ITC Admissible On Sale And Buyback Transactions When Payment Is Settled Through Book Adjustment: AAR

The West Bengal Authority of Advance Ruling (AAR) has held that in cases of sale and buyback transactions, the input tax credit is admissible in respect of goods purchased from outsourced vendors when payment is settled through book adjustment against the debt created on outward supplies to those vendors.

The bench of Tanisha Dutta and Joyjit Banik has observed that settlement of mutual debts through book adjustment is a valid mode of payment under the GST Act. Recipients can pay the supplier by way of setting book debt since the provision of the Act has not put any restriction in this regard. Therefore, claiming credit for input tax cannot be denied on the sole ground that consideration is paid through book adjustment.

The applicant is in the business of trading footwear in the state of West Bengal under the brand name 'Paragon'. The applicant intends to manufacture footwear through independent outsource units under the sale and buyback model, where raw materials for production will be sold by the applicant to the outsourced vendors, and the applicant will buy back the manufactured goods from the vendors. The applicant expresses its willingness to settle these mutual debts through book adjustments and the net dues through bank transfer.

The applicant sought an advance ruling on the issue in the case of sale and buyback transactions: whether the input tax credit is admissible in respect of goods purchased from outsourced vendors when payment is settled through book adjustment against the debt created on outward supplies to these vendors.

The applicant submitted that in the proposed'sale and buyback model', the raw materials required for the manufacturing of footwear will be supplied first by the applicant to the outsourced vendors against the issue of a tax invoice. The vendors will manufacture footwear using the inputs received from the applicant along with other materials that may be purchased from other suppliers. Thereafter, the finished goods, i.e., footwear, will be supplied by the vendors to the applicant, for which the vendors will also issue tax invoices. So, the business model will involve two distinct supplies. The first supply is to be made by the applicant to the outsourced vendors, and the second supply will be made by the vendors to the applicant.

The expression 'consideration' has been defined in clause 31 of Section 2 of the GST Act. The applicant argues that the definition of 'consideration' casts the net so wide that almost no form of payment is excluded. For example, a mix of money and the monetary value of the goods offered together is a valid 'consideration'. Similarly, 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. In other words, a reduction in book debt (an asset in the payer's books of accounts) is a valid 'consideration'.

The applicant contended that payment through books of accounts is a prevalent commercial practice in the market. Based on Paragraph 42 of Indian Accounting Standard 32, the applicant states that a financial asset and a financial liability shall be offset by the net amount presented in the balance sheet when, and only when, an entity currently has a legally enforceable right to set off the recognized amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

The authority held that it is immaterial whether the payment is made by the recipient or by any other person. Further, when there is a barter of goods or services, the same activity constitutes supply as well as consideration. For example, when a barber cuts hair in exchange for a painting, a haircut is a supply of services by the barber. It is a consideration for the painting received. Similarly, the supply of painting is supplied by the painter, and the painting is the consideration for a haircut.

Name of the applicant: Paragon Polymer Products Pvt. Ltd.

Case No: WBAAR 23 of 2023

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