Credit eligibility – cases where no payment liability exists

[Shilpi Jain]

Under GST, any registered person would be eligible to claim ITC of taxes paid on goods or services procured, which are used or intended to be used in the course or furtherance of business and to the extent used for effecting taxable supplies, unless specifically restricted u/s 17(5) of the Act.

Apart from the restrictions specified in section 17(5) of the Act, there could be situations where credit would become ineligible, like non-payment within 180 days in certain cases, non-receipt of proper tax invoice, etc. However, it can be said that the provisions are not as stringent as under the earlier laws where receipt of the capital goods in the premises/factory of the manufacturer was required. Further, under GST there could be some situations where, say, in spite of non-receipt of the goods in the premises of the recipient or non-payment of consideration to the supplier, credit would still be eligible.

It is also to be understood that loss of ITC is equal to loss of revenue for any business. Hence, it is very important to interpret law appropriately and avail ITC wherever eligible. Let us look into the eligibility of ITC in a few peculiar cases:

Case-1: A company (located outside India, say USA) has sent some material samples for testing/analysis to another company in India through a third party courier (hereinafter referred as TP). The TP has filed Bill of Entry (BOE) in name of such Indian company. However, the basic customs duty and IGST has been paid by the TP and reimbursed by the US company. In this case, whether the Indian company is eligible to claim ITC of IGST paid by the TP, even though it has not paid any amount towards the same?

Answer: Firstly, the term “input tax” as defined in section 2(62) of the Act includes IGST charged on import of goods. However, it is not mentioned as IGST PAID on imports. Thus, IGST charged on import of goods, in the instant case, even though not paid for by the Indian company, falls under the purview of input tax credit. Further, the goods are used by the Indian company for business purpose and for effecting taxable supplies as required by section 16(1) and 17(2) of the Act. Hence, prima facie ITC is eligible.

Further, section 16(2) of the Act prescribes conditions for availing ITC, which are as follows:

Condition	Applicability in the instant case
The registered person is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other taxpaying documents as may be prescribed	As per rule 36 of CGST Rules 2017, BoE is a prescribed document.
The registered person has received the goods or services or both	The Indian company has received the goods.
The tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply.	It is only provided that tax has to be paid to the Government, i.e. it can be paid by any person, in the instant case by TP and reimbursed by the US company.
Registered person has furnished the return under section 39 of the Act	Indian company has to furnish return.

Hence, all the above conditions are satisfied in the instant case.

Further, 2^ndproviso to section 16 of the Act states that “where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed”:-

It can be said that the above proviso is applicable only in cases when the recipient is liable to pay tax also to the supplier. However, in case of BoEs, the recipient is not required to pay the taxes to the supplier, but the same has to be paid to the Government directly. Thus, it can be said that this proviso is not applicable.

Therefore, as all the conditions prescribed for availing ITC are satisfied and credit is not restricted under section 17(5) of the Act, it can be said that the credit of the taxes mentioned in the BoE will be eligible to the Indian company irrespective of the fact that no amount has been paid by such company to either the Government or to the supplier, in respect of the BoE.

Case-2: A company has purchased machinery for which the supplier has given 3 years warranty. After 1 year, the machinery was damaged. Since, the machine was in the warranty period, the supplier replaced the machinery free of cost. However, while sending the spare parts for replacement, the supplier has discharged GST liability at its end by treating such replacement as supply in terms of entry 1 of Schedule I to the Act (permanent transfer of business assets  on which ITC has been claimed), and made available the invoice to the company. In some cases GST is collected from the company and in some cases no amount is collected from the company. In this case, whether the company is eligible to claim ITC of GST paid by supplier?

Answer: In this case, since the recipient company has used the said good for business and in making taxable supplies, it would be eligible to claim the credit. Also, the recipient company would have satisfied all the conditions specified in section 16(2) of the Act i.e.

i) Company is in possession of tax paying document i.e. invoice

ii) Company has received the goods

iii) The tax charged in respect of such supply has been paid to the Government by the supplier

iv) The company has furnished the GST returns.

Thus, as all conditions are satisfied and since ITC is not restricted under section 17(5) of the Act, the recipient company would be eligible to claim said ITC. Further, 2^nd proviso to section 16(2) of the Act (as discussed in above case, relating to payment to the supplier) would not be applicable to the instant case in terms of proviso to rule 37(2) of the Rules, being a Schedule I supply. Hence the recipient company would be eligible for the credit.

Thereby, it can be seen that under GST, payment for the value of the goods and the related taxes, is not a pre-requisite in all cases for being eligible for the credit. Thereby, it is important for all assesses to, not only analyse the expenses booked to identify missed credit but also to look at other goods or services received for business purpose and used for making taxable supplies and analyse the credit eligibility.