Book adjustment a valid method of consideration under GST

The AAR, Kerala, in the matter of Paragon Polymer Products Private Limited[Advance Ruling No. KER/03/2023 dated March 02, 2023] ruled that ITC is admissible for goods purchased from outsourced vendors when the consideration is settled through book adjustment, subject to the conditions outlined in Sections 16, 17 and 18 of the Central Goods and Services Tax Act, 2017 ("the CGST Act") and their corresponding rules.

Facts

M/s. Paragon Polymer Products Private Limited ("the Applicant") is engaged in manufacturing and trading of footwears. The Applicant submits that in the course of manufacturing of footwear, the Applicant outsources some activities to outside vendors. However, the Applicant sells few raw materials required for the production to these vendors. 

The supply of materials by the Applicantto the vendors will be made as sale by raising taxable sales invoice. The vendor along with the raw materials purchased from the Applicant and other materials directly procured by them, manufactures footwear / parts of footwear as per the Applicant's requirement and return to the Applicant. This transfer is also made as sale by vendor to the Applicant under the cover of taxable sales invoice.

The Applicant intends to settle these mutual debts through book adjustments and settle the net dues only through bank transfer.

The Applicant stated that the cast net of term 'consideration' under the CGST Act so wide that almost no form of payment is excluded. Thus, the reduction in book debt (an asset in the payer's books of accounts) is a valid 'consideration' for payment and the

Applicant is entitled for ITC in case of such transactions.

Issue

Whether ITC is admissible in respect of goods purchased from vendors in case payment is settled through book adjustment?

Held

The AAR, Kerala, in Advance Ruling No. KER/03/2023 held as under:

• Observed that, the settlement of the mutual debts through book adjustment by the Applicant is a valid mode of payment of consideration for the receipt of goods and services since, it satisfies all the requirements.
• Opined that, the term consideration under the CGST Act, is has an inclusive definition which covers any form of payment, therefore if the payee owes the payer a debt, and accepts a reduction in such a debt liability as a valid form of payment, that should also be regarded as a valid 'consideration' for a supply.
• Held that, ITC is admissible when consideration is settled through book adjustment, subject to the conditions outlined in Sections 16, 17, and 18 of the CGST Act and their corresponding rules.