No Reversal of ITC on financial credit note in relation to post sale discount

The AAR, Andhra Pradesh, in the matter of Vedmutha Electricals India Pvt. Ltd. [Advance Ruling no. 05/AP/GST/2023 dated May 26,2023] ruled that assessee is eligible to take full credit of GST charged in invoice issued by the supplier even though later commercial/financial credit note has been issued.

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 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.

Our Comments

The above judgment brings clarity to the issue concerning whether the assessee is required to reverse the ITC to the extent of financial/ commercial credit note issued by the supplier.
Similar to the above ruling the AAAR, Tamil Nadu in Re: M/s. MRF LTD.[2019 (27) G. S. T. L. 578 (App. A. A. R. - GST)]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 ofreversal of ITC by the buyer.

Therefore, the buyer is eligible to take full credit of GST charged in the tax invoice issued by the supplier, even if a financial/ commercial credit note is issued later, subject to the condition that there is no mis-utilization of financial/ commercial credit note.

Relevant Provision

Section 15(3) of the CGST Act 2017

"Value of taxable supply

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."