Consideration paid to third person on the direction of seller, Goods and Services Tax - GST

[GAURAV SHARMA]

Namaskar,

Mr. A has purchased goods from Mr.B but has made the payment to Mr. C on the direction of Mr.B.

Whether second proviso of section 16(2)(d) violated ?

Posts / Replies

[Amit Agrawal]

In my view, payment made to Mr. C on the direction of Mr. B, amounts to payment to Mr. B for the purpose of 'second proviso of Section 16(2)(d)'. In other words, this does not amount to 'failure to pay to the supplier'. Hence, said proviso is not violated purely due to making payment to Mr. C instead of Mr. B in given circumstances.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[KASTURI SETHI]

Such method is not in letter and spirit of Section 16(2) of CGST Act. It is not safe at all.The department may raise objection and you will be unnecessarily in trouble. Why to take the risk of inviting interest and penalty ? Proper procedure must be followed. What is avoidable must be avoided.

Our way of working should be doubt-free and thus you will be tension-free.

[Rakesh Bansal]

I appreciate the views of Mr Sethi, in addition the provisions of section 40A(3) of the Income Tax Act also must be given thought. In my opinion if the arrangement of third party payment has been formulated the same must be declared in the e invoice it self. Regards

[GAURAV SHARMA]

Thank you Amit ji and Kasturi for the enriching replies.

As per my understanding payment made to Mr. C on the direction of Mr.B does not amount to failure to make payment but department interpretation is that payment has not been done and hence reversal of ITC.

Kindly help me .

Thank you

[GAURAV SHARMA]

Thank you Rakesh ji for sharing your insight on this complex issue.

Kindly help me in understanding whether department can allege that Mr.A has failed to make payment as he already has done the payment to Mr. C through electronic means and on the direction of Mr. B.

Thank you

[KASTURI SETHI]

Sh.Gaurav Sharma Ji,

Such payment made to third person 'C' will be treated as failure. Even if you get a certificate to this effect, that is not digestible i.e. not acceptable de jure.

Such like methods cannot be accepted even in private transactions and hence prone to litigation.

Regarding the solution to the problem, bring it in writing to the notice of the department and prove your bona fides. Follow remedial measure as per advice of the department.

You may agree or not it is your prerogative. It is my sincere advice.

[Amit Agrawal]

Kindly get necessary evidences like declaration and account-ledger from Mr. B to explain the facts to the officer and how there is no failure to pay Mr. B.

Once Mr. B agrees receipt of subject payment as consideration against his supplies in his declaration as well as accounts-ledger, I find it very difficult to understand any need for Dept. to issue SCN alleging contravention under 'second proviso of Section 16(2)(d)'.

It will be real irony when supplier says 'he got payment and nothing is outstanding against his supplies', but Dept. says that payment is still due to the supplier (thereby meaning that same needs to be again paid to the supplier).

But, if Officer still disagrees and issue SCN denying ITC using 'second proviso of Section 16(2)(d)', you got a very strong case to defend in my view.

Such cases of Dept. will not stand legal scrutiny at-least in higher forums like tribunal & above, in my humble view. But, one need to start convincing from stage of original adjudicating authority and hopefully, need not take such case to higher forums.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

If officer does not get satisfied and issues SCN asking of reversal of ITC using 'second proviso of Section 16(2)(d)', then, you can consider following point as part of your legal defense (which should be additional and without prejudice to basic / main defense on merits):

A. Said proviso reads as under:

"Provided further 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"

B. Relevant portion of rule 37 (1) reads as follows:

A registered person, who has availed of input tax credit on any inward supply of goods or services or both, but fails to pay to the supplier thereof, the value of such supply along with the tax payable thereon, within the time limit specified in the second proviso to sub-section (2) of section 16, shall furnish the details of such supply, the amount of value not paid and the amount of input tax credit availed of proportionate to such amount not paid to the supplier in FORM GSTR-2 for the month immediately following the period of one hundred and eighty days from the date of the issue of the invoice:

C. Rule 37 (2) reads as follows: The amount of input tax credit referred to in sub-rule (1) shall be added to the output tax liability of the registered person for the month in which the details are furnished.

D. As the manner of reversal / payment "prescribed" against subject ITC under dispute as per 'second proviso of Section 16(2)(d)' read with sub-rule (1) & (2) of Rule 37 is NOT even made available to any assessee, assessee cannot be held at fault for non-doing any such reversal / payment.

D1. In other words. operation of said proviso is kept in limbo by Government itself by not making facility available to an assessee for making reversal / payment as "prescribed" under law and rules made thereunder.

P.S. As said before, please treat this 'additional' and 'without prejudice to basic / main defense on merits'. And I consider your case very strong even otherwise. And I coutinue to hope that you will manage to convince Dept. officers on the basis of subject facts and situation will not reach the stage of SCN.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[GAURAV SHARMA]

It is very enriching experience discussing complex issues of GST on this platform. I extend sincere thanks to the panelist Mr. Amit ji & Kasturi Sir for sharing their knowledge and extending a helping hand to find solutions. Regarding this particular issue my understanding of not reversing ITC has been further enhanced with the discussion with the esteemed panelist.

Thank you again

[Shilpi Jain]

Paying on the direction of B should be sufficient to satisfy the payment due to B.

The provisions of law do not mandate that the payment has to be settled only by way of money and that too only to be paid directly to the person to whom it is due.

In such cases, even non-monetary payments , book adjustment, etc. are regarded payments made. Hence, there should be no hassle is availing the credit in this regard.

[KASTURI SETHI]

With due respect to all experts, I am still of the opinion that this is wrong approach to think that the buyer (A) can make payment to C on the directions of B. Such payment is official and not private payment to be made to a private person. If invoice has been raised to A by B, B will make payment to A. Mode of payment is not in picture here.

[KASTURI SETHI]

'Person' is in picture. Whether 'C' is a valid person to receive payment as sale price (including tax) ?

[Ganeshan Kalyani]

I agree with the view of Sri Kasturi Sir. C is no where in transaction with A.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

Thanks a lot for your support on merits. As per Section 9 (1) of CGST ACT, GST is to be collected by the supplier from the buyer/receiver of service and deposit with Govt. The sale price including GST is to be paid by the buyer to the seller (supplier). We cannot treat the department of Govt.of India/State Govt. as trader entity.

[Ravinesh Sinha]

I agree with the view of Sri Kasturi ji . Transaction with C is not proper under GST as payment to C is without any supply of goods or supply.

[Amit Agrawal]

In continuation of my earlier views here, I agree with what is stated by Ms. Shilpi Jain in above-post at serial number 10.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.