed and exercised by the parties. Thus, the waiver of right under Section 63 of the Contract Act has to be a matter of mutual consensus. Once the right to waiver has been exercised then the promisor has no obligations with respect to the promise he had made to the promisee. The promise stands to be waived off in whole.

That provision of Section 63 of the Indian Contract Act, 1872 are being reproduced as under-

63. Promise may dispense with or remit performance of promisee.—Every promisee may dispense with or remit, wholly or in part, the performance of the promisee made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.

Illustrations

  • A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to perform the promise.
  • A owes B 5,000 rupees. A pays to B, and B accepts, in satisfaction of the whole debt, 2,000 rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is discharged.
  • A owes B 5,000 rupees. C pays to B 1,000 rupees, and B accepts them, in satisfaction of his claim on A. This payment is a discharge of the whole claim.
  • A owes B, under. a contract, a sum of money, the amount of which has not been ascertained. A, without ascertaining the amount, gives to B, and B, in satisfaction thereof, accepts, the sum of 2,000 rupees. This is a discharge of the whole debt, whatever may be its amount.

(e) A owes B 2,000 rupees, and is also indebted to other creditors. A makes an arrangement with his creditors, including B, to pay them a composition of eight annas in the rupee upon their respective demands. Payment to B of 1,000 rupees is a discharge of B‟s demand.

In the matter of Jagad Bandhu Chatterjee v. Smt. Nilima Rani & Ors. (1969) 3 SCC 445, the Supreme Court, while discussing waiver of a right under Section 63 of the Contract Act, has held that such waiver of right does not even require any consideration or an agreement. The Supreme Court also made a reference to the Waman Shriniwas Kini v. Ratilal Bhagwandas and Co. AIR 1959 SC 689 and held that waiver constitutes abandonment of a right and normally, everybody is at liberty to waive such a right.

Therefore, even for the sake of admission, if it is admitted that payment for the invoice gets due as soon as it is raised but the supplier waives of the right to receive the payment and agrees it to be treated as retention money, then it shall be treated as performance of payment obligation by the recipient.

By virtue of provision of Section 63 of the Indian Contract Act, 1872 supplier is entitled to dispense with or remit, wholly or in part, the performance of the recipient made to him, or supplier may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit. That, once this right to waive is exercised by the supplier then recipient has no obligation left with respect to payment of the invoice from the date of invoice until as per the terms of the contract the payment become due. The promise to pay the invoice until the condition as per the agreement is satisfied stands to be waived off in whole.

Therefore, once supplier has waived off his right to receive the payment until it become due as per the terms and conditions of the contract, the condition to pay stands satisfied from the point of the recipient and therefore, once is stands satisfied, there can be no reversal on account of non-payment of consideration by the recipient within 180 days from the date of invoice.

Once the supplier himself has waived off the right to receive the payment, then asking the recipient to pay the invoice within 180 days of the invoice is asking the recipient to do the impossible. That a condition of the statute asking the taxpayer to do the impossible cannot be enforced and should either be treated as complied with or should stand read down to the extent the taxpayer is not devoid of complying with the condition.

Proviso to Section 16(2) of CGST requires the taxpayer to make payment within 180 days of the date of invoice assuming that the payment for an invoice falls due on the same date when it has been issued by the supplier. It is pretty evident that as per the provisions of Section 63 of the Indian Contract Act, 1872 a supplier has the right to waive off the right to receive the payment upon a subsequent date. That now in the case of retention of money by recipient, supplier waives off the right to receive the payment immediately and agrees the same to be deferred to a future date. Now since the recipient is no longer required to make the payment until the due date as per the terms and conditions of the contract, therefore to treat the instant case as non-payment of consideration by the recipient is asking the taxpayer to do the impossible. It would be asking the recipient to do the impossible.

Hon’ble Apex Court in the matter of Cochin State Power And Light … vs State Of Kerala on 25 February, 1965 Equivalent citations: 1965 AIR 1688, 1965 SCR (3) 187 held that

“The performance of this impossible duty must be excused in accordance with the maxim, lex non cogitate ad impossible (the law does not compel the doing of impossibilities), and sub-s(4) of s.6 must be construed as not being applicable to a case where compliance with it is impossible.”

Further, Hon’ble Allahabad High Court in the matter of The Inter College, Through Its … vs The State Of U.P. Through … on 6 January, 2006 (All HC) held that where the law creates a duty and the party is disable to perform it without any default in him and has no remedy over there, the law will excuse him.

Hon’ble Apex Court in the matter of State Of Rajasthan &AnrvsShamsher Singh on 1 May, 1985 Equivalent citations: 1985 AIR 1082, 1985 SCR Supl. (1) 83 held that however mandatory the provision may be, where it is impossible of compliance that would be a sufficient excuse for non-compliance, particularly when it is a question of the time factor.

Therefore, in view of the above that since the supplier himself has waived off the right to receive the payment within a period of 180 days and this waiver either shall be treated as performance of the condition by the recipient or since the recipient has been prevented from a cause beyond his control to perform the condition, that condition be not being applicable in the instant case as its compliance is impossible.

Since the right to claim payment in case of retention arises at the time of satisfaction of the condition as per the contract and not from the date of raising of the invoices, therefore the period of 180 days shall be calculated from the date when the payment of retention money becomes due and not from the date of invoice.

Since the right to claim payment in case of retention arises at the time of satisfaction of the condition as per the contract and not from the date of raising of the invoices, therefore the period of 180 days shall be calculated from the date when the payment of retention money becomes due and not from the date of invoice.

That hon’ble Calcutta High Court in the matter of Commissioner Of Income-Tax vs Simplex Concrete Piles (India) … on 5 December, 1988 Equivalent citations: 1989 179 ITR 8 Cal held thatthe payment of retention money is deferred and is contingent on the satisfactory completion of the work and removal of defects and payment of damages, if any. Till then, there is no admission of liability and no right to receive any part of the retention money accrues to the assessee.

The Hon’ble Court thus held that

Having regard to the facts and circumstances of the case, we are of the view that on the terms and conditions of the contract as examined by the Tribunal, it cannot be held that either 10 per cent. or 5 per cent. as the case may be, being the retention money, became legally due to the assessee on the completion of the work. Only after the assessee fulfils the obligation under the contract, that the retention money would be released and the assessee would acquire the right to receive such retention money. Therefore, on the date when the bills were submitted, having regard to the nature of the contract, no enforceable liability has accrued or arisen and, accordingly, it cannot be said that the-assessee had any right to receive the entire amount on the completion of the work or on the submission of bills. The assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract.

Further Similar view was taken by Hon’ble Gujrat High Court in Anup engineering Ltd. (247 ITR 457), wherein it held that looking to the facts of the case and in light of the law laid down by the Supreme Court, it is very clear that unless and until a debt is created in favour of the assessee, which is due by somebody, it cannot be said that the assessee has acquired a right to receive. A debt must have come into existence and the assessee must have acquired a right to receive the payment.

Hon’ble Bombay High Court in the matter of ClT v. Associated Cables P. Ltd. (286 ITR 596) held inter alia that the right to receive the retention money is accrued only after the obligations under the contract are fulfilled.

Therefore, in view of the above it is pretty clear that retention money does not gets due when the invoice is issued but the money gets due as per the stipulations in the terms of the agreement. The right to receive the amount is the paramount consideration for getting the amount recovered. Mere raising or submission of the invoice does not vest the supplier with right to receive the payment. Therefore, in view of the above calculation of one hundred eighty days should be done from the date when the retention money gets due rather than from the date of invoice.

Since the retention money has been withheld with the consent of the supplier and amount paid by recipient to the supplier is more than the entire tax amount of the entire invoice, therefore it should be treated that recipient has complied with the provision of payment to the supplier within 180 days of the issue of the invoice.

A similar provision for reversal of input tax credit for non-payment of consideration to the supplier existed in Cenvat Credit Rules, 2004, The provision was similar in erstwhile law however it was restricted to services only unlike under GST it is applicable to both goods and services. Third proviso to Rule 4(7) of the CENVAT Credit Rules, 2004 provided that in case the payment of the value of input service and the service tax paid (or payable) as indicated in the invoice is not made within 3 months from the date of the invoice then the manufacturer or the service provider shall pay an amount equal to the CENVAT credit so availed.

In this regard the Tribunal in the case of Hindustan Zinc Limited [(2014) 34 S.T.R. 440 (Tri-Del)] has held that Rule 4(7) would be applicable only in a situation where the service provider has issued the invoice but he has not paid the service tax. But where there is no dispute that service tax has been paid by the service provider on the full invoice value, even though he has not received full payment from the service recipient and part of the payment due to him has been withheld by the service recipient due to some reason, this rule would not be applicable.

If the recipient pays the tax amount to the suppliers and only amount which has been retained is with the consent of the supplier as retention money is the deposit amount which also would be refunded to the suppliers as and when they meet their obligation.

Therefore, in view of the above and following the judgement as laid down in the matter of Hindustan Zinc Limited [(2014) 34 S.T.R. 440 (Tri-Del)], input tax credit shall be allowed to the recipient as the retention money has been withheld with the consent of the supplier and amount paid by recipient to the supplier is more than the entire tax amount of the entire invoice.

The amount being retained be treated as deposit as once retained it loses the character of amount being retained for an invoice.

For start, the transaction of withholding can be seen from the point of view that the amount withheld as retention money is nothing but deposit.

What would have been the scenario, supposedly without retaining the amount as retention money, if entire amount would have been paid to the supplier and he would have deposited it again by way of remittance separately. Therefore, in the opinion of the author it would not have been treated as a case of non-payment of consideration.

It can be argued that it was open for supplier and the recipient to opt either of the method i.e. either against the invoice raised by the supplier, recipient could have made the payment for the entire invoice amount and then taken back the amount back from the supplier as retention money to be held as deposit or could have deducted the amount as retention money from the invoice. That either of the methods result in same end result and insistence on one method rather than the second is arbitrary and the nature of transaction should be looked into rather than merely looking to the nomenclature of the transaction.

The provisions of Second Proviso to Section 16(2) nowhere provides for the mode of payment that payment should be made through cheque only. That had the intention of the legislature been so, then they would have specifically so provided for in the statute. That the taxability or otherwise should be governed by the nature rather than nomenclature of procedural matter.

The transactions need to be viewed as two separate transactions one wherein the entire amount towards has been paid and second wherein subsequent to treating the invoice being paid by the recipient to the supplier, part of the amount of amount is repaid back/retained by the recipient for successful completion of the contract as deposit.

Once an amount is retained, it is not for the particular invoice but as a deposit with the consent of the supplier wherein he has treated that the amount due towards the individual invoice has been paid but the deposit has been kept for the successful completion of the contract. That further when a claim is made by the supplier for payment of retention money, it is not with respect to the individual invoice but with respect to entire amount retained.

Once an amount is retained it loses it connection with invoice as it is held in the nature of deposit thereafter. Therefore, cases regarding retention money shall not at all be treated as a case of non-payment for an invoice but it is holding of an amount towards completion of the contract as deposit treating that amount towards invoice being paid with the consent of the supplier and thus provisions of second proviso to Section 16(2) of CGST Act, 2017 being treated as complied.

Second Proviso to Section 16(2) is illegal and ultra vires as it forces the buyer to reverse the credit for non-payment of consideration to supplier and government itself get unjustly enriched when both the parties have agreed to defer the payment and the supplier by exercising the right as vested under Section 63 of the Indian Contract Act, 1872 has waived off the right to receive the payment until a future date. That the provision is ultra vires per se as tax in the instant case has already been deposited with the Government and the Government is disallowing the Input Tax Credit citing superficial reasons even in cases wherein both the supplier and recipient have agreed for a payment beyond the stipulated time period of 180 days.

Second Proviso to Section 16(2) is illegal and ultra vires as it forces the buyer to reverse the credit for non-payment of consideration to supplier and government itself get unjustly enriched when both the parties have agreed to defer the payment and the supplier by exercising the right as vested under Section 63 of the Indian Contract Act, 1872 has waived off the right to receive the payment until a future date.

That minutes of the 5th GST Council Meeting held on 2-3 December 2016 at New Delhi states the object of the provisions regarding reversal of input tax credit on non-payment for the reasons as under:

“XXI. Section 16(2) (Eligibility and conditions for taking input tax credit):

The minister from West Bengal raised a question in respect of the second proviso of the Section 16(2), as to why tax would be payable in a situation where a contract between two taxable persons could provide for period for making payment beyond three months and second question raised was as to why the same principle was not applied to goods. In response the of the same The Commissioner (GST Policy Wing), CBEC clarified that it was an anti-evasion measure and that the credit reversed after three months could be again taken once the recipient of the service had made payment to the suppler and for the second question the clarification presented that goods being tangible, there would be a proof of its receipt which was not the case in services, where there was only a book entry.

                                                                       Emphasis Supplied

The purpose behind insertion of the above said provision as insertion of anti-evasion measure. That provision was intended to be inserted initially only on services as an anti-evasion measure. That since the movement of the goods can be traced, therefore the fact that the goods have been received can be counter checked by its movement but since movement of the services cannot be traced therefore the provision for reversal of Input Tax Credit was sought to be inserted for services only to link the credit with the payment.

The business terms and conditions in our Country have always been a prerogative of the buyer and seller. The government cannot force any buyer or seller to choose a particular methodology for doing their business as long as they follow the other regulatory frameworks. In many situations, it is not always necessary that the buyer will make payment to the seller within 180 days. Rather, it also depends on nature of business, model of business, form of business and relationship between the parties. In practical scenario, there are many situations where higher credit period is necessary and allowed.

Through the insertion of the provision, government has entered itself into a position of unjust enrichment. The tax has already been deposited by the supplier to the Government and government in turn by not allowing the credit and retaining the money with itself has enriched itself unjustifiably. The provision on the face might seem that it favours the supplier but in effect, through this provision, government has entered into the field of unjust enrichment.

For Example, A has supplied services to B for Rs 100 and has charged tax of Rs 10. B does not pay to A part of the amount held as retention. B however further supplies services to C for Rs 150 and collects tax of Rs 15.

In a normal scenario, entire tax collection from the transaction would have been Rs. 15. However, since B has not paid any amount to A, therefore he would not be entitled for any credit of the tax paid and he would again deposit entire amount of Rs 15 charged from C. Therefore, government would get revenue of Rs 25 as against Rs 15 on account of non-payment value of services supplied alongwith tax by B to A and that too on account of their own disputes.

The government is indulging itself in unjust enrichment. The government has nothing to do in the matters between A and B. It’s just that A has deposited the tax and B claims it irrespective of fact whether he pays any amount to A or not. For, there may be “N” number of reasons that why B would not pay to A. If the intention of the government is fair, then it should collect the tax amount from B and remit the same to A. Holding on to the amount would be unjust enrichment.

That the provision is ultra vires per se as the mere fact that the legitimate credit is being denied to the recipient under the pretext of non-payment when the tax has already been deposited and the government is enriching itself with the money of the recipient.

Conclusion-That in the humble opinion of the author, therefore applicability of reversal of Input Tax Credit on retention money is not at all correct and the fact that right to receive has been waived off by the supplier should be treated as payment of consideration and recipient cannot be asked to do the impossible. In the alternative, it can be considered that the period of 180 days should start from the day when the retention money becomes due. Further, once tax has been deposited by the supplier, then government has no right to indulge itself into unjust enrichment in the name of welfare of SSI.