Case : Sanghvi Movers Ltd., In re  113 taxmann.com 24 (AAAR – TAMILNADU)
Eligibility to claim full ITC as per proviso to Rule 37 even if consideration is not paid within 180 days as per second proviso to Sec 16(2) for transactions between distinct persons covered under Sch-I.
Second proviso to Section 16(2) applicability on transactions covered under Sch-I vis-à-vis Proviso to Rule 37.
Applicant was engaged in business of providing medium-sized heavy-duty cranes on rental/lease/hire basis to its clients without transferring the right to use the cranes. Under GST, applicant had obtained registration for 10 locations across India, including its head office (“SML Maharashtra”) located in Pune, Maharashtra and branch office (“SML Tamil Nadu”) located in Chennai, Tamil Nadu. Applicant branch offices received enquiries from various customers for supply of cranes on hire charges. Applicant branch offices negotiated with customers and received final work orders from customers. Title and ownership of all different types of cranes along with their components vested with SML Maharashtra. Therefore, on receipt of final work order, all applicant branch offices in turn raised internal work orders on SML Maharashtra to provide requisite cranes on hire charges along with appropriate support and assistance to various customers across India.
SML Maharashtra has entered into a formal service arrangement with all SML branch offices (including SML Tamil Nadu) by entering into a Memorandum of Understanding (MoU), wherein SML Maharashtra has agreed to provide cranes and crane components to all SML branch offices on hire charges. An invoice from SML Maharashtra is issued to the appellant (SML Tamil Nadu) and the value considered for levying GST is approximately 95% of the value charged to the customer by the appellant.
SML Maharashtra discharges IGST on the value of hire charges recovered from the appellant treating the same as inter-state supply of service. Consequently, the recipient i.e. the appellant avails credit of IGST charged/paid by SML Maharashtra on the value of hire charges charged on the invoice. The appellant sought the authority for advance ruling to determine the admissibility of ITC of the IGST paid by SML Maharashtra in the hands of the appellant. Appellant / other branches raises invoices to HO for ‘Up-keepment’ charges as per para 10 of Schedule I.
The order of AAR against which appeal is filed is as follows:-
On the supplies received from M/s. Sanghvi Movers Ltd., Maharashtra, the applicant M/s. Sanghvi Movers Ltd., Tamil Nadu, is not eligible for the full Input Tax Credit but only to the extent specified in the restrictions as per second proviso to Section 16(2) of CGST Act and Rule 37 of CGST Rules read with Section 20(iv) of IGST Act, subject to fulfillment of all other conditions under Section 16 of CGST Act, read with Section 20(iv) of IGST Act.
4. Contention of the Assessee:
- The supply constitutes a supply of service between two distinct entities as per provision of GST law covered under Sch-I.
- The transaction in its commercial sense is still without any consideration, as is the case, in the case of branch transfers, as an entity, the commercial contractual arrangement is always vis-a-vis customers.
- The consideration specified in the MOU is only for the purposes of compliance with valuation provisions under GST law.
- Being a legal entity, accounting of revenue and flow of money is only when the transaction is with customer, inter-branch transactions are not considered to be revenue generating transactions.
- Appellant has complied with all the four conditions of Sec 16(2) of the CGST Act in order to be eligible to claim ITC.
- As per Schedule I of CGST Act, any activities or transactions between distinct person (i.e. SML Maharashtra and SML Tamil Nadu in this case) will be deemed to be supply, even if made without consideration. Further, for the purpose of GST compliance and discharging GST, the MOU provides the mechanism to determine the value.
- In terms of Section 31(2) of the CGST Act, it is mandatory for a registered person supplying taxable services to issue a tax invoice, showing the description, value and tax charged thereon.
- As per the decision given by AAR, in order to avail ITC, every branch office of a legal entity would be forced to open separate bank accounts and undertake thousands of bank payment transactions with other distinct persons (branch offices) of the same entity. It would completely defeat the purpose of introducing the proviso to Rule 37 of the CGST Rules, 2017. AAR concluding that payment needs to be made even for supplies made between distinct persons, only because consideration is specified in the MOU/tax invoice. SML Tamil Nadu has been led to specify the consideration in the MOU/tax invoice and discharge applicable GST, only on account of Schedule I read with Section 31(2) of the CGST Act
- Appellate Advance Ruling pronounced by this authority in the case of M/s. MRF Limited [2019 (27) G.S.T.L. 578 (App. A.A.R. – GST] is referred to state that the second proviso to Section 16(2) of the CGST Act is merely an anti-evasion measure. It is not the intention of the legislator to apply this proviso to transactions between inter-offices as distinct persons.
- The order has erred in concluding that the up-keepment charges receivable by SML Tamil Nadu are being netted off against the lease/hire charges payable by SML Tamil Nadu and hence full consideration is not being paid. Based on accounting principles, the receivable and payable have to be considered at an entity level and not at a GST registration level, as such book adjustments of netting off are made at an entity level in the books of accounts i.e. the receivable of SML Maharashtra is netted off against the payable of SML Tamil Nadu in the books of account of SML. Further, while preparing financial statements, transactions between SML, Maharashtra and SML Tamil Nadu are netted off in books of account and these transactions do not form part of revenue or expenses/purchases disclosed in financial statements.
- The definition of consideration under Section 2(31) of CGST Act, provides the scope and ambit for modes of payment. It includes “any payment made or to be made, whether in money or otherwise”. The term “otherwise” is very wide, and it would include all modes of payment i.e. netting off of receivable and payable in books of account, barter, exchange, etc. as well.
- AAR West Bengal in M/s. Senco Gold Limited [2019 (24) G.S.T.L. 688 (A.A.R. – GST] clarified “The Applicant can pay the consideration for inward supplies by way of setting off book debt. The GST Act and rules made thereunder does not restrict the recipient from claiming the input tax credit when consideration is paid through book adjustment, subject to the conditions and restrictions as may be prescribed and, in the manner, specified in Sections 16 and 49 of the GST Act”.
- Payment through adjustment of the books of accounts is a prevalent commercial practice which also finds support in Ind AS 32 which establishes the principles for offsetting financial assets and financial liabilities. Para 42 of Ind AS 32 provides that a financial asset and a financial liability shall be offset and the net amount presented in the balance sheet when, and only when, an entity,
(a) currently has a legally enforceable right to set-off the recognized amounts; and
(b) intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.
a) Applicability of Section 16 read with Rule 37: From the statutory provisions of Second Proviso to Section 16(2) read with First proviso to Rule 37, the following are evident :
- The supply of goods or services to the distinct persons in the course or furtherance of business, even without consideration are taxable supply;
- A registered person shall be entitled to take credit of input tax charged on any supply to him which are used in the course or furtherance of business if he is in possession of a tax invoice, received the goods or services and the tax charged is paid to the Government and the returns are furnished;
- When the recipient fails to pay the supplier the amount towards the value of supply along with tax payable within a period of one hundred and eighty days from the date of issue of invoice, the proportionate credit availed is to be added to his output liability;
- The value of supplies made without consideration as specified in Schedule I of the Act is deemed to have been paid for the purposes of availment of ITC.
It was observed that this is a case which was covered by Schedule I of the CGST Act. The transaction was between distinct persons. The appellant in the tax invoice raised on their customers mentioned that payment to be made either by Cheque/DD in the name of ‘Sanghvi Movers Limited’ or directly to the account of SML HO at Pune. The appellant represented that receipts and payables are accounted at entity level only. The HO being distinct person in the eyes of law and transaction was in the course of furtherance of business, supply is taxable supply for which SML HO had adopted a value agreed under the ‘Pricing’ clause of the MOU and paid the tax on the value declared in the invoice. The proviso to Rule 37, provides for deemed payment of value in such transactions.
b) . Proviso to Section 16 recognizes payment even by “setting off against the payables”-Even considering that said proviso did not have application in the case at hand as there is a value stated in the tax invoice as held by Lower Authority, it was observed by AAAR that they had no reason to restrict Input Tax Credit of tax paid by SML HO, in the hands of appellant as it has been substantially brought out that ‘consideration’ stands paid to SML HO either by customer of Appellant or by setting off against payables of appellant to SML HO, in respect of lease/hire of Cranes, etc. which is as per established Accounting Principles. Therefore, they did not find any reason to restrict eligibility of ITC credit under Section 16(2) of the Act.
The appellant was held to be eligible to avail full Input Tax Credit of tax paid by SML HO on the lease/hire of cranes to them for furtherance of business, subject to other conditions of eligibility to such credit as per Section 16 of CGST/TNGST Act, 2017.
An order which restored the sanctity of transaction between the head office and branches otherwise the order of AAR would have resulted in creating a situation which otherwise never exists on the ground.
The decision also lays down and accepts decision of M/s. MRF Limited [2019 (27) G.S.T.L. 578 (App. A.A.R. – GST) and M/s. Senco Gold Limited [2019 (24) G.S.T.L. 688 (A.A.R. – GST] wherein it has been held that payment for the purpose of second proviso to section 16(2) can also be made by book adjustments and law no where restricts the payment to be made by cheque or cash mode for the requirement of second proviso to Section 16(2) of CGST Act, 2017.
The contention by the applicant also makes a valid point which might otherwise be relevant that proviso to Sec 16(2) does not specify that entire value of supply has to be paid. The words ‘amount towards the value of supply’, implies only the amount as agreed between the supplier and the recipient which need not be the entire value of supply. As per the mutual agreement, if such value of supply is reduced, even such reduced payment fulfils the requirement, “amount towards the value of supply”.