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Amended Section 16(4) to de-link ITC on Debit Note with Invoice fails to get stamping of Gujarat AAR in case of M/s I-Tech Plast

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Amended Section 16(4) to de-link ITC on Debit Note with Invoice fails to get stamping of Gujarat AAR in case of M/s I-Tech Plast
By: NikhilMohan Jhanwar
April 19, 2021
All Articles by: NikhilMohan Jhanwar       View Profile
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Input tax credit is a beneficial piece of legislation but subject to various conditions and limitations prescribed under Section 16 and 17 of CGST Act, 2017. One of the conditions contained in Section 16(4) is that such right is not indefinite and can be availed upto a prescribed time limit. As per Section 16(4), the assessee cannot claim the input tax credit on supply of goods or services after the due date of furnishing of the return under section 39 (i.e. GSTR-3B) for the month of September following the end of financial year or furnishing of the relevant annual return, whichever is earlier. After the introduction of GST, Section 16(4) reads as under:

‘(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or Invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.’

The above Section as originally enacted links the time limit to claim the Input tax credit on the Debit Note with the Financial Year in which the corresponding Invoice is issued instead of Financial Year in which Debit Note is issued. For example, Invoice was issued in F.Y. 2018-19 and Debit Note corresponding to the Invoice was issued in F.Y. 2020-21. As per original Section 16(4), ITC on the Debit Note can be claimed latest upto September following the Financial year in which Invoice was issued. Since, Invoice was issued in F.Y. 2018-19, ITC can be claimed latest upto September 2019 whereas Debit Note itself is issued after September 2019. This is nothing but an anomaly in the Section 16(4) which seeks to do impossible. This was a big loss to the recipient of Debit Note without any revenue loss to the Government as the Supplier is required to pay GST charged on such Debit Notes, whenever issued

Unlike, Credit Notes, which seeks to reduce the output tax liability and its issuance to adjust the GST liability is barred by time limitation under Section 34(2) latest upto September month following the Financial Year to which supply is made,  there is no express time limits prescribed under GST law till when a Debit Note against corresponding Invoice should be issued. This is due to obvious reason that issuance of Debit Note increasing GST liability adds to the Govt. Exchequer’s kitty.

However, by restricting the ITC on Debit Notes by linking it with the original corresponding Invoice, it is unfair and unjust for the recipient of goods or services which caught attention of lawmakers which led to amendment in Section 16(4) by Finance Act (No. 2), 2020 to rectify the anomaly and de-link the time limit to claim ITC on Debit Note with Original Invoice and hence, availability of ITC can be determined independently on the basis of Financial Year in which Debit Note has been issued. Amended Section 16(4) reads as under (which has been made effective w.e.f. 1st January 2021):

‘(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or Invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier

The effect of the aforesaid amendment is that time limit to claim ITC on Debit Note as prescribed under Section 16(4) can be applied independently irrespective of the fact in which Financial Year Invoice was issued. For example, Invoice was issued in F.Y. 2020-21 and Debit Note corresponding to the Invoice was issued in F.Y. 2021-22. As per amended Section 16(4), ITC on Debit Note can be claimed latest upto September 2022 as against earlier the same could be claimed upto September 2021 (as the same was linked with Financial Year in which corresponding Invoice was issued).

However, not so pleased by the aforesaid amendment, Recently, Hon'ble AAR in the case of  IN RE: M/S. I-TECH PLAST INDIA PVT. LTD., 2021 (4) TMI 558 - AUTHORITY FOR ADVANCE RULING, GUJARAT discussed the scope of amended Section 16(4) of CGST Act, 2017 and did not give any weightage to the amendment and held that change affected as a result of Finance Act, 2020 has not brought about any drastic or far-reaching change in the interpretation of sub-section(4) of Section 16, and even if a debit note issued by a supplier in connection with an invoice due to increase in price of a particular commodity, is issued in a different financial year than that of the financial year in which the original invoice was issued, the financial year to which the debit note pertains, will always be considered to be the year in which the original invoice was issued.

The Hon’ble AAR completely overlooked the intent of the amendment and opined that even after amendment in Section 16(4), ITC on Debit Note should be seen with respect to the Financial Year in which corresponding Invoice was issued instead of Financial Year in which Debit Note was issued. Such observation of the Ruling makes the amendment itself redundant and if the intention of the Government was to link the Debit Note with Invoice only, then there would not be any requirement for amendment at first place. Hon’ble AAR emphasized on the fact that Debit Note is not an independent document in itself and hence, the same would also be dependent on the Original Invoice. 

It is imperative to advert to the Explanatory clauses to the Finance Bill, 2020 and Memorandum Document to understand the intent behind the amendment which reads as under:

“Clause 118 of the Bill seeks to amend sub-section (4) of section 16 of the Central Goods and Services Tax Act so as to delink the date of issuance of debit note from the date of issuance of the underlying invoice for purposes of availing input tax credit.”

The explanatory clause which gives us insight into the intent of the amendment is clearly provides that such amendment has been done for purpose of availing input tax credit.

In our humble opinion, after reading amended Section 16(4) alongwith aforesaid Clause of the Explanatory Notes, language of the amended provision is unambiguous and does not have the scope of multiple interpretations which could not be appreciated by Hon’ble AAR while giving its ruling in the aforesaid case.

Inspite of legal clarity on the issue affirming the view that ITC on debit note stands delinked with Original Invoice after amendment, such views by AAR showcase the interpretation of Department on such amended provision and open doors for impending litigation on the subject.

Further, prospective effect of amendment w.e.f. 1st January 2021 is a grey area for claims of ITC on Debit Notes issued prior to amendment in Section 16(4). It will not be out of place to mention that being a rectification of anomaly, such amendment should be treated as a curative amendment and hence, should have application retrospectively w.e.f. 1st July 2017, however, with a piece of caution and ready for disputes from Revenue.

 

By: NikhilMohan Jhanwar - April 19, 2021

 

Discussions to this article

 

very nicely crafted and brought all the relevant poaints at one place. thank you.

By: CA.Tarun Agarwalla
Dated: 24/04/2021

So far as delayed filing of Return is concerned, the condition sripulated in S.16(2)(d) is as under

“furnishing of Return u/s 39

And S.16(2), CGST Act starts with notwithstanding clause meaning thereby that it supersedes sub-section 4 of section 16, based on the following cases;

2019 (12) TMI 1213 - GUJARAT HIGH COURT Synergy Fertichem Pvt. Ltd. v. State of Gujarat, A.C.T.O. v. Laxmi Misthan Bhandar (Raj) 1988 (4) TMI 418, Central Bank of India v. State of Kerala 2009 (2) TMI 451 (SC), Skill Lotto Solutions Pvt. Ltd. v. Union of India & Ors. 2020 (12) TMI 140 - SUPREME COURT.

Beyond this, no more conditions can be put under GST Act by framing rules &/or otherwise.

ITC is a vested property right under Article 300A, Constitution of India per recent judgment in Union of India & Ors. v. Adfert Technologies Pvt. Ltd.2020 (3) TMI 188 - SC ORDERPreviously also, ITC/CENVAT Credit was held to be a vested right, which can not be allowed to be lapsed vide case law─1999 (1) TMI 34 Eicher Motors Ltd. v. Union of Ind (SC), Siddharth Enterprises v. The Nodal Officer & Ors. 2019 (9) TMI 319 - GUJARAT HIGH COURT*.

*The review petition filed by the Govt. has been dismissed by the Gujarat High court 2020 (2) TMI 1240 - GUJARAT HIGH COURT Nodal Officer & Ors. v. Siddharth Enterprises (Guj)

The Hon’ble Supreme Court held that “every taxing statue including, charging, computation and exemption clause (at the threshold stage) should be interpreted strictly per Commissioner of Customs v. Dilip Kumar and Company 2018 (7) TMI 1826 - SUPREME COURT, & as per SC case The State of Karnataka v. M.K. Agro Tech Pvt. Ltd.  2017 (9) TMI 1308 - SUPREME COURT. It is settled proposition of law that taxing statutes are to be interpreted literally and nothing could be added to what is stated in the itself per SC case Eureka Forbes Limited v. State of Bihar and Ors. 2014 (7) TMI 235 - SUPREME COURT. .

The court only interprets the law within the four corners of the Act and cannot legislate it under the disguise of interpretation.

Sub-clause (d) of section 16 stipulates “furnishing of return u/s 39 for entitlement of ITC”. This clause nowhere mentions “timely submission of returns and/or debarring rectification statute of any return belatedly, for being entitled to avail ITC. The “notwithstanding clause”, in the section 16(2) means that it supersedes[1] all the sub-sections of section 16 including sub-section (4). As such, in our view, if a registered person has furnished returns &/or rectified any return belatedly, he is entitled to ITC and his vested right per SC Case Eicher Motor = 1999 (1) TMI 34 - SUPREME COURT Can not be withdrawn.

The SLP filed by the Govt. against the decision of High Court of Punjab and Haryana in the case of Adfert Technologies Pvt. Ltd. v. Union of India (P&H) [2019 (11) TMI 282 - PUNJAB AND HARYANA HIGH COURT], has been dismissed by the Hon’ble Supreme court on UNION OF INDIA & ORS. VERSUS ADFERT TECHNOLOGIES PVT. LTD. [2020 (3) TMI 188 - SC ORDER]. , making the following ratio decidendi of P&H High Court as Final & binding on the lower courts

“The right to carry forward the Unutilized credit has been recognized as vested right and property in terms of Article 300A of the Constitution of India”.

Moreover, the Govt. has no legal authority to retain the amount of credit to which the respondent is entitled to and retention of it by the Govt., cannot be sustained, being violative of Article 265 of the Constitution of India Per Gujarat HC case of Jakap Metind Pvt. Ltd. v. Union of India & Ors. 2019 (11) TMI 710 - GUJARAT HIGH COURT.

By: OmPrakash jain
Dated: 26/04/2021

 

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