Reversal of Input tax credit: Navigating Financial and Commercial Credit notes

Section 15 of the said Act are not satisfied. In other words, Credit note(s) can be issued as a commercial transaction between the two contracting parties. Secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.

In other words, value of supply shall not include any discount by way of issuance of Credit note(s) as explained above in para 2 (D)(iii) or by any other means, except in cases where the provisions contained in clause (b) of sub-section (3) of section 15 of the said Act are satisfied. There is no impact on availability or otherwise of ITC in the hands of supplier in this case.

Further guidance can be taken from the ruling of AAR, Andhra Pradesh, in the matter of Vedmutha Electricals India Pvt. Ltd. [2023] 60 TAXLOK.COM 089 (AAR-AP) [Advance Ruling no. 05/AP/GST/2023 dated May 26,2023].

Facts:

M/s. Vedmutha Electricals India Private Limited (“the Applicant”) are engaged in the business of supply various electronic items.

The Applicant purchased various electronic items from M/s. Gold Medal Electricals Private Limited (“the Supplier”). The supplier issued tax invoice as per Rule 46 of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”), and charge GST on taxable as per section 15 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”).

The supplier provided number of incentives in the form of “discounts,” including Turnover Discounts, Quantity Discounts, Cash Discounts, Additional Scheme Discounts, 3 Months Regular Scheme Discounts, etc., year by year from the time of registration to the present. All of the aforementioned discounts are post sale discounts. The supplier raised financial/commercial Credit notes for the above-mentioned discounts. Both the Applicant and the supplier acknowledged the financial/commercial Credit notes in their income tax returns. Furthermore, because section 15 of the CGST Act does not allow exclusion of “Post Supply Discount” from transaction value, the supplier does not lower its Output tax liability with regard to the aforementioned financial/commercial Credit notes.

The Applicant further asserts that in case of post supply discounts, the discount is specified in an agreement made at or before the time of the supply and the Input tax credit (“ITC”) attributable to the discount is not to be reversed by the Applicant.

Issues:

Whether the Applicant is liable to reverse the ITC proportionately to the extent of financial/ commercial Credit note issued by the supplier?

Held:

The AAR, Andhra Pradesh, in Advance Ruling no. 05/AP/GST/2023 [2023] 60 TAXLOK.COM 089 (AAR-AP) held as under:

• Observed that, the provisions of section 15(3)(b) of the CGST Act can only be applicable if there was a prior agreement and a link is established between the relevant invoices and the discounts provided. In this case, no such correlation was found between the Credit notes issued by the supplier and the Applicant. As a result, the benefit of reducing the value of the discount from the transaction value, as per the provisions of section 15(3)(b), was not allowed.

• Noted that, the financial credit note should not be used as a means of fraudulently transferring ITC by inflating an invoice.

• Held that, the post-supply discount received by the Applicant from the supplier did not impact the transaction value between the parties. Therefore, the Applicant is eligible to take full credit of the GST charged in the tax invoice and was not required to reverse the ITC to the extent of the financial or commercial Credit notes issued by the supplier.

Similar to the above ruling the AAAR, Tamil Nadu in Re: M/s. MRF LTD. [2019] 13 TAXLOK.COM 084 (AAAR-Tamil Nadu)  ruled that, in case of financial/commercial Credit note which is only adjustment of commercial transaction, no GST impact is there. Thus, there is no need of reversal of ITC by the buyer.

Conclusion-

The question of whether a reversal of Input tax credit is required in the case of financial or commercial Credit notes is a complex issue. It depends on the purpose and nature of the Credit note. To navigate this area effectively, businesses should maintain transparent and accurate records of all transactions. Understanding the nuances of ITC and Credit notes is essential for businesses seeking to operate within the bounds of tax compliance while optimizing their financial processes.